<DOC> [108th Congress House Hearings] [From the U.S. Government Printing Office via GPO Access] [DOCID: f:88503.wais] THE CONSOLIDATED FINANCIAL STATEMENTS OF THE FEDERAL GOVERNMENT FOR FISCAL YEAR 2002 ======================================================================= HEARING before the SUBCOMMITTEE ON GOVERNMENT EFFICIENCY AND FINANCIAL MANAGEMENT of the COMMITTEE ON GOVERNMENT REFORM HOUSE OF REPRESENTATIVES ONE HUNDRED EIGHTH CONGRESS FIRST SESSION __________ APRIL 8, 2003 __________ Serial No. 108-34 __________ Printed for the use of the Committee on Government Reform Available via the World Wide Web: http://www.gpo.gov/congress/house http://www.house.gov/reform ______ 88-503 U.S. GOVERNMENT PRINTING OFFICE WASHINGTON : 2003 ____________________________________________________________________________ For Sale by the Superintendent of Documents, U.S. Government Printing Office Internet: bookstore.gpr.gov Phone: toll free (866) 512-1800; (202) 512ÿ091800 Fax: (202) 512ÿ092250 Mail: Stop SSOP, Washington, DC 20402ÿ090001 COMMITTEE ON GOVERNMENT REFORM TOM DAVIS, Virginia, Chairman DAN BURTON, Indiana HENRY A. WAXMAN, California CHRISTOPHER SHAYS, Connecticut 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 MARK E. SOUDER, Indiana CAROLYN B. MALONEY, New York STEVEN C. LaTOURETTE, Ohio ELIJAH E. CUMMINGS, Maryland DOUG OSE, California DENNIS J. KUCINICH, Ohio RON LEWIS, Kentucky DANNY K. DAVIS, Illinois JO ANN DAVIS, Virginia JOHN F. TIERNEY, Massachusetts TODD RUSSELL PLATTS, Pennsylvania WM. LACY CLAY, Missouri CHRIS CANNON, Utah DIANE E. WATSON, California ADAM H. PUTNAM, Florida STEPHEN F. LYNCH, Massachusetts EDWARD L. SCHROCK, Virginia CHRIS VAN HOLLEN, Maryland JOHN J. DUNCAN, Jr., Tennessee LINDA T. SANCHEZ, California JOHN SULLIVAN, Oklahoma C.A. ``DUTCH'' RUPPERSBERGER, NATHAN DEAL, Georgia Maryland CANDICE S. MILLER, Michigan ELEANOR HOLMES NORTON, District of TIM MURPHY, Pennsylvania Columbia MICHAEL R. TURNER, Ohio JIM COOPER, Tennessee JOHN R. CARTER, Texas CHRIS BELL, Texas WILLIAM J. JANKLOW, South Dakota ------ MARSHA BLACKBURN, Tennessee BERNARD SANDERS, Vermont (Independent) Peter Sirh, Staff Director Melissa Wojciak, Deputy Staff Director Randy Kaplan, Senior Counsel/Parliamentarian Teresa Austin, Chief Clerk Philip M. Schiliro, Minority Staff Director Subcommittee on Government Efficiency and Financial Management TODD RUSSELL PLATTS, Pennsylvania, Chairman MARSHA BLACKBURN, Tennessee EDOLPHUS TOWNS, New York STEVEN C. LaTOURETTE, Ohio PAUL E. KANJORSKI, Pennsylvania JOHN SULLIVAN, Oklahoma MAJOR R. OWENS, New York CANDICE S. MILLER, Michigan CAROLYN B. MALONEY, New York MICHAEL R. TURNER, Ohio Ex Officio TOM DAVIS, Virginia HENRY A. WAXMAN, California Mike Hettinger, Staff Director Larry Brady, Professional Staff Member Amy Laudeman, Clerk Mark Stephenson, Minority Professional Staff Member C O N T E N T S ---------- Page Hearing held on April 8, 2003.................................... 1 Statement of: Walker, David M., Comptroller General of the United States, U.S. General Accounting Office; Linda M. Springer, Controller, Office of Federal Financial Management, Office of Management and Budget; and Donald V. Hammond, Fiscal Assistant Secretary, Department of the Treasury............ 6 Letters, statements, etc., submitted for the record by: Hammond, Donald V., Fiscal Assistant Secretary, Department of the Treasury, prepared statement of........................ 69 Platts, Hon. Todd Russell, a Representative in Congress from the State of Pennsylvania, prepared statement of........... 3 Springer, Linda M., Controller, Office of Federal Financial Management, Office of Management and Budget, prepared statement of............................................... 61 Walker, David M., Comptroller General of the United States, U.S. General Accounting Office, prepared statement of...... 10 THE CONSOLIDATED FINANCIAL STATEMENTS OF THE FEDERAL GOVERNMENT FOR FISCAL YEAR 2002 ---------- TUESDAY, APRIL 8, 2003 House of Representatives, Subcommittee on Government Efficiency and Financial Management, Committee on Government Reform, Washington, DC. The subcommittee met, pursuant to notice, at 10:38 a.m., in room 2203, Rayburn House Office Building, Hon. Todd Russell Platts (chairman of the subcommittee) presiding. Present: Representatives Platts, Blackburn and Towns. Staff present: Mike Hettinger, staff director; Dan Daly, counsel; Larry Brady and Kara Galles, professional staff members; Amy Laudeman, clerk; Mark Stephenson, minority professional staff member; and Christopher Davis, minority staff assistant. Mr. Platts. The Subcommittee on Government Efficiency and Financial Management will come to order. I appreciate everyone attending today and hope we enjoy the intimate setting we are in today as it is a little smaller room than normal. Countless taxpayer dollars continue to be lost each year to fraud, waste and financial mismanagement in hundreds of Federal programs. In the subcommittee's last two hearings on the subject of ``Governing with Accountability,'' we examined the President's Management Agenda, the Government Performance and Results Act [GPRA] and the Program Assessment Rating Tool [PART]. Each of those tools assists in improving financial management, but today we will look at the single most comprehensive statement of the status of the financial management of the Federal Government, the 2002 Financial Report of the U.S. Government. The Financial Report and the accompanying audit of the report performed by the General Accounting Office were released on time as usual, on March 31, 2003. For the 6th straight year, GAO was unable to render an opinion on the Federal Government's financial statements. GAO reported significant material deficiencies that affected both the financial statements and the management of government operations. For fiscal year 2002, an unprecedented 21 out of the 24 Chief Financial Officer Act agencies received unqualified or ``clean'' audit opinions on their individual financial statements. This is an improvement over 