<DOC>
[109th Congress House Hearings]
[From the U.S. Government Printing Office via GPO Access]
[DOCID: f:26239.wais]
15 YEARS OF THE CFO ACT--WHAT IS THE CURRENT STATE OF FEDERAL FINANCIAL
MANAGEMENT?
=======================================================================
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
__________
NOVEMBER 17, 2005
__________
Serial No. 109-121
__________
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
______
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26-239 PDF WASHINGTON : 2006
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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
JON C. PORTER, Nevada C.A. DUTCH RUPPERSBERGER, Maryland
KENNY MARCHANT, Texas BRIAN HIGGINS, New York
LYNN A. WESTMORELAND, Georgia ELEANOR HOLMES NORTON, District of
PATRICK T. McHENRY, North Carolina Columbia
CHARLES W. DENT, Pennsylvania ------
VIRGINIA FOXX, North Carolina BERNARD SANDERS, Vermont
JEAN SCHMIDT, Ohio (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
Erin Phillips, Clerk
Adam Bordes, Minority Professional Staff Member
C O N T E N T S
----------
Page
Hearing held on November 17, 2005................................ 1
Statement of:
Combs, Dr. Linda, Controller, Office of Federal Financial
Management, Office of Management and Budget................ 3
Steinhoff, Jeffrey C., Managing Director, Financial
Management and Assurance, Government Accountability Office. 10
Letters, statements, etc., submitted for the record by:
Combs, Dr. Linda, Controller, Office of Federal Financial
Management, Office of Management and Budget................ 5
Steinhoff, Jeffrey C., Managing Director, Financial
Management and Assurance, Government Accountability Office,
prepared statement of...................................... 13
15 YEARS OF THE CFO ACT--WHAT IS THE CURRENT STATE OF FEDERAL FINANCIAL
MANAGEMENT?
----------
THURSDAY, NOVEMBER 17, 2005
House of Representatives,
Subcommittee on Government Management, Finance, and
Accountability,
Committee on Government Reform,
Washington, DC.
The subcommittee met, pursuant to notice, at 2:40 p.m., in
room 2247, Rayburn House Office Building, Hon. Todd Russell
Platts (chairman of the subcommittee) presiding.
Present: Representative Platts.
Staff present: Mike Hettinger, staff director; Tabetha
Mueller, professional staff member; Dan Daly, counsel; Erin
Phillips, clerk; Adam Bordes, minority professional staff
member; and Cecelia Morton, minority office manager.
Mr. Platts. This hearing of the Government Reform
Subcommittee on Government Management, Finance, and
Accountability will come to order.
As stewards of the taxpayers' money, we in Congress have
perhaps no greater responsibility than to ensure that every
dollar is spent wisely. Regardless of party affiliation or
ideological bent, all of us entrusted with public resources
agree that they must be managed effectively and safeguarded
from fraud or misuse.
Toward that end, President George Herbert Walker Bush
signed the Chief Financial Officers Act on November 15, 1990.
The CFO Act was heralded as the beginning of a new era not only
in Federal management and accountability but also in efforts to
improve government operations. The law laid a foundation for
comprehensive reform, establishing Chief Financial Officers in
all major executive agencies as well as a Deputy Director for
Management and a Controller in the Office of Management and
Budget.
With the understanding that transparency brings
accountability, the CFO Act also instituted the requirement for
Federal agencies to submit audited financial statements, begun
on a piloted basis and eventually extended to all agencies.
In 1996, when the first year audits were performed
governmentwide, agencies took 5 months to close their books.
Only six were able to earn a clean opinion. Fifteen years
later, we have seen progress. Instead of 5 months, agencies now
have only 45 days to submit audited statements. As opposed to
only a handful of agencies, the majority of Federal departments
now earn clean opinions on a regular basis. Two days ago, all
agencies were required to submit their statements for fiscal
year 2005, and we will discuss the results of those audits here
today.
It is important to note that sound financial management
does not end with a clean opinion. In fact, clean audits are
merely a starting point. What we need is timely, accurate,
useful financial data to manage programs effectively, to shift
resources if necessary, and to make informed decisions. This
was a need that was highlighted by the response to this year's
devastating hurricane season.
Despite progress in a general sense, the audits reveal a
troubling picture at some of our most important departments. As
a nation at war and under the threat of terrorism, management
at the Department of Defense and Homeland Security should be
top-notch. Yet these two departments have never been able to
earn a clean opinion, a trend that unfortunately continues this
year. It is dangerous to assume that an important front-line
mission should relegate management to the back burner. On the
contrary, sound financial management can only enhance mission
performance. This is why it must be a priority at every
department. This level of transformation can only occur with
the commitment of top leadership.
We are honored to have two influential leaders in financial
management before us today. The Honorable Dr. Linda Combs is
the Controller for the Office of Federal Financial Management
at OMB, one of the key positions established by the CFO Act.
Dr. Combs has served as CFO at the Department of Transportation
and the Environmental Protection Agency and brings an important
perspective as she guides CFOs governmentwide.
Mr. Jeffrey Steinhoff is the Director of Financial
Management and Assurance at the Government Accountability
Office. He was part of the team that was instrumental in
drafting and enacting the CFO Act.
We thank both of you for being here today and for your
continued work with the subcommittee. We will look forward to
your testimonies. As a practice, we will have both of you stand
and be sworn in. If Mr. Towns joins us during your testimony,
we will see if he has a statement that he would like to offer
before we then go into questions, depending on his interest.
If you would both raise your right hand, and any staff that
will be guiding you today, if they would stand and be sworn in
as well.
[Witnesses sworn.]
Mr. Platts. Thank you. The clerk will note all witnesses
affirmed the oath.
We appreciate, as always, your substantive written
testimonies and allowing us to be well prepared for a good
dialog here today. We are going to set the clock for 8 minutes,
but we really do appreciate both your time and efforts, and
that is a guide. But don't worry, if you need more time to
complete your statements, please take the time. We really want
to hear what you have to say.
Dr. Combs.
STATEMENT OF DR. LINDA COMBS, CONTROLLER, OFFICE OF FEDERAL
FINANCIAL MANAGEMENT, OFFICE OF MANAGEMENT AND BUDGET
Ms. Combs. Thank you, Chairman Platts, and we welcome the
opportunity to be with you today. It is a great opportunity to
appear before this committee and discuss the CFO Act and the
overall state of financial management in the Federal
Government.
When the CFO Act was passed in 1990, I was the Assistant
Secretary for Management at the Department of the Treasury. So
for those of us who have worked on the CFO Act from its initial
passage and have been passionate about financial management in
the Federal Government for all these years, it is indeed a
welcomed opportunity to have a 15-year reflection and to remind
ourselves of how far we have actually come thanks to the
committed efforts of people sitting here at this table and
people behind the bench where you sit as well. So I thank you
again for this opportunity and for the financial management
support that you give in the Federal Government.
I think there has been tremendous, strong progress in
Federal financial management, and recognizing the
accomplishments of hard working financial managers across the
Federal Government is a tremendous, wonderful way to celebrate
the 15 years that we are here to talk about today.
When the CFO Act was signed 15 years ago, the Federal
Government was responding to many financial management
challenges. And in responding to these challenges, the act, as
you pointed out, set forth many ways in which financial
management should be strengthened. One of those ways was in the
leadership. Another was in implementing more disciplined
financial controls and producing more timely and reliable
financial information for day-to-day decisionmaking.
I am proud to share that today. Here 15 years later, we do
have the CFO community that's committed to very, very strong
financial leadership, committed to transparency in financial
reporting, and committed to meeting the very highest standards
in reporting, and that we are reporting on those highest
standards to be the highest in our modern memory.
The administration monitors our financial goals using the
improved financial performance initiative under the President's
management agenda. We are definitely looking for results in
financial management. We believe that what gets measured gets
done.
The improving financial performance initiative, as part of
the President's management agenda, includes a very detailed set
of financial standards that every Federal agency is accountable
for meeting. As the Controller in the Office of Management and
Budget, I work very closely with each of our agencies' CFOs to
develop financial management improvement plans and to monitor
those results.
I want to say that I am very, very proud of our CFOs. I am
proud of their hard work, diligent efforts, and continuing
efforts to improve Federal financial management. We in the
administration know that money we spend is indeed the
taxpayers' money. Therefore, we must be good stewards of the
people's money. And over the past few years, we have made
tremendous strides in accelerating, improving, and streamlining
financial management processes.
Timely audits are vital for ensuring that taxpayer money is
spent honestly and wisely. When the CFO Act was passed in 1990,
as I recall there were only five agencies at that time that
were participating in a pilot to see if they could even produce
auditable financial statements. As I recall, the result of that
was that one of those pilots actually attained a clean audit.
Moving forward to 10 years later, in 2000, when we came
into this administration, the CFO Act agencies were taking as
long as 5 months still at that time to complete their financial
statements. And now we have Federal agencies that are reporting
45 days after the end of the fiscal year. And this year, just 2
days ago, we reached a remarkable milestone in regard to that
45-day reporting deadline. On Tuesday, November 15, every major
Federal agency completed its performance and accountability
report just 45 days after year end of the 2005 fiscal year.
This is the first time every audit was completed since that
deadline was set in 2001. That is, in and of itself, a
remarkable success story.
As a result of the accelerated reporting process and the
expectations of high standards, the overall quality of
financial reporting at Federal agencies has consistently
produced clean audits. For 3 consecutive years the number of
unqualified opinions has remained relatively stable.
Additionally, I believe our steps to bring about stronger
internal controls, which are emphasized in the revisions to
Circular A-123, represent tremendous advances toward timely and
reliable financial information.
Beginning with this fiscal year, and already in progress,
agency managers are required to undertake a strengthened
internal control assessment process. Key milestones from these
plans are being incorporated into the improved financial
performance initiative scorecard to ensure that agencies are
accountable for meeting their goals. These efforts will
culminate in the agencies' first management assurance statement
for internal controls over financial reporting on June 30,
2006.
In closing, I continue to believe that the President's
management agenda is one of the most effective tools we have in
promoting financial improvement and excellence to hold agencies
accountable for good, positive results. The administration
remains dedicated to being a good steward of taxpayer dollars
through strong financial management. Specifically, we hope to
accomplish this through continued good leadership, our
dedication to transparency, and our adherence to the highest
standards possible.
I look forward to continuing to work with this subcommittee
on the overall financial management of the Federal Government.
Thank you, Mr. Chairman, for the opportunity to be here with
you today. I will be pleased to address at the appropriate time
any questions that you may have. Thank you.
[The prepared statement of Ms. Combs follows:]
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Mr. Platts. Thank you, Dr. Combs. We appreciate your
testimony. Mr. Steinhoff.
STATEMENT OF JEFFREY C. STEINHOFF, MANAGING DIRECTOR, FINANCIAL
MANAGEMENT AND ASSURANCE, GOVERNMENT ACCOUNTABILITY OFFICE
Mr. Steinhoff. Chairman Platts, it is a special privilege
to be here today on the 15th anniversary of the passage of the
CFO Act, widely heralded as the most far-reaching financial
management reform legislation in 40 years. A decade and a half
later, the act has clearly stood the test of time and is the
foundation of efforts to strengthen financial accountability.
Today, I would like to do three things: Provide a quick
historical perspective of what the framers of this act were
trying to achieve; second, share my thoughts on the impact of
the act to date; and, finally, to talk about some of the
challenges going forward, as we are not yet at the finish line.
Let me quickly touch on the historical perspective. In
1990, the environment was one where financial systems and
controls were abysmal and there was hardly any good year-end
financial reporting. Clearly, financial management was not a
high priority and the CFO job was typically part of a broader
range of duties and received short shrift. The CFO Act was
directed at establishing financial accountability and managing
the cost of government. It was even recognized back then that
we did face serious financial challenges and we had to manage
our costs much better.
While understandably there is a lot of focus on the audited
financial statements, the end game has always been the
establishment of a fully functioning CFO operation that
includes a cadre of highly qualified CFOs and supporting staff,
modern financial management systems that provide reliable,
timely, and useful information to support day-to-day
decisionmaking and that enable the systematic measure of
performance--this is not about accounting, it is about
accountability--and, finally, sound internal controls that
safeguard assets and ensure accountability.
Regarding the impact of the act 15 years later, I would
like to answer a few questions tied directly back to the act's
objectives.
Has the quality of financial management leadership been
strengthened? The answer is an emphatic yes. The CFO position
has moved from the back room to the board room. Dr. Combs, who
came to this job with a proven track record in financial
management, not in something else, exemplifies today's CFO.
Have financial management systems improved? Again, yes.
While systems continue to be the most difficult challenge by
far, we are not close to the finish line there. There has been
important progress, people have come a long way, whether it be
standardization, core systems, or better defining what is
required and needed. And for most agencies the problems are not
nearly on the order of magnitude they were in 1990. There are,
nevertheless, very difficult challenges ahead, and they fall
mainly in the area of systems.
Have there been improvements in internal control? Again,
yes, but it is with financial management systems that
additional improvements are needed. Importantly, recent
revisions to a 123 that you and Dr. Combs referred to, which
GAO fully supports, have bolstered the emphasis in this
important area.
Has financial reporting improved? As you pointed out in
your opening statement, 18 clean opinions versus 6. In 1990, no
one even imagined we would have a requirement for audited
financial statements. There were pilots. They weren't expected
to go too far. No one would have ever imagined one clean
opinion versus 18, much less in 45 days. Where the law gives
folks 5 months, the fact of the matter is in some of those
earlier years, there were some agencies that took up to 13 and
14 months. So this is a major achievement.
Most importantly, we have witnessed a culture
transformation. In 1990, not everyone in the CFO community was
supportive of the CFO Act. Some believed the demand for reform
would simply run its course and fade away. Well, that has not
been the case. We have seen strong support from the past three
administrations. From the outset of the current administration,
improved financial management has been one of the cornerstones
of the President's management agenda. We have seen strong
support and continuous oversight by the Congress. Especially
important has been this subcommittee's strong leadership.
As Dr. Combs mentioned, you get what you measure. And one
measure, a very important measure, is whether Congress really
cares.
Fifteen years later, people no longer question the value of
the concepts in the CFO Act. Today, the question is no longer
why do I have to do these things, but rather how can I do them
better?
While I have spoken about the positive impact of the act,
the journey to excellence in financial management is far from
over. I see five principal challenges for the future.
First and foremost, agencies must take full advantage of
modern technology and develop financial management systems that
are integrated with a range of other business systems. This is
a key requirement of the CFO Act.
The past is littered with far too many failed systems
initiatives and/or projects that simply perpetuated stovepipe
systems. One need only look at the Department of Defense.
Despite spending tens of billions of dollars, and at last count
having over 4,200 business systems, DOD remains high risk in
every primary business area and cannot produce auditable
financial information. Today, we see strong commitment in DOD
to transform its business operations and to overhaul financial
management. But it will take many years under the best of
circumstances to address deeply rooted problems.
Second, the financial management work force of the future
will have to be able to provide even greater strategic decision
support in order to add value to program managers. The goal is
to move primary focus from transaction processing and
reconciliation and cleaning up of errors to the systematic
measurement of performance and the development of cost
information, as called for in the CFO Act. This will require a
different skill set.
Third, addressing internal control weaknesses will be an
ongoing challenge. Good internal control requires constant
vigilance. It is not a one-time event and an ability to
leverage technology. Improper payments and computer security
are two cross-cutting issues that are now being addressed.
Fourth, we must continue to refine financial reporting so
that there is better transparency regarding our Nation's fiscal
condition. A summary consolidated financial report and
different ways of recognizing the range of Federal commitments
are two areas on the radar screen.
Finally, we must deal with the long-term nature of reform
and provide for continuity in an environment where leadership
changes are a way of life. The President's management agenda
has provided a sound framework for reform. It fully supports
the concepts of the CFO Act and has been very important in what
we have seen in the last 5 years. The job, though, will not be
complete at the end of this administration and continuity will
be critical going forward.
In closing, I want to thank this subcommittee and its
predecessors who had the vision to enact the CFO Act and for
the positive continuous support and oversight over the past 15
years. Your continued attention has been instrumental to the
very positive results we have seen to date and will be
essential in reaching the goals of the CFO Act going forward.
This completes my summary statement. I will be pleased to
answer any questions that you may have at this time.
[The prepared statement of Mr. Steinhoff follows:]
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Mr. Platts. Thank you, Mr. Steinhoff. Again, both of you,
we appreciate your testimony here today and your written
testimonies. I think both of you well captured where we are
today with some great successes, all major agencies reporting
in 45 days versus months and months and months in the past.