18 out of 24 agencies from fiscal year 2001. Only the Department of Defense, the Small Business Administration, and the U.S. Agency for International Development failed to receive clean opinions this year. GAO points out in their audit report of the consolidated statement that the financial management problems at DOD are ``pervasive, complex, long-standing, and deeply rooted in virtually all business operations throughout the department.'' President Bush's administration has made improving financial performance a top priority, and I certainly commend the administration for their efforts. Secretary of Defense Donald Rumsfeld is working hard to improve DOD's financial management. With each fiscal year, DOD gets closer to obtaining an audit opinion. However, until DOD solves their financial problems and receives a clean opinion, the entire Federal Government's financial statement will continue to be unreliable. Congress has placed a great deal of emphasis on the financial accountability of publicly traded companies and their responsibility to provide accurate information to investors. Congress and the Federal Government have an equal, if not greater responsibility, to be accountable to our investors, the American taxpayer. Our witnesses today will shed light on the results of the consolidated financial statement and discuss areas that need improvement as well as financial management successes. Today, we are honored to have the Honorable David M. Walker who is the Comptroller General of the United States, who has just testified in the Senate; the Honorable Linda Springer, who is the Controller from the Office of Federal Financial Management at the Office of Management and Budget. I understand this is your first official testimony in your new position and we welcome you here today. I am going to use the chairman's privilege also as a proud son to recognize we have Ms. Springer's mom with us today to see her in action. We are delighted to have mom with us as well. We also have Donald V. Hammond, Fiscal Assistant Secretary, Department of Treasury. I look forward to your testimonies. [The prepared statement of Hon. Todd Russell Platts follows:] [GRAPHIC] [TIFF OMITTED] T8503.001 [GRAPHIC] [TIFF OMITTED] T8503.002 Mr. Platts. I am pleased to yield to the gentleman from New York, Mr. Towns, for the purpose of making an opening statement. Mr. Towns. Thank you very much, Mr. Chairman. Let me begin by saying this is a very important hearing. There is certainly a significant amount of good news in the General Accounting Office's audit of the Federal Government's finances. This year, the GAO was able to give 21 of the 24 agencies a clean audit opinion, up from 18 last year. We are moving in the right direction. However, to ensure that the entire Federal Government receives a clean audit, we must continue to pressure, cajole, persuade and encourage the executive branch agencies through hearings such as these. Unfortunately, the prospect of all remaining agencies getting complete audits appear dim. The Comptroller General has described the financial management problem at DOD as pervasive, complex, longstanding and deeply rooted in virtually all business operations throughout the department. While it is probably difficult to divert additional resources at DOD to financial management systems during a time of war, we need to remember that correcting such management problems will make the department more effective in the long run and that we should not forget. The Comptroller also noted weaknesses in financial systems throughout the executive branch. He specifically pointed out the Federal Government's inability to account for billions of dollars in transactions across government agencies. To overcome such problems, it seems apparent that we must replace all current stovepipe systems with the interoperable financial management solutions. We must also invest in the human capital in these agencies to understand and operate these systems. If the operation of financial systems of each agency is farmed out to different private companies, we will not be able to develop the day to day financial information system which we are seeking. I look forward to hearing from our witnesses about the progress that has been made and what we need to do to overcome the remaining barriers to a consolidated financial statement of the Federal Government. We have come a long way but we still have a great distance to go. On that note, Mr. Chairman, I yield. Mr. Platts. Thank you, Mr. Towns. I would now ask each witness and anyone who will be assisting you in the testimony you will provide to stand, raise your right hand and take the oath together. We will then proceed with the testimony. [Witnesses sworn.] Mr. Platts. Thank you. We will proceed now to testimony. Mr. Walker, we will begin with you. We appreciate your racing over from the Senate. Hopefully you have had a chance to catch your breath before starting. We will then proceed to Ms. Springer and Mr. Hammond. We appreciate the substantive detailed testimony in writing you all provided to the committee which allowed us a chance to review it prior to today's hearing and please summarize that as best you can. Because of the detail and importance of the information you are covering today, we would extend to each of you 10 minutes for your opening statements. Then we will go to questions. Mr. Walker. STATEMENTS OF DAVID M. WALKER, COMPTROLLER GENERAL OF THE UNITED STATES, U.S. GENERAL ACCOUNTING OFFICE; LINDA M. SPRINGER, CONTROLLER, OFFICE OF FEDERAL FINANCIAL MANAGEMENT, OFFICE OF MANAGEMENT AND BUDGET; AND DONALD V. HAMMOND, FISCAL ASSISTANT SECRETARY, DEPARTMENT OF THE TREASURY Mr. Walker. Thank you, Mr. Chairman and members of the subcommittee. I appreciate your understanding. I literally ran from a joint Senate/House hearing. I am glad I am in good shape because otherwise I may not have made it. I appreciate also being able to put the entire statement in the record and being able to summarize the key portions. I am pleased to be here today to discuss our