Mr. Steinhoff, your statement about the importance that
this is about accountability, not simply accounting, and what
are the taxpayers getting for their money that is being
expended, at the end of the day is it a good investment? And
you mentioned the challenges that still lie ahead. But the team
effort that has transpired in the last 15 years from those who
were behind the legislation, and you certainly played a direct
role in writing that legislation, and then everybody since, the
Department CFOs in your past positions and now in your current
positions, the GAO continuing to be very engaged, OMB, and that
Congress needs to stay part of the effort. If we continue as a
team in that fine-tuning and strengthening, whoever is sitting
in this chair 15 years from now will hopefully, though there is
always going to be room for improvement, but hopefully there
will be less room for improvement.
And who knows, maybe even DOD will have had a clean
opinion, or actually have an opinion. Maybe not clean, but we
will take just an opinion.
One of the examples I think that is very relevant, Dr.
Combs, that you highlight in your written testimony is the
financial management community working closely with each other.
The CFO Act in creating the CFO Council, I imagine there was
some interaction either informal or formal, but having a formal
structure for CFOs to work together and share best practices.
And as we talked earlier this week, the example with
Katrina and how your twice-a-week meetings with all the
relevant CFOs is a perfect example of that structure being in
place to ensure that we are kind of all on the same page and
working ahead.
With all the advancements that have occurred, and now in my
third year as chair of the subcommittee, I am looking at where
we came from and where we are. And when I look at the numbers,
despite great advancement, at least 11 different major agencies
have received less than unqualified opinions. And as we saw
last year, our number of restatements rose from five in 2003 to
11 in 2004. This year, when we look at the numbers, we kind of
held even in unqualified opinions at 18 and we dropped from 4
to 3 on those with no material weaknesses, no evidence of
noncompliance.
It seems we have kind of leveled off. Is there anything
that kind of explains that or that we need to be conscious of
to not just stay at this level but to keep pushing? And why are
we seeing those numbers where they are; somewhat kind of
leveling off? We have seen great gains, but then hit a plateau.
We don't seem to be able to continue the path upward.
Ms. Combs. I think that one of the major situations we are
dealing with here relates to the move forward and where we are
right now with our internal controls. I think the 45-day
deadline has given us a tremendous opportunity to cause
quarterly statements to have to be issued during the year to
provide a tremendous amount of stability during the year. But I
think where we have to go henceforth is continuing to work
through those material weaknesses, reportable conditions, and
our internal controls governmentwide.
Because in each and every department, it's extremely
important to do that day-to-day work and to get it done right
all during the year and not to wait until year end. I think, if
anything, the 45-day time limit has forced agencies to be more
aggressive, more determined at each quarter, at each month in
presenting their statements. And I think that has had a
tremendous impact on where we are right now.
In order to continue to strengthen that base and in order
to add two or three or four or more departments to the clean
audit rank up for next year, I think we have to work very, very
hard this year to certify these internal controls, and I think
that will add as much stability as anything that we can do.
I also think Jeff hit it exactly right in terms of the
technology and the systems integration that we have to continue
to work toward in these departments. It cannot be manual and
heroic efforts. It has to be sustained through these diligent
internal control efforts and having the right technology and
processes in place in order to get continuous improvement.
Mr. Platts. The focus on the internal control initiative, I
would agree and hope that is kind of the impetus that gets us
off the plateau; that initially it could even have us off the
plateau in a regressive way. But long term it has to be key to
getting not only just 18 but 19, 20, and continue chipping away
at a complete success.
So we will be anxious as we move forward with that to see
how that plays out.
Mr. Steinhoff.
Mr. Steinhoff. If you look at 2005, you have three agencies
that went down from the previous year. And in looking at the
type of problems they cited for two of those three it directly
related to putting up a new system, and that's a risky
proposition.
We audit the IRS, and they were going to roll out the first
module of their system about a year and a half before they did.
And as the auditor, we said, ``Well, gee, are you really ready
to turn that thing on October 1st?'' And there was a little bit
of a pause there. Well, that's the date. We said, ``You're
taking a big, big risk here. That's a date driven decision and
if you don't do it right, you will probably lose your opinion
and you may lose it for several years.''
So they stepped back and made sure that disciplined
processes were followed. I give Mark Everson a lot of credit
for that, and they rolled that system out this year and it
worked fine.
But for two of those three that went down, it was a result
of having a new system in place. I think people are learning
more. There were perhaps problems in previous years that
management just was not aware of. There might have been a roll-
out in a new site where certain things were not picked up. I
think the auditors are becoming more savvy and they have a
better understanding of the risk of some of these entities.
When entities have a lot of adjusting entries at year end,
it's not what you want to see. Maybe if you have four or five
of them, but not thousands of them. And I think some of it is
the fact that you have had heroic efforts in the past. And as
people become more sophisticated, they can get down underneath
the numbers a little better.
The other area which I think has driven some of the going
back and forth on agencies from clean to a disclaimer or a
qualified opinion are some of the unique financial statements,
the statement of budgetary resources. Some of these have become
somewhat confusing to some. I do not think they're rocket
science, I do not think the problem is the lack of guidance
from OMB, which some have claimed, but I think it's the lack of
familiarity. And I think some of the auditors had to learn what
those statements really were. They were signing off on them
with gigantic errors that were fairly easy to find.
So I think it's a learning process. The two you mentioned
in your opening remarks, DOD and Homeland Security, are the
ones that face the biggest problems, biggest challenges. I
wouldn't see them on the radar screen for a thumb up or two in
the next couple of years.
Mr. Platts. Hopefully not my 15-year prediction.
Mr. Steinhoff. It shouldn't be 15 years. It shouldn't be 15
years.
Mr. Platts. Mr. Steinhoff, you touched there and in your
written testimony on the system issue.
Mr. Steinhoff. Yes.
Mr. Platts. And in your statement you reference about NASA
and DOD not following the necessary disciplined processes for
developing the systems. We have seen that earlier in your
statement where you referenced the billion dollars the Navy had
spent on the four enterprise resource planning systems, and
currently underway with a new program, $800 million, what is
the best thing we can do, either as a subcommittee with
oversight or OMB in their coordination with all these, to try
to ensure that type of up-front preparation is occurring?
Because I would think that after the number of failings in
DOD alone or elsewhere, anybody out there looking to do one of
these systems saying, ``All right, what are these disciplines,
what are the steps we want to make sure we follow,'' but that
doesn't seem to be the case. So what do we need to do different
to ensure that does happen?
Mr. Steinhoff. I think it's very important that when
funding is provided for these systems that the Congress has
oversight directly over those that represent a major
investment. When you're talking $800 million, a billion, you
are talking big dollars there. And it is not uncommon in a
large activity like defense to have development projects of
that size. They become unmanageable. You don't have any direct
accountability over them, you have multiple project managers.
At the time it's finished, someone is in charge that had
nothing to do with all the mistakes made along the way.
It is a matter of holding someone accountable along the
way, having regular oversight, making sure that the agencies
and departments are following disciplined processes in
practice. Many activities have a good set of rules. If someone
wanted to look at a leading organization in terms of written
practices, DOD would have those written practices. But these
are very complex operations. You have many, many stovepipes
involved. You have many players. You have numerous committees
or jurisdictions on the Hill that have responsibility. You're
going to have to have a way for the major large dollar
investments to have some kind of oversight mechanism where they
have to come back to the Congress or come back to OMB or come
back to someone and say we have achieved X, Y and Z and here is
the return on investment.
I remember a number of years ago looking at a system and
the return on investment at that time was projected to be 2
percent. That was before they started. Well, no one would ever
invest $1 billion, especially in the early years of computer
technology, to get a 2 percent rate of return. Private sector
wouldn't invest unless it was a large rate of return.
So systems, I think, are a real difficult issue. The
disciplined processes, the enterprise architectures, investment
management, concept of operations requirements, management,
testing, they can't shortcut any of those things. And,
typically, when one does a postmortem when they go down, you
will find some or all of those things.
I would think right now, we just issued that Navy ERP
report, that some in the Navy would be asking some very tough
questions. How is that effort that has just started going to
fit in with the other 44 systems it is supposed to integrate
with? I do not think they have any idea. So I'm not sure I
would invest that amount of money in something until I knew.
But it is really a lot of oversight over that is needed.
Mr. Platts. Dr. Combs, is there any consideration at OMB
to, through executive action, put that type of threshold review
in place with OMB; that if it's going to be--and I would
probably start low, low relative to DOD--say $10 million, if
you are going to spend X amount, whatever X is, on a new
system, that it has to be presented to and reviewed maybe by
OMB and GAO; that you have dotted the I's crossed the T's
before going forward?
Is that something you are doing or are willing to look at
as a possible action?
Ms. Combs. Mr. Chairman, we are already in the process of
reviewing each and every financial system upgrade, each and
every financial systems change that is being presented. And the
way we do that is individually, department by department. It is
amazing. There is a considerable amount of knowledge out there
about what not to do, and it is quite amazing how much of that
knowledge we end up sharing with people who are either
beginning the thoughts of their business plan to eventually get
into a new financial system.
But first and foremost we are requiring them to do a very
detailed business plan for any kind of core financial system.
Mr. Platts. What's the consequence if you review it and
don't think that they are ready to move forward? How does that
play out?
Ms. Combs. Well, I will give you an example. There was a
department this past year, just a few months ago, that we
worked with them, they worked with us. It was a very collegial
working relationship, because no one wants to be written up as
getting on the front page of the Washington Post for wasting
the taxpayers' money. There is nobody out there that wants to
do that. They all want to do it right. So this department was
actually seeking help.
We were able to work with them and show them where the high
risk areas were, where the pitfalls potentially could be if
they stayed on the same plan that they were on. And they, along
with our consultation, decided to do something very similar
that Jeff talked about with the IRS. They decided to delay
their implementation for a year so that they could get on to a
very good business plan, get it broken up into very
constructive pieces, and reduce their risk of running into a
problem.
Mr. Steinhoff. One of the difficult challenges, and DOD is
a bit different, there is a little bit different kind of
oversight in DOD, and in DOD about 80 percent of the financial
information comes from nonaccounting systems, so these systems
wouldn't necessarily go through that prism of the financial
system prism. They would go through a different set. So you
have various sets of looking at it and you have totally
different, in the end, funding mechanisms in DOD where they are
dealing directly with the Congress verses through OMB. They go
through OMB but it's different.
Mr. Platts. So if it's a specific line item in approps for
DOD for this program, that is financial management related but
it is specifically delineated in the appropriation, OMB, you
are still going to engage; right? Will you still review that
type of program, even if it is a specific line item for a
program versus here are your funds for financial management and
they decide to use some of those funds to upgrade?
Ms. Combs. Well, I would say that our first and foremost
priority is looking at core financial systems. And quite
frankly, Mr. Chairman, I'd be really, really in good shape if I
think we have reviewed all core financial systems and had them
on the right track, not just for the DOD that we are talking
about, but for each one of the 24 act agencies as well.
In fact, there are people I have heard recently even stand
up at meetings and say, ``Oh, I do not think there's anybody
out there that has ever kept their clean opinion and done a
core financial systems change.'' Well, I'm here to dispel that.
We did it when I was at DOT and the CFO there. So there is a
way to do a core financial system, get it into an agency or
department and do it right and still keep your clean opinion.
That's what we're seeking for all of our agencies.
Mr. Platts. I want to make sure I understood you, Dr.
Combs. Do I take that to mean that while that review should
happen with all programs, it's not necessarily happening?
Ms. Combs. Well, are you talking about the core financial
systems?
Mr. Platts. Yes, for the core systems.
Ms. Combs. The core financial systems are being looked at
individually by our division OFFM, the Office of Federal
Financial Management, each and every one of those individually,
department by department. We are reviewing their business
plans, we are reviewing and having a great deal of oversight
with anybody who wants to make changes in their core financial
system. That is ongoing.
Mr. Platts. So that is across the board?
Ms. Combs. That is ongoing. We welcome transparency and
continued good input from our colleagues in GAO as well as the
Hill on each and every one of those.
Mr. Platts. Mr. Steinhoff, your example in the ERP would be
an example in DOD where it is outside of that core financial
huge sum. It's a system investment that perhaps doesn't get the
same level of scrutiny that OMB is able to give to the core
financials?
Mr. Steinhoff. Yes. And the part of the real challenge is
who controls the money. Take, for example, the Navy system.
That money really wasn't controlled by the Defense Controller,
that was controlled by the Navy.
And one of the things I think the Controller General has
spoken to at these hearings is who controls the money. And
perhaps in Defense, as they are putting their architecture in
place, they should be looking from a corporate perspective. Is
it worthwhile to spend this money on this system in the Navy or
this system in the Army? Right now these individual services
get their own money for their own systems for their own
committees. And, again, when it's part of a broader array of
systems that feed into a financial system, you need to look
even harder at it.
So you don't have the same degree of control when you don't
control the funding. To the extent one controls the funding, if
the Controller controlled the funding, that would be different.
They can provide advice, they can suggest some things. But to
the extent whoever controls the funding or oversees the funding
makes the ultimate decision.
Mr. Platts. With DOD, and this kind of leads to the next
question I was going to touch on, is that easy one of what is
it going to take at DOD and DHS, and maybe specifically
starting with this issue of oversight of these systems
investments.
I apologize, my staff maybe can remind me of the name, but
with the recent announcement with Acting Deputy Secretary
England and taking the lead role on the business
modernization--I forget the exact title--the Business
Transformation Agency, yes. I was close. Do you see that
helping to change the culture there, the environment, to have a
more coordinated oversight? Or, again, not when we get into
things like this.
Mr. Steinhoff. OK, yes. First of all, I want to say that I
have nothing but admiration for the capability of the defense
managers. This is a unique, highly different environment they
are in. It is the biggest entity in the world, really. They run
cities, towns, school systems, hospitals. You name it, they do
it. Seventy-five percent of the procurement dollars, most is
discretionary spending. So they have a complex set of issues
and have a lot of very highly capable people.
The concern that we have raised is that, yes, we have
certainly seen a change at the top in DOD. There were many
years of denial or of, well, these rules don't really apply to
us. You have now a very concerted commitment from the Secretary
on down. You have the deputy, who is involved personally. And I
have observed it, having attended some of these Defense
business board meetings. He is personally engaged. He's a
highly knowledgeable person. Very, very capable. If someone is
going to achieve reform and get it done, you would have to do
it at that level.
The issue that GAO and the Controller General have raised
is the duration of the time it will take for this reform to
take place. A Deputy Secretary does not have a span of control
or a span of office that is going to be sufficient to complete
the task. And one of the proposals that we have made for
consideration is to have a chief management official, or chief
operating officer.
And what one would do is just really have two deputies. You
would have one deputy for the policy or the warfighting side
that would be engaged in that, and a separate deputy in charge
of business operations, and that person would be empowered to
make those decisions across the department. The CFOs from the
various services have a very strong dotted line relationship,
almost a solid line--which is what the CFO Act envisioned--back
to that deputy. That deputy would control the money for
business operations.
Granted, you would have to have the logistics heads and all
those groups. I mean, they have their needs to carry out their
missions. But it would not be the stovepiped type of approaches
they have today. Today, it's stovepipe within systems, and
that's what they're trying to break down. And we're very
supportive of what they are doing, but the real tough question
is how far do they get before another group is there, and what
kind of staying power do you have?
They have had initiatives before where they have had
systems czars and what not, and it is a very difficult cultural
type of barrier to break through. So you have to have a very
strong person. They have to have unequivocal backing on high,
probably some kind of contract or term, and it has to be
someone who has done this before and who is going to be there
for, let's say, 7 to 10 years to do it.
Mr. Platts. That authority over all of those entities, a
CFOs analogy on a much smaller scale, is with NASA.
Mr. Steinhoff. Much smaller.
Mr. Platts. And giving the CFO authority over all the
center CFOs, so that they really have authority but one-
thirtieth or so of the budget.
Mr. Steinhoff. Yes, much, much smaller. And DHS, which you
mentioned before, that's a different situation somewhat.
Mr. Platts. I was going to ask you to expand, because,
again, a very important department, important mission, with
obviously very significant challenges. Is there anything that
you want to highlight regarding DHS?