report on the U.S. Government's consolidated financial statements for fiscal years 2002 and 2001. As in the 5 previous fiscal years, certain material weaknesses in internal control and in accounting and reporting prevented us from being able to provide the Congress and American citizens an opinion as to whether the consolidated financial statements are fairly stated in conformity with U.S. generally accepted accounting principles. Across government, financial management improvement initiatives are under way that, if effectively implemented, have the potential to appreciably improve the quality of the Federal Government's financial management and reporting. You, Mr. Chairman, and members of the subcommittee know I have a 15 year term. I am now 4\1/2\ years into my term and I hope and expect that by the end of my term, there will be a clean opinion on the Government's financial statements. I underline I hope and expect but there is a lot of work that needs to be done to get us there. For fiscal year 2002, 21 of the 24 CFO Act agencies were able to attain unqualified audit opinions on their financial statements, up from 6 agencies for fiscal year 1996. Also, 4 CFO Act agencies showed improvement by receiving unqualified opinions from their auditors this year. Although obtaining unqualified audit opinions is important, according to the President's Management Agenda, ``most Federal agencies that obtain clean audits only do so after making extraordinary, labor-intensive assaults on financial records.'' I have referred to this in past years as ``heroic efforts'' to basically be able to recreate the books at the end of the year several months after the end of the year. I question the prudence or appropriateness of doing that, which is why, as I will note in a few minutes, the JFMIP Principles have agreed to a number of steps that will help to assure this does not occur in the future and that these opinions are truly earned and not created due to significant expenditures or human resource commitments that are questionable. Before discussing the results of the audit of the U.S. Government's consolidated financial statements in more detail, I would like to discuss why sound financial management is especially necessary for the future, as well as for today, to meet tomorrow's challenges. I have on the chart the latest 50 year, long-range budget simulation results from GAO's analysis, which we do twice a year and have been doing for about 10 years. It shows that based upon current tax revenues as a percentage of the economy, based upon projected spending by the Social Security and Medicare trustees, their best estimate, and assuming that discretionary spending grows at the rate of the economy, if you assume all that is true, this is what the future looks like on autopilot. Starting in less than 10 years, the current deficits start escalating very rapidly due primarily to known demographic trends and rising health care costs to levels that we have never seen before. As a result, it is critically important that we start reviewing all existing Federal programs and policies--spending, tax incentives, regulatory, and otherwise--to basically answer three fundamental questions. What should the Federal Government be doing in the 21st century, how should the Federal Government do business in the 21st century and, in some cases, who should do the Government's business in the 21st century? The current base is unsustainable. We have to make tough choices and in order to make those tough choices, it will be important to have timely, accurate, and useful financial and cost information to be able to make informed choices that are going to be difficult but nonetheless necessary. The next chart shows a range of existing commitments, liabilities, and contingencies that we already have. In some cases, these amounts are noted as liabilities in the consolidated financial statements of the U.S. Government; in some cases they are not and may not ever be but they are huge. We have publicly held debt which is a liability of $3.54 trillion. We also have a significant amount of Government-held debt, debt held in trust funds like Social Security and Medicare which are backed by an unconditional promise to pay from the Federal Government, $2.67 trillion but it is where the right hand owes the left hand, so poof, it is gone on the consolidated financial statements of the U.S. Government. It is not currently shown as a liability. Furthermore, we have significant differences between projected revenues and projected expenditures under a number of programs, such as Social Security and Medicare, where the discounted present value of that difference amounts to almost $10 trillion just in Social Security and Medicare Part A alone. In other words, you would have to have $10 trillion invested at Treasury rates today just to be able to fund the gap between promised benefits and estimated revenues. These gaps are huge. And by the way, these gaps only cover 75 years and are growing every year. So it is important that we recognize that we are on an unsustainable path, that tough choices will have to be made, not only with regard to entitlement programs but also with regard to discretionary spending and, in some cases, with regard to certain tax incentives. Frankly some tax incentives may not be doing what we would like them to do as it relates to policy, such as, for example, health care tax incentives, on which I will answer questions on if you like. Having sound financial management systems is important to understanding these issues and making tough choices. As I mentioned earlier, as has been the case for the past 5 years, the Federal Government continues to have a significant number of material weaknesses related to financial statements, the fundamental recordkeeping and financial reporting problems and incomplete documentation. Several of these material weaknesses resulted in conditions that prevented us from being able to express an opinion. The three major impediments to GAO being able to express an opinion on the