Mr. Steinhoff. I thought you might ask something about it
today, so I gave it some thought. One day they did not exist,
the next day they did. And you took a lot of entities, put them
all together. They came from disparate agencies, and they all
had different systems. Many of them came in there without the
best systems in town and they had to operate. And it is
probably a work in process in terms of how do you manage and
how do you establish a culture.
They say it takes 7 years to make cultural changes, 7 to 10
years. Well, they have been in business a couple of years and
they had maybe 10 or 12 cultures when they started. And they
just don't have a cohesive set of business systems and they
have certainly had some difficulty getting started because they
had a whole host of other things they were trying to deal with.
I remember having meetings there shortly after they set up
shop and most people didn't have phones or offices or didn't
know who their staff were. So you have a basic startup
operation. I think their problems can be resolved much more
easily than Defense's, but they do have serious problems. And I
think you're going to have to have a very committed vision
toward what those business systems are. You're going to have to
consider that it won't get done in, let's say, the 3 years
remaining in this administration. So you might have to have
somebody that can sustain it from one administration to the
next. But this is a very difficult challenge. It's not going to
be easy.
Mr. Platts. Dr. Combs, did you want to add anything on
either DOD or DHS?
Ms. Combs. Well, I think Jeff has hit on the high points. I
think one of the real critical elements, whether it's these
departments that you have just discussed with him or whether
it's any of our other departments, top-level leadership is
extremely critical. I think there are some committed people
there who are committed to doing the right thing with the
management of those departments.
I think the other critical aspect is to have some very,
very clear action plans, hold people accountable for those
plans of action, and keep breaking those things down into
manageable entities so that they can be worked on and people
can see some success.
Mr. Platts. Actually, before I move on, I want to go back
to one followup, Mr. Steinhoff. On those Navy systems that were
the $1 billion and the four systems, I expect I know the
answer, but to the best of your knowledge was anyone demoted,
fired, or any funds recovered regarding the billion dollars
that were spent that proved not worthwhile; that they had to
start over?
Mr. Steinhoff. I do not know if there were any personnel
actions taken or anything along those lines. In terms of the
money spent, the money was spent. There were certainly some
lessons learned. There was probably some things they gained
they could take to the new project, but certainly not $1
billion worth.
And we felt at the end of the day that the effort was
largely a waste. It just shouldn't have started and it really
was not a return on investment.
Mr. Platts. When I look at those numbers, and having just
come to the hearing from the appropriations vote where I voted
no on an appropriations bill that failed, the Education-Labor-
HHS, and specific things I looked at in this bill, Special Ed
funding, an increase, but minimal increase, and proven programs
like Even Start that was cut by 67 percent, that have proven
successes out there. Then I see us turn around and spend $1
billion on things that really in the end didn't help anyone. It
just really makes me more certain that the vote I just cast was
the right one.
Dr. Combs, in your position, you have some unique
perspective, having been CFO in two agencies and now as
Controller. How do you see your role in interacting with those
agency CFOs in the environment that you are able to kind of
establish the culture out there?
And then what is your read of the major department agencies
of the environment for the individual agency CFOs who are
trying to really get their financial houses in order?
Ms. Combs. Well, I'm very, very proud to serve with the
cadre of CFOs that I serve with and have served with in the CFO
role. I think we have some very hard working, determined, and
committed managers out there who have taken very strong
leadership roles in each of their respective departments and
agencies.
One of the things that I look back on that I think has
helped us tremendously in the CFO Act of 1990 was turning
financial management into a leadership role. It brought it out
of the back room, as Jeff reminded us a bit earlier, and
brought it to the front table. And I think of all the things
that the CFOs have to work with, the top leadership in their
own respective departments and agencies and having that top-
level support has given all of us an opportunity to do the
right thing and to establish the right processes and know that
we are going to be respected for who we are and what we do in
each and every one of those departments.
I have been extremely fortunate to always have the senior
leadership behind me. The commitments that I have been able to
make and the things that I have been able to personally do have
all been sustained by upper-level leadership. I think you have
to have that in each and every one of these departments.
Mr. Platts. Without needing to know specifics of a certain
Secretary or department in mind, are there instances in the
time you have been Controller that you have seen or are aware
of where a certain department or agency is just not responding
well to what OMB expects of them from a financial management
point; that you or any of your predecessors in going to
Director Bolten, or whoever the Director of OMB is, that the
financial management issue kind of comes up to the top level at
OMB and then to the top level in whatever department or
agencies to the Secretary? So rather than your working with a
CFO without success, does it then get up kind of to the top
boxes of the department in OMB?
Ms. Combs. Well, I am certain that could happen if it
needed to happen. There is no question in my mind that not only
do I have that availability to make that happen through my
Director or through the Deputy Director, if I needed to utilize
that mechanism I could and would do that. Fortunately, as I
said earlier, I have a very wonderful cadre of CFOs that have
previously been my peers and who are now either ascending into
a new CFO role, because we do have some new CFOs, that I have
been able to establish a very good working relationship with.
And because I have been there and have done this job in so many
different departments, I think a lot of people rely and depend
on my consultation early in the process, and that's what I
want. I want to be a colleague as well as an energizer and
someone who does indeed hold them accountable when they need to
be held accountable.
I think the issues that I have seen thus far relative to
departments that have needed some special help, we talked about
the three departments that in essence regained their clean
opinion this year. Obviously, they lost it last year. Those
were three departments that we came in with and tried to work
collegially with them to say, ``have you done this, have you
done this?'' And there are certain things that you do as a day-
to-day management requirement in these departments and agencies
that make all the difference in the world relative to quarterly
statements, and, consequently, your audited opinion for the
year.
So I think it's important to know that top level leadership
is behind you and you can utilize it. It's important for your
peers and the departments and agencies to know that. And quite
often, because of the President's management agenda, everybody
is speaking off the same page, so it doesn't matter if the
Deputy Secretaries are meeting or if the Secretaries are
meeting, which occasionally the President might say to them,
how are you doing in your financial management, and they always
know that might be a possibility.
So having the President's management agenda is a wonderful
tool at all levels. There is no level that is immune from being
asked, how are you doing on financial management, and I think
that is a great tool, and one we utilize very effectively.
Mr. Platts. And I think the importance of that senior
leadership cannot be understated, I think it's one of the
aspects of President Bush's administration that this issue has
not really been, in a broad sense, highlighted as it should be.
The administration really has been diligent and very determined
in trying to have good financial management be instilled and
lasting. And I think that's reflected--DOD has worked with
Secretary England in a number of positions, with Navy, or as
Navy. Now Deputy Secretary of DOD as well, that sent a very
strong message and one that the new agency effort was being
kind of rolled out said, ``Well, I've got to really learn more
about it.'' But one thing that did give me good confidence was
the fact that Deputy Secretary England was going to be there,
personally involved, and that was both going to send a very
important message out throughout the Department and would
provide truly a very good leadership at that senior level.
So the relationship--we've kind of been internally in the
financial community, but when we're talking about the financial
systems, we get into the Chief Information Officer and the
interaction between CIO and CFO and how that impacts the
system, the investments that are made.
Could the two of you expand on your view of how that is
occurring within agencies, and then specifically with OMB.
What, if any, level of intensity or interaction between OMB and
CIOs, where it is relating to financial management systems?
Ms. Combs. I'll speak first within the agencies, because as
a CFO in an agency, if you are adopting new financial
management systems or any systems that you're working on, maybe
it's some enhancements to your system, you really need a very
strong partner in your CIO. And both of those positions report
directly to the Secretaries or the heads of each of the
agencies. So it's very, very important for the CFOs to
understand the complete CIO level of involvement as well as
you, the CIO, has an expanded level, looking at the entire
enterprise, the financial management needs to be a part of
that.
And it has always served me very well as a CFO to work
very, very closely with the CIO and developing any business
plans--of course those are all presented each and every year
through the CIO and through my counterpart, who deals with the
CFOs at OMB. She and I have a very close working relationship
as well as we're dealing with financial management matters and
financial systems that relate to the CIOs in these departments
and agencies as well.
So I think the close working relationship is there, both at
the OMB level, and it must be there at the departments and
agencies for them to be successful.
Mr. Platts. Mr. Steinhoff, what do you see as far as good
or bad in departments and agencies?
Mr. Steinhoff. I agree fully with what Linda Combs just
said. You have to have a partnership. It has to go both ways.
We're really looking here at business systems, business
modernization. And there is a fine line between the CIO role,
CFO role, program role. You have to have a partnership between
all the parties moving toward a common goal of providing
business support. That's really what the CFO is doing,
providing strategic business information to top management,
year-end reporting, stewardship-type of functions, paying
bills, etc. And they are doing that on behalf of the programs
that are there.
So you have to have people in these roles who can work with
other people, have the proper kind of interpersonal abilities,
and can see things from multiple sides. You have to look at
what the enterprise needs. And for those entities that are most
successful, they will have developed these kinds of personal
partnerships that Linda Combs spoke to.
If it be that the CFO says I have these powers, I'm going
to do this regardless of what you say, and the CIO says I
control the system, I'm going to do X, Y and Z, and then the
program manager on the other side says well, I want it another
way, there has to be a partnership and there has to be a very
clear plan in a department that deals with its range of
business systems of which the accounting or financial is part
of it.
Mr. Platts. Is there any department that you're seeing
where that type of relationship is not occurring, that
interaction, that partnership, that concerns you?
Mr. Steinhoff. It's not something that I could really
address across government. I can say that in the experiences
I've had in DOD they seem to be trying to establish that
partnership between these various units. There are problems and
their systems are huge, but I can't really speak to any--I can
get back to you if we have issued any reports out of our IT
team that's spoken to that.
I'm sure from just a common sense view there probably are
some that don't work well together, but those are the kind of
things that the head of the agency, head of the department
should be aware of. And the head of the department should make
sure that's really what their job is, they and the deputy, to
make sure these business partners are working together. Because
if they're not working together you will suboptimize the
results, and you will find yourself in the same position year
after year.
Ms. Combs. And I will just add to that. I think if Jeff and
I probably went back and looked at the lessons learned from
some of the failed areas, we probably would find that at least
one of the top three areas were considered to be some of the
causes for it.
Mr. Platts. That partnership broke down and didn't occur?
Ms. Combs. Correct.
Mr. Platts. On DHS in specific, Dr. Combs, when we passed
the Financial Accountability Act, DHS Financial Accountability
Act, we tried to place greater emphasis on financial
accountability to bring it in compliance with the CFO Act, to
move forward so that this major agency is on the same plane as
all the others.
In your initial review of their end of the year 2005
statement, do you see progress being made in DHS this year
versus last year? And Mr. Steinhoff's highlighted what the
challenge is as a new agency, 22 agencies come together
inheriting multiple material weaknesses, it's a pretty
staggering assignment, but do you see progress being made
there?
Ms. Combs. Well, I think the mere fact that they presented
on time is certainly something to applaud them over.
I think there is tremendous hard work going on, and we've
talked about in the past some heroic efforts. I think that--
because of what Mr. Steinhoff had to say earlier about the way
this department came together, that it is a major, major task
to have come as far as they have actually come over the last
couple of years for the very same reasons he referred to.
I think that the progress is continuous, and I think that
it will continue to be toward the positive.
Mr. Platts. You mentioned about past heroic efforts and not
just at DHS, but in your assessment with all of them making the
45 days. I agree, it's a great step to get that information now
and be able to review and act on it rather than waiting another
several months. What is your read on how their role, the heroic
effort played into the 24 agencies and departments in getting
that done versus the quarterly statements happen to guard
against that or negate the necessity of that type of heroic
effort?
Ms. Combs. I've talked with a number of CFOs over the
course of the last couple of weeks, and I've also talked with
some IGs as well to get their sense of whether or not they
think things are better or, ``less heroic'' than they have been
in the past, and I think 100 percent of those have indicated to
me that it gets better and better every year, and that this
year is better than last. But it is because of those monthly
and quarterly statements, it's because of that discipline that
has had to be interjected in each and every department each and
every month along the way. And that discipline is serving us
all well. And one of the ways that discipline continues to
serve us there is that fewer and fewer heroic efforts are
having to be engaged in at year end in order to get the clean
audit.
Mr. Platts. Mr. Steinhoff, your assessment on the heroic
effort issue?
Mr. Steinhoff. I would basically agree. I think that when
we went from 5 months to 1\1/2\ months, that wasn't nibbling at
the edges. And someone couldn't just throw five more people at
it. They had to fundamentally change the processes that they
used to prepare financial statements, they had to step back. It
wasn't a matter of telling the auditor to work harder or
faster, it was a matter of being able to project information
forward, to prepare quarterly statements, and to organize
materials. And we find every year in our audit of the IRS--we
are the auditors of IRS--it's a very large audit. It's a very
large entity. It's got a lot of complex issues that are
involved there. They do have a lot of systems challenges, a lot
of control challenges, but they made fundamental changes in
their processes for preparing statements. They took the various
business owners, people who have owned the inventory or
whatever it might be, they forced them to the table to change
their processes. So they were routinely doing certain things
like reconciling each month, taking fiscal inventories if that
was part of the job, it was built into what people would do day
to day, and therefore it wouldn't be an add-on at the end of
the year.
We have found that the audit, the preparation has gone
smoother in the last few years. Auditors will always find some
transactions they question. There is always a degree of those.
The question is, do they break the threshold for materiality?
We find fewer and fewer errors, they correct the errors we
find, but fewer and fewer, not material in any way, but fewer
and fewer. They've improved at doing that. The fact that they
had to accelerate, the fact that one time they had a business
there like Charles Rossetti, they changed their personnel, that
was extended, and they've got people that know what they're
doing. And I have just seen a marketed improvement on their
side, having been the auditor up close and personal for years
and years. And I would say that is across the board.
Is it difficult? Do they work real hard at it? Do they
spend nights and weekends on it? Yes. Do the auditors spend
nights and weekends on it? Yes, whether they be private sector
or government auditors, so this is a big effort. I remember in
the early years one of the agencies I think it took 14 months
that 1 year and had something like 3,300 spread sheets, these
big spread sheets. So they were taking vouchers and recording
numbers on these sheets, and that's how they prepared the
statements.
Mr. Platts. I'm glad they didn't come and have to present
all that before the committee.
Mr. Steinhoff. Well, they were in this room, I actually saw
it. And people were sitting there for 14 months doing that. You
just don't see that.
There are a lot of real challenges and a lot of hard work,
and there are numbers that must be derived through statistical
samples or special analyses which you would like to routinely
come from the system, but if they work toward that--in theory,
the ultimate is you push the button, your numbers come out, and
you would just have the normal things you have to accrue. I
think they're all moving in that direction, and they certainly
understand what to do. When they first started, they didn't
each know how to prepare these things or what to do.
Mr. Platts. We will have one heck of a celebration when we
get all the departments, agencies to be able to push the button
and have them just appear. It will really be something to
continue working for because if we get to that with any
department, agency, that really is going to get what we're
after--that day-to-day, reliable substantive information with
which to make informed decisions.
As we go forward, and with the A-123 requirements, you
talked about in the short term, there is likely to be some
additional weaknesses uncovered because we're kind of digging a
little deeper, a little more thoroughly. In the short term we
will have some additional weaknesses which in the end will have
long-term benefits. In light of that prediction or belief,
which I think is probably a fair one, do you think that in
those six we should anticipate some entities that have clean
opinions now not getting a clean opinion next year because of
the more substantive review that the new internal control
requirements will place on them?
Ms. Combs. Absolutely not. I expect that we will continue
to improve the number of clean opinions. I expect that A-123
and the certifications that are done in June are indeed going
to uncover some things, but I do believe that they will uncover
some things that are not as difficult to correct as some of the
things that we already know about.
I think that one of the things that we have seen over the
past, if you look at the material weaknesses and you analyze
the material weaknesses in each and every department, these are
very long-term, pervasive, repeat material weaknesses. And
while there may be new material weaknesses that are presented,
there may be evidence that some of the internal controls that
are not in place that should be put in place. I envision while
they may be deeper, they may be indeed easier to correct. That
is my hope, my anticipation. Because as you and I have talked
before, we will be closer to where we want to be in terms of
financial management in each and every department when we have
all the program managers and all the financial managers looking
at material weaknesses and reportable conditions just like they
were the same and correcting them on a day-by-day, month-by-
month basis, understanding what they are and understanding what
it means to correct them.
So I think that my anticipation at this point is we're
going to push forward, we're going to use this opportunity with
A-123 that we have to ferret out additional things that need to
be corrected, and expect and hold accountable departments and
entities in making them happen and making them happen quickly.