consolidated financial statements are: (1) the serious financial management problems at DOD, although they are making progress; (2) the Federal Government's continued inability to fully account for and reconcile billions of dollars of transactions between Federal Government departments and agencies; and (3) the Federal Government's inability to properly prepare consolidated financial statements. Over the past year, the JFMIP Principals, which I had the privilege to chair for a 2-year period ending last September 30, began an effort to accelerate progress in financial reform that involved a personal commitment of each of the principals to provide leadership in this critical area. Since August 2001, the JFMIP Principals have established an excellent working relationship and basis for action, a new sense of urgency in this area through which significant and meaningful progress has been achieved and continues to be achieved. In fiscal year 2002, we had a series of regular deliberative meetings and took a number of steps outlined on page 20 of my testimony. The continued personal involvement of the principals is critical to full and successful implementation of financial management reforms. I would add it is also critical that this subcommittee and others in Congress continue to hold oversight hearings in order for us to continue to make progress. This subcommittee has been fantastic over the last several years in making sure everybody is focused on continually making progress. Building on the success that has been achieved in obtaining unqualified opinions, Federal agency management must continue to work to fully resolve the pervasive and generally longstanding material weaknesses we have reported. Irrespective of the unqualified opinions in their financial statements, many Federal agencies do not have sound controls along with timely, accurate, and useful financial information and sound controls with which to make informed decisions and ensure accountability on a day-to-day basis. Two audit matters have come to the fore in the last year that are key to protecting the public interest. One matter involves auditor responsibilities for reporting internal control and the other concerns auditor independence. GAO has led by example in these two areas, not only within the Government but also within the accountability profession at large. We are committed to continue to do so. In closing, Mr. Chairman and members, our report on the U.S. Government's consolidated financial statements for fiscal years 2001 and 2002 highlights the need to continue addressing the Government's serious financial management weaknesses. The requirement for timely, accurate, and useful financial and performance information is greater than ever as the Congress and the administration prepare to meet our growing fiscal challenges. Finally, I want to reiterate the value of sustained congressional interest in these issues as demonstrated by this hearing and by the sustained commitment of this subcommittee. Thank you, Mr. Chairman. I would be happy to answer questions after my colleagues have their chance to read their testimony. [The prepared statement of Mr. Walker follows:] [GRAPHIC] [TIFF OMITTED] T8503.003 [GRAPHIC] [TIFF OMITTED] T8503.004 [GRAPHIC] [TIFF OMITTED] T8503.005 [GRAPHIC] [TIFF OMITTED] T8503.006 [GRAPHIC] [TIFF OMITTED] T8503.007 [GRAPHIC] [TIFF OMITTED] T8503.008 [GRAPHIC] [TIFF OMITTED] T8503.009 [GRAPHIC] [TIFF OMITTED] T8503.010 [GRAPHIC] [TIFF OMITTED] T8503.011 [GRAPHIC] [TIFF OMITTED] T8503.012 [GRAPHIC] [TIFF OMITTED] T8503.013 [GRAPHIC] [TIFF OMITTED] T8503.014 [GRAPHIC] [TIFF OMITTED] T8503.015 [GRAPHIC] [TIFF OMITTED] T8503.016 [GRAPHIC] [TIFF OMITTED] T8503.017 [GRAPHIC] [TIFF OMITTED] T8503.018 [GRAPHIC] [TIFF OMITTED] T8503.019 [GRAPHIC] [TIFF OMITTED] T8503.020 [GRAPHIC] [TIFF OMITTED] T8503.021 [GRAPHIC] [TIFF OMITTED] T8503.022 [GRAPHIC] [TIFF OMITTED] T8503.023 [GRAPHIC] [TIFF OMITTED] T8503.024 [GRAPHIC] [TIFF OMITTED] T8503.025 [GRAPHIC] [TIFF OMITTED] T8503.026 [GRAPHIC] [TIFF OMITTED] T8503.027 [GRAPHIC] [TIFF OMITTED] T8503.028 [GRAPHIC] [TIFF OMITTED] T8503.029 [GRAPHIC] [TIFF OMITTED] T8503.030 [GRAPHIC] [TIFF OMITTED] T8503.031 [GRAPHIC] [TIFF OMITTED] T8503.032 [GRAPHIC] [TIFF OMITTED] T8503.033 [GRAPHIC] [TIFF OMITTED] T8503.034 [GRAPHIC] [TIFF OMITTED] T8503.035 [GRAPHIC] [TIFF OMITTED] T8503.036 [GRAPHIC] [TIFF OMITTED] T8503.037 [GRAPHIC] [TIFF OMITTED] T8503.038 [GRAPHIC] [TIFF OMITTED] T8503.039 [GRAPHIC] [TIFF OMITTED] T8503.040 [GRAPHIC] [TIFF OMITTED] T8503.041 [GRAPHIC] [TIFF OMITTED] T8503.042 [GRAPHIC] [TIFF OMITTED] T8503.043 [GRAPHIC] [TIFF OMITTED] T8503.044 [GRAPHIC] [TIFF OMITTED] T8503.045 [GRAPHIC] [TIFF OMITTED] T8503.046 [GRAPHIC] [TIFF OMITTED] T8503.047 [GRAPHIC] [TIFF OMITTED] T8503.048 [GRAPHIC] [TIFF OMITTED] T8503.049 [GRAPHIC] [TIFF OMITTED] T8503.050 Mr. Platts. Thank you, Mr. Walker for your testimony and your very frank assessment of where we are from a management sense and why we need to do a lot better as we move to the years to come and the challenges we are going to face. Also, your comments regarding former Chairman Steve Horn and his efforts are very appropriate. I am honored to succeed Chairman Horn in this position. Ms. Springer. Ms. Springer. Thank you, Mr. Chairman. I am honored to testify for the first time as the Controller, Office of Management and Budget before this subcommittee. I feel today as I have many times before reporting to the audit committee of corporate boards of directors. As I did in those meetings, I am here to provide you with a response by management to the issues presented in the auditor's report on the Federal Government's consolidated financial statements for the fiscal years ended September 30, 2002 and 2001. The General Accounting Office has issued a disclaimer of opinion on the consolidated financial statements for these periods as Mr. Walker has noted. In so doing, material weaknesses were noted in the following areas: (1) the area of assets, property, plant, and equipment and inventories and related property; (2) the area of liabilities, and commitments and contingencies; (3) cost of government operations and disbursement activity; (4) accounting for and reconciliation of intragovernmental activity and balances; and (5) preparation of consolidated financial statements. The primary source of weakness in the first three areas is the Department of Defense. Items four and five are process impediments that have governmentwide impact. GAO also identified the following material weaknesses in internal control throughout the executive branch: (1) loans receivable and loan guarantee liabilities; (2) improper payments; (3) information security; and (4) tax collection activities. OMB agrees with GAO that these are areas of weakness. We are not satisfied with this result. In fact, we believe that even unqualified audit opinions and the absence of material weaknesses do not necessarily indicate the presence of first class financial management. First class financial management requires integration of the financial impact of agency decisions and activities in operational execution and senior management decisionmaking. These things would be accompanied by accountability standard setting, performance tracking and other analyses. These are among the characteristics we should seek in government every bit as much as they are expected in the private sector. These are the objectives of the Improved Financial Performance Initiative which the President's Management Agenda is focused on. The administration is making a concerted effort to address the weaknesses identified by GAO and agency Inspectors General and independent auditors. For example, we are working to identify the root causes and current status of, as well as action plans to remedy, the deficiencies at the Department of Defense. Some of these actions will be near term. Others will take longer and will be dependent on the new financial management systems implementation. OMB has reviewed with DOD its assessment and plans for each area identified by GAO. Our most recent update was just last week when I met with not only Comptroller Zakheim but also with the Inspector General. These meetings are typical of planning sessions we have with every CFO Act agency's CFO and their IG. These meetings will be an ongoing series and at those we will be reviewing plans to review how to achieve clean audits and also remove other material weaknesses, and meeting accelerated reporting deadlines. As you know, our reporting deadline in 2004 has been accelerated to November 15 with the governmentwide report coming out 1 month later in December. In our judgment, DOD is identifying its problems and is engaged in both short and long term remediation activities. These activities would substantially address the first three material weaknesses I noted previously. OMB will continue to monitor this progress with both the department and its IG. Regarding intragovernmental transactions, we have new rules in place that govern the manner in which agencies record intragovernmental transactions. Simply put, these rules once and for all standardize the governmentwide processing and recording of intragovernmental activity. In conjunction with the automated process by which we will compile the governmentwide financial statements in the near future, will go a long way toward resolving the other material weaknesses that contribute to the disclaimer of opinion by the auditors. As you have heard at the recent testimony on the President's Management Agenda, notable progress was made in fiscal year 2002 in agency financial reporting. For 2002, a record number of the government's major departments and agencies received unqualified opinions on their annual audited financial statements, 21 of 24 up from 18 in fiscal year 2001. I appreciate Mr. Walker going back even farther than that to six to show even further progress over the years. Two agencies, Treasury and the Social Security Administration, met the new governmentwide standard for timeliness of reliable financial information 2 years early, the November 15 deadline. All agencies for 2003 have targeted earlier dates required to make a step forward, about half of them looking to meet the November date in 2003. In addition to DOD, only the Small Business Administration and the U.S. Agency for International Development are keeping us from our goal of unqualified audit opinions on the financial statements of the major departments and agencies. I met with the DOD Comptroller just last week to assess the department's status. I am also meeting with officials from USAID and SBA in the coming weeks to begin regular updates on their progress in getting clean audit opinions. I want to note for the subcommittee that USAID received an unqualified opinion for four of its five financial statements and a qualified opinion on the fifth statement. The fifth statement is the statement of net costs and there are still some remaining material weaknesses with which we concur with GAO. There are plans in place to remediate the weaknesses on that statement. I should mention this is up from three statements that were unqualified and two disclaimed in the previous year. Part of the President's Improved Financial Performance Initiative is our effort to reduce erroneous payments. While GAO in the past had tallied just $20 billion in erroneous payments, OMB reported to the Congress last year that our effort, which requires erroneous payment estimates for major benefit programs has raised that total estimate to $35 billion annually. We are expanding our efforts in this area with the implementation of the Improper Payments Information Act of 2002, which originated in this subcommittee. This act requires an estimate of the extent of erroneous payments from all Federal programs. Program-wide erroneous payment estimates can only help stem the loss to the Federal Government in waste, fraud, and abuse, too much of which is taking place without accounting. Our erroneous payment efforts are not just about estimates. The President's fiscal year 2004 