Mr. Platts. And I think maybe it is a fair statement to
say, in that belief it was going to happen is what you have
seen at IRS, is that exact type of identification, correction
and positive results.
Mr. Steinhoff. Yes. I think fixing something that you find
to be wrong, holding someone accountable. Some things in the
past are hung out there for years that could have been
relatively simply resolved, and it's having a basic policy
perhaps that we expect these things resolved in 3 months or 2
months, whatever it is, and holding someone accountable for
doing that. It needn't result in a loss of a clean opinion. If
you have done the work in an arduous manner, you should find
your problems before year end.
Looking at some of the problems this past year, there were
things that were found toward the end of the audit or end of
the period sometimes found by management. They didn't know
about a certain something. So it's getting on it quickly, it's
recognizing when you've got a long-term, deeply rooted problem,
what it takes to do that and get on top of that and hold
someone accountable, but not having hundreds and hundreds of
open weaknesses, hundreds and hundreds of audit recommendations
and requiring management to take responsibility.
One of the very important things in the revision to A-123
is it really revitalizes what was in the 1982 act, and that is
that management is responsible for this, it's a fundamental
responsibility. And there is nothing wrong with finding a
control problem. The problem is if one doesn't then fix it. It
should be rewarded for finding it and rewarded for fixing it
and punished if they don't fix it.
Mr. Platts. Agreed. And that approach is certainly what we
all are after.
The only two questions that somewhat relate to the
personnel issue and continuity, one is we find that many
agencies rely heavily on contractors to perform their financial
statement production. And how does that impact the long-term
ability or continuity of that department or agency using
contractors to maintain and really have that knowledge base be
there and retained year to year, long term to build on if it's
contractors performing the work?
Mr. Steinhoff. It's not the environment you want to find
yourself in. You want to use a contractor if you think this is
a body of work that you need it to be done once or twice, you
don't have the skill mix; but you wouldn't want to be paying
somebody every year to carry out your basic responsibility.
There certainly are good reasons to use contractors, especially
if you have a skills gap. But if you're totally dependent on a
contractor to do just basic things and every year you're paying
someone to come in and estimate what your inventory is worth or
how much property you have, that's only a number for that 1
day. It doesn't really give you the kind of information to
manage day-to-day.
I remember early on in our work at IRS they hired a
contractor to come up with an estimate of their property, and
we made it very clear to them that 1 day after the end of the
fiscal year any number they had was not of any use, and they
would have to spend that money again, and again, and again. And
you ought to fix the basic system, you want your own people to
be generating those numbers. And the fact that they were going
to have to keep paying and paying and paying, you want to have
your own capacity. But that is not to say that you can't make a
business decision in certain areas that it might be more cost
effective to use a contractor, but it shouldn't be to process
transactions and what not.
Mr. Platts. Dr. Combs.
Ms. Combs. I think it really boils down to management
accountability and management effectiveness. I think good
managers and good leaders in any organization look across the
entire enterprise and they see where the human capital needs
are. And you either go out and buy the support you need,
whether it's temporary or long term. You might make a long-term
decision, as Jeff just mentioned, that is a particular cadre of
individuals that maybe we can't attract into the Federal sector
like we should. But it all comes back to the general management
responsibility and having a leader, a manager look across the
entire enterprise of an organization and decide what human
capital needs there are. And if there are business reasons and
good business reasons for using contractor support versus our
own Federal cadre, then I think that needs to be explained by
management, both to employees as well as the people that we
support.
Mr. Platts. Is my understanding correct that with the A-123
work, that's heavy--or maybe not extensive, or mostly
contractor done work?
Ms. Combs. I am aware that there are some agencies and
departments that are contracting some of that work out, but I
am further aware and have been very clear with other CFOs that
this is a management responsibility. This particular element,
and certifying these internal controls is nothing that can be
delegated, it's nothing that can be bought, this is clearly on
the shoulders of management. You have to stand behind whatever
work is done, whether it's done by contractors or whether it's
done internally.
Mr. Platts. OK. The related issues--you have touched on
really both of getting the necessary human capital in place,
especially in times when we're really trying to emphasize good
financial management and really to set a good path for the
future.
And Mr. Steinhoff, in your written testimony, I'm going to
just quote and I think you capture it well, ``building a world
class financial work force will require a work force
transformation strategy devised in partnership between CFOs and
agency human resource departments working with OMB and the
Office of Personnel Management.'' I would be interested if both
of you, where are we recording that type of effort, that
strategy and all the partners being on the same page to bring
that together?
Mr. Steinhoff. I think this is a huge challenge. We're in a
technology age today, it's the very early stages of it. We have
a Federal work force that has large numbers that are going to
be retiring soon, and we have major opportunity to restructure
at the same time. If you look at the financial management
arena, the IT arena, both of which are heavily engaged in what
a CFO would be doing, the competition for talent is intense.
The students get top dollar when they get out of school, you
have to aggressively compete for them, you have to be very
agile in doing that. And frankly, you have to have a very
strong human capital strategy. You have to be able to quickly
respond to needs. And I know at GAO I feel very fortunate that
we have a lot of these abilities. And I have attended forums in
the executive branch and I think they face a real difficult
challenge, challenge of being agile and being able to
immediately hire somebody to go out and try to get the best
people they can get when they're competing against the major
consulting firms who are paying top dollar. We have to
challenge people when they come into government. The average
person today that enters the work force is not going to spend
30 years or 40 years at the same job like yours truly did,
they're going to move from job to job. I have kids in their
20's, and I don't think they plan to stay one place for their
whole career. But the government's going to have to be able to
really compete in a tough, tough market. It presents a good
opportunity, but I know that GAO can compete quite well. I'm
not sure that some of the agencies are prepared to compete on
the same basis.
Mr. Platts. Are you seeing that type of--that recognition
governmentwide and the strategy that you reference even in the
initial stages?
Mr. Steinhoff. I don't think in the financial management
arena, based on just discussions I've had with CFOs, some of
the forums that have been sponsored in the past where people
have talked about human capital and they've shared the war
stories about 8 months to hire someone, and you know, and they
go down to colleges. I know I asked my kids all the time when
they were in college, well, when the recruiters came down, you
know, how was it. And there was sometimes a big difference
between what was sent down to these colleges to recruit these
kids. If you're going to be recruiting an accountant, you send
a young accountant down, you don't send a personnelist down,
you don't send a person down to pass out fliers, you don't give
them a 45-page form to fill out with many of the questions not
really applicable to them, and you don't spend months getting
back to them on it. You have to do it immediately.
We have a lot of summer interns in GAO, we are bringing in
sharp people, they're seniors maybe going into their fifth year
because most of the cutting students are in 5-year programs
now. And we have them there, they're there for the summer, and
we make a face to face offer at the end of the summer. We have
a competitive wage we're paying them, and we are pursuing them
the same way a CPA firm would be. And I think that's really
what the executive branch is going to have to be in a position
to do.
One of the concerns that I always have whenever we have
budgetary problems is some of the first things to go are what
are called support functions in financial management. But as
people retire, you have an opportunity, but you have to have a
good plan for succession. You have to be grooming people for
the future and you have to be willing to move quickly, you have
to be agile.
I will let Linda speak a little more about some of the
authorities they have, but I felt in some of the forums I
participated in that I was speaking about a whole different way
of procuring services than some others were. And it's not easy
for me because I'm competing against all the major accounting
firms, I'm competing against all the consulting houses. The
government has a lot to offer, and we have to have strategies
both for the entry level, we also have to have strategies for
those people that want to rebound in their career, they've been
with a major firm for 5 or 6 years, they have sort of burnt
that out in life, they want to move on. And you have to have
very, very astute recruiting strategies there. And I'm not
really sure if the CFO community--my sense is that is an area
they need to work on, look at in the future on.
Mr. Platts. Dr. Combs, I would be interested in your
perspective, and especially what, if any, relations with Office
of Personnel Management and how to develop that effort.
Ms. Combs. I, too, am very concerned about our ability to
attract and retain financial managers in the Federal
Government. I think that the President's management agenda on
human capital governmentwide has sensitized people to the fact
that we have a particular need in the financial community to
strengthen that particular area, as well as others. But Jeff
mentioned the IT community. But CFO and IT are more and more
difficult to attract and retain people because the outside
salaries are so substantial and we can't even come close to
those.