budget includes a $100 million increase to clarify Earned Income Tax Credit rules and to help ensure only eligible taxpayers receive payments. This investment could help us reduce the more than $9 billion in erroneous EITC payments we make annually. The administration has also proposed a number of tools to give agencies the ability to further save us billions of dollars over time. Mr. Chairman, I would be derelict not to mention one of the great challenges before us, the migration of the component agencies to the new Department of Homeland Security which will pose a major challenge from a financial management perspective. Disparate systems at different stages of implementation are just one of the complicating factors that will be dealt with by the new department. We plan and are working closely with Under Secretary Hale and her staff in meeting these challenges. Our auditor, GAO, has highlighted many of our weaknesses, but I don't want to pass up the opportunity to highlight some of the favorable assertions made in GAO's report about the efforts the Bush administration is making to improve financial management throughout the government. ``Across government, financial management improvement initiatives are under way that, if effectively implemented, have the potential to appreciably improve the quality of the Federal Government's financial management and reporting. A number of Federal agencies have started to make progress in their efforts to modernize their financial management systems and improve financial management performance as called for in the President's Management Agenda. The President's Management Agenda includes improved financial performance as one of the top five governmentwide management goals. This is a step in the right direction to improving management and performance. The attention we are paying to improving financial performance and the progress we have made thus far move us down the playing field, but still short of the goal line. It is important that we not lose sight of these achievements, however. Even though no score appears on the board until we have crossed the line, we have moved inside the red zone and the goal is in sight. This administration is committed, with the help of this subcommittee, to achieving the first class financial management of which we and the American people can be proud. Thank you, Mr. Chairman. [The prepared statement of Ms. Springer follows:] [GRAPHIC] [TIFF OMITTED] T8503.051 [GRAPHIC] [TIFF OMITTED] T8503.052 [GRAPHIC] [TIFF OMITTED] T8503.053 [GRAPHIC] [TIFF OMITTED] T8503.054 [GRAPHIC] [TIFF OMITTED] T8503.055 Mr. Platts. Thank you, Ms. Springer, for your substantive statement. We commend you for having already met with the DOD Comptroller and having SBA and USAID meetings scheduled to get your arms around the challenges in those agencies. We look forward to working with you. Ms. Springer. Thank you. Mr. Platts. Mr. Hammond. Mr. Hammond. Thank you, Mr. Chairman and members of the subcommittee. Thank you for the opportunity to discuss the Financial Report of the U.S. Government. I would ask that the Chairman include the full text of my statement in the record but on behalf of the Secretary, I would like to thank you for focusing on and promoting the improvement of Federal Government financial accountability and reporting. We appreciate the subcommittee's continued leadership in this area. Before I continue, I wish to congratulate you, Chairman Platts, on your appointment to chair this important panel. We had the pleasure of working very closely with Chairman Horn in previous Congresses and look forward to the same effective working relationship with your subcommittee. The financial report is prepared pursuant to the Government Management Reform Act of 1994 to provide the President, the Congress and the American people with reliable financial information on an accrual basis about the Federal Government's operations. The Federal Government does not have a single bottom line that reflects its financial status. Therefore the information included in the financial report provides a comprehensive view of the Federal Government's finances that is not available elsewhere. The report covers all accounts from the executive branch but since the legislative and judicial branches are not required to prepare financial statements, recording information included from those branches is limited. The Department of the Treasury is committed to producing accurate and useful governmentwide financial statements and continues to devote considerable resources at both the departmental level and at the Financial Management Service to making the government's finances as clear and transparent as possible. Everyone should be able to understand the cost of government operations and the implications of its commitments. The financial report is important in this respect because it highlights the difference between budget and accrual-based reporting. Accrual results offer a longer term view that extends the horizon for making budget decisions. This year, for the first time, we have grouped together all of the significant liabilities, stewardship responsibilities and other commitments in the front of the report, specifically on page 6. They total an estimated $31.1 trillion, almost 10 times the size of the debt held by the public. These amounts reported separately for several years become more transparent we believe when they are presented together for analysis. The importance of this report is also highlighted in this year's results. For fiscal 2002, the Financial Report indicates an accrual-based net operating cost for the Federal Government of $365 billion. This compares to the more familiar $158 billion budget deficit reported last fall. The principal difference between these two figures is the accrual recognition of an additional over $157 billion of veterans benefit costs and liabilities. Without accrual-based reporting, these differences would be lost and would not be visible to the American taxpayer. For Treasury to achieve its goals for improved