But I think the other thing that I would commend GAO on and
say that I think we have to buildupon the work that GAO has
done over the last several years in their human capital effort.
I think they're probably one of the stars that I have seen in--
certainly in the Washington arena, but certainly for a private
sector organization as well. I think they've done some
remarkable things relative to human capital efforts, and I
think that certainly is a priority of the CFO Council.
We have a sitting CFO from the corporate world to come to
each one of our CFO Council meetings and talk with us about
issues of common concern. They are always the first to bring up
human capital, and we listen with intrigue to hear them talk
about retention and attracting their share of well-trained
financial managers. And I can't help but know, as I hear them
talk about the training programs that they embark upon and the
tremendous efforts that they undertake in these very large
corporations to keep people on their payroll, they do an awful
lot once they are able to attract people into their
corporation.
We had a loose federation of us CFOs embark upon bringing
in some MBAs between their first and second year last summer,
and I had done it when I was at EPA and DOT. And I think we had
11 MBAs throughout government this past summer. They had never
thought about working for the Federal Government, and would not
have thought about it had I not gone and recruited on their
campus. They had a tremendous eye opening as to what it was
like to work in financial management in the Federal Government.
It was a very, very positive experience. But I told them coming
in I already apologize to you because I know when you get ready
to graduate this coming June, I will not be able to attract you
into the Federal Government because the salary I could offer
you is so low compared to what you could get in the private
sector. I will not be able to touch you. And that breaks my
heart to know that is the way we have less vehicles than we
need to work with in our human capital.
You asked if I had done some work with OPM. Obviously there
are some proposals underway right now, and the financial
community is of course a part of some of those proposals, but I
truly look forward to a day when I can say to those MBA
candidates, you come see me next year, I want to have a shot at
you as well. That's where we need to be.
Mr. Platts. And some of that is outside of all of our
control, and not just meaning salaries, but perspective of the
employee that serving in public service is a high calling. And
maybe it's money, but there is a way of giving back to the
service that makes up for less money, that you're serving your
country, whether it be in uniform in the military or civilian
in a department or agency.
Mr. Steinhoff. They have to see they're making a
difference, they have be to challenged and motivated, they have
to be given responsibilities that they feel are challenging. I
think all those things are very, very key. And you have to
then, once you have them, to point that finger raised on
spending money and developing the people. You have a
procurement community right now that's got an acquisition sort
of professional that receives certain training and certain
special funding. They should have that in the financial
management community. I mean, do they have the money to train,
to develop, to move people around? And again, it's retaining,
it's attracting. And people are attracted, as you say, for a
variety of reasons.
Mr. Platts. I see it in my immediate office with our
district offices and my D.C. office with summer interns. We
always have six each summer that split the summer, half in the
district, half down in D.C. and then throughout the school
year. And one of the things we find, especially when they are
in the district, is that making a difference as a college
student, either junior or senior year going into, and when
they're--because we very quickly throw them in the deep end.
We're not interested in having someone around to make copies,
we're interested in having them really understand what the work
is all about, and very quickly, you know, swim--not sink, swim.
But when they start to experience that they've made a
difference in the life of a constituent, a veteran in getting
their benefits or Social Security, whatever it may be, that
feeling of accomplishment that they helped somebody, you know,
that goes a long way.
Ms. Combs. And in the financial community, when you give
them projects that are in the billions of dollars of magnitude,
that they would never probably work on in a lifetime in a
corporation--or maybe not for 10 or 15 years in some of the
major corporations--they really have their eyes opened. And
many of them have indeed said what you just did. Well, yes,
you're right, you can't attract me because of the money, but
because I've seen what I've seen about public service and been
able to look at the magnitude of responsibility I could have
even as a summer employee, and they get to see some of these
other capable senior managers in our work force as well, they
can tell that they can truly make a difference.
Mr. Platts. I have one final specific question, and it
really is--again is pretty early, but the GSA disclaimer is one
that seems, given a track record of great success, that jumps
out. Is there an initial read that either or both of you have
on what has transpired there to result in the disclaimer being
required?
Ms. Combs. We have not had a chance to review that
completely yet. It's obviously a disappointment. I know that in
talking with the CFO there, she was extremely disappointed. It
came up, as Jeff talked about, toward the end as well. And
very, very committed, though, to doing the right things to turn
that around, and we're eager to help in any way we can.
Mr. Platts. OK.
Mr. Steinhoff. We really have not had a chance to look
behind it. I think it is somewhat related to some systems
changes they made, but we have not had an opportunity to go
behind it.
In that case they--as I recall they got a clean opinion on
certain statements and disclaimer on others, so they have a
mixed kind of opinion for 2005.
Mr. Platts. We're kind of anxious to see how that does play
out and what we have learned from that because of that, that
we're going to move forward in an increasingly positive way and
not regress, and they have been an agency as a great example of
good work, that continues.
One final more general question, and that is we've talked
early this year, and we're continuing to work on I guess behind
the scenes on the kind of consolidation, looking at the CFO Act
and the various related financial management pieces of
legislation that have been adopted over the last 20 or so years
and how they need to be updated and better coordinated.
Is there a benefit for us going forward with that effort to
eliminate redundancies? As we're challenging financial managers
in lots of ways, is it worth the effort that we're putting
forth and will need to continue to put forth to undertake a
major consolidation effort that in the end benefit those
managers out there day in and day out to have that
consolidation occur?
Ms. Combs. I think any way that we can better define what
success looks like to managers in a more streamlined fashion,
the way that we continue to look at financial management
throughout government, if we can pull together some things that
make sense to work together, even in the internal controls
efforts, we continue to encourage people to look across their
entire enterprise and look at things they already have in
place, things that are already being looked at, take those and
adopt those. Don't layer on something on top of this, this is
not a layering on process, this is a utilization of what is
already there and helping management to come to grips and to
agreement with the idea that this is a management
accountability, and I'm the one certifying this using their own
judgment. So those are the kind of I think things I think that
help managers a lot to know that they have the authority to do
that, and to rely on their own good judgment and their own good
processes that are in place.
Mr. Steinhoff. I think it's also a good idea to do that
now. We need to harmonize certain things, we need to clarify
certain things, consolidate certain reporting. Some things are
now being done that meet the intent of these acts, but they're
in a different form. And we need to make that legitimate. We no
longer really need to have a separate Federal Manager's
Integrity Act report if you make it part of the PAR. We don't
need to have some of the things that we presently have.
So a lot of harmonization, perhaps updating certain things
to address what's been more refined practices. We can deal with
some of the investment issues, place more clearly some of the
things that would be, in fact, expected. I think there is a
good opportunity for a committee report that would lay out and
provide a record of where the Congress is today of where
they're expecting this to be, some of the things we've spoken
about today. There can even be some human capital proposals in
there that deal with training, development, etc. So we look
forward to working with you all on it.
And I think it's a good opportunity to kind of step back.
All these acts interrelate in some way, and it's not too hard
for those who have been involved for a long time to see how
they interrelate, but I could certainly see someone coming on
the scene new looking at all these laws and all these acronyms
and what not and not recognizing that gee, it's not this and
that, it's really this broader concept. You don't see some of
the things we spoke about today in Black and White in some of
those bills.
Mr. Platts. Well, as Dr. Combs was saying about a young
graduate coming out and the opportunity to work on billion
dollars projects, that is the other side. I was thinking of
also coming out and saying you have the CFO Act, you have
FMFIA, you have--being a little overwhelmed, because as we kept
layering as opposed to bring it in in a cohesive fashion--we
are working on that type of report and welcome the continued
insights of our offices and staff. And again, part of that same
team effort that we're all after at the end of the day, that
same goal.
We are very grateful for your testimony here today, and
especially day in and day out the work of you and your staffs
on what I continue to believe is one of our most important
responsibilities, as we like to reference to, accounting for
the people's money was laid out in Article I of the
Constitution, and I think appropriately so. And it's a little
different times today in 2005 than in the 1700's, but the
importance and the right of the public to know what their money
is being used for is just as important today as it was then. So
your efforts are very commendable and appreciated.
We will keep the record open, if there is anything you need
to followup with us for 2 weeks, and we will look forward to
our continued interactions with you.
Mr. Steinhoff. Thank you very much.
Mr. Platts. This hearing stands adjourned.
[Whereupon, at 4:25 p.m., the subcommittee was adjourned.]