financial reporting, continued strong support from OMB and all the Chief Financial Officers Act agencies will be critical. We have charted a course for continued improvements and we expect to implement them fully in the fiscal 2004 statements. In my remaining time, Mr. Chairman, I will discuss our progress over the last year and outline some of the planned improvements. As noted, this is the 6th year we have prepared consolidated, governmentwide financial reports. Each year there have been significant improvements in the agency data. This year, 21 of the 24 CFO Act agencies received clean audit opinions, up from 6 agencies only 7 years ago. Also, three major agencies, the Social Security Administration, Treasury Department and yes, the U.S. Postal Service, completed their financial statement audits by November 15, 3\1/2\ months earlier than statutorily required for the first two and the Postal Service has no due date on their financial statements that I am aware of. Data for the Financial Report primarily comes from the 24 CFO Act agencies, 9 other significant entities such as the Postal Service and 180 smaller entities. Preparing the report, as you can imagine, is a complex task based on a foundation of over 2,000 individual reporting components' standardized Standard General Ledger reporting, highlighting the importance of good data quality. In other words, the data has to be right the first time coming from the agency level. There is really very little opportunity to massage it at the end. In auditing the Financial Report, GAO was unable to express an opinion on the reliability of this year's financial statements, primarily due to three areas: data and financial system problems at the Department of Defense, preparation issues relating to intragovernmental balances both in agency data quality and consolidation eliminations, and consistency with agency financial reporting. However, GAO did acknowledge in its audit report that financial management improvement initiatives are being undertaken that will improve the quality of financial management and reporting in the Federal Government. These include DOD improving its financial management and related systems, Treasury and OMB taking a number of steps to address the intragovernmental issues and development of a new preparation process for the financial report itself. The above indicates that the current state of Federal financial reporting needs improvement. I am confident that a creative and committed effort by top management at Treasury, program agencies, OMB, the CFO Council, and GAO can result in breakthrough changes. Later this year, for example, Treasury will provide agencies with a detailed account statement monthly to help them reconcile their fund balance with Treasury. The production of this account statement is the next step in a Web-based, governmentwide accounting modernization project that, when completed, will provide agencies with better tools for both reporting their financial information and monitoring its status. This new approach will enable agencies to eliminate duplicative reporting and costly, manually intensive reconciliations. After extensive consultation with our auditors and financial managers throughout the government, it was clear that broad and sweeping changes in the compilation process of the Financial Report were necessary to address the ``process'' related material weaknesses. Treasury, in coordination with OMB, is adopting a new process to collect agency financial information that will be used to prepare the fiscal 2004 Financial Report. Agencies will follow an automated process to convert their audited financial statements to a standardized statement format which will ensure the data in the report is consistent with the data in the agency's audited financial statements. These changes, along with modifications in the manner in which we perform eliminations and consolidate the data, should eliminate the material compilation weaknesses identified by GAO. We are also in the process of accelerating agency budget reporting. To facilitate the accelerated deadlines for submission of annual agency-level financial statements and the governmentwide financial statements, Treasury's Financial Management Service has accelerated the monthly agency budget reporting timeframes. The accelerated timeframes will support agencies accelerated preparation of their year-end audited financial statements and provide for more timely information to improve decisionmaking. Treasury is the first to acknowledge that reporting financial results 6 months after the close of a fiscal year is simply not good enough. Accordingly, the scheduled date for issuing the fiscal 2004 financial report is December 15, 2004. Meeting this timeframe is dependent on agencies meeting their accelerated reporting dates. I currently chair the CFO council committee charged with assisting agencies in meeting the accelerated issuance dates for fiscal 2004 and believe these dates are in fact achievable. This is a significant step forward since we will finally have actual data about the prior year for use in the budget deliberations for the coming year and managers throughout government will have accurate data for day-to-day decisionmaking at all levels. A core responsibility of the Treasury Department is to accurately and effectively report on the Nation's finances. Long ago we accomplished transparency of budget results. Our challenge is to bring that same transparency to the full extent of our financial operations. We have made great progress in that quest, and the Federal financial community working together will soon realize that vision. Thank you again for the opportunity to testify and I would be happy to answer any questions the committee may have. [The prepared statement of Mr. Hammond follows:] [GRAPHIC] [TIFF OMITTED] T8503.056 [GRAPHIC] [TIFF OMITTED] T8503.057 [GRAPHIC] [TIFF OMITTED] T8503.058 [GRAPHIC] [TIFF OMITTED] T8503.059 [GRAPHIC] [TIFF OMITTED] T8503.060 [GRAPHIC] [TIFF OMITTED] T8503.061 [GRAPHIC] [TIFF OMITTED] T8503.062 [GRAPHIC] [TIFF OMITTED] T8503.063 Mr. Platts. Thank you, Mr. Hammond. I appreciate your testimony, as with each of the witnesses and the in-depth presentations and your shared efforts and interest in truly getting us to where the American taxpayer knows how their dollars are being spent. We are going to proceed to questions now and for the most part we will follow in the first round 5 minutes each and then maybe a second time around when we are not as strict on the 5- minute rule. For Mr. Walker and Ms. Springer, your testimony certainly makes the picture clear. We have made some progress but have a long way to go, and even some of the agencies that have gotten that clean audit, it was through Herculean labor intensive efforts after the fact not internal throughout the year. That is what we really need to get to so any day of the year we can say where are you and we know it as opposed to much afterwards. I don't expect you to be able to do this today but if you could followup with us and give us your summation of each agency and where they stand in their efforts to modernize and be more accountable. That would help guide this committee where we may need to bring some additional attention from an oversight perspective. Could you today give us your best opinion on what agency is the closest to having a financial reporting system in place that nears what a large private corporation would have in accounting for their records? Mr. Walker. I would note for the record my understanding is the only agency that is green, based upon the President's Management Agenda in financial management is the National Science Foundation. I would imagine that Controller Springer can tell us whether there is anyone else getting close in OMB's view, but I would argue that unless you are green, then you are not even a candidate for being able to give an affirmative to your question. Ms. Springer. Yes, that is exactly right. The two that are getting close, there are several, the two closest in addition to NSF would be the Social Security Administration and the Environmental Protection Agency that are kind of knocking at the door at that same point. There are currently 17 of 24 CFO Act agencies that have significant financial management system modernization efforts going on right now. The Government right now invests over 1,900 financial management systems. In the current budget proposal for 2004, there is about $1.5 billion included for financial management systems, so it is a significant effort governmentwide. With the exception of just a few agencies, it is active with all those. Even with that, NSF is the only one today that really meets that standard. Mr. Platts. You are noting 1,900 initiatives or efforts and it seems that speaks to the size of the problem we have, that many initiatives trying to get us on track. Is it also a part of the problem that we have so many diverse efforts as opposed to a more unified, cohesive approach? Ms. Springer. Yes, it is. I think one of the comments earlier from Representative Towns discussed having solutions that span across a variety of agencies as opposed to just one. One of the strategies we will be looking at will be to find where we can have meaningful joint efforts so that we are not having redundant investments. It seems with financial systems, there ought to be that opportunity, so we will be looking at that. Mr. Platts. Is it going to be your office specifically kind of watching the progress on those 1,900 efforts and birding from OMB's perspective? Ms. Springer. Yes, along with the IS group headed by Mark Forman. In the CFO Act, the Office of Federal Financial Management has specific responsibility for overseeing those activities and monitoring them as they go forward. Mr. Walker. Mr. Chairman, I think it is important to note the Federal Government is a late entrant to the financial management business as well as the financial auditing area. The fact of the matter is that for many, many years, the Federal Government focused all of its time and attention on getting the money and spending the money. It was called the budget. It didn't focus enough on transparency and accountability which is something we need to do now for some of the reasons that I previously articulated. We have come a long way in a fairly short period of time but we don't have the type of market forces the private sector has. If you are going out there to try to raise stock or if you have publicly traded debt which by the way State and local governments have, so they have had better financial management for years. They have had to have it because in order to be able to have publicly traded debt, in order to get a decent bond rating, they had to have it. We haven't been subject to those same market pressures. If Brazil can do it, namely have a modern, effective, credible, integrated financial management system for their government, we ought to be able to do it. Mr. Platts. The focus on having that system in place and also renewed focus through PART as the Bush administration asking is not just how much you are spending and where it is coming from but what are we getting in return. That is part of government efficiency as well. I am going to defer to Mr. Towns now but I would make the analogy in the very frank but stark picture you painted, Mr. Walker, for future years, that I have been one to always balance my checkbook to the penny every month. When my wife and I met, she didn't worry about balancing her checkbook because she knew there was money in there, so she didn't worry month to month. Once we were engaged, married and both graduate students and the excess dollars got less and less, the importance of having a very detailed management system in place, balancing it was more important. That is kind of where we are going as a Federal Government. We look to those out years and we need to make sure every dollar is being used effectively and we know how much we have to spend to set those priorities. Mr. Walker. I would respectfully suggest we need to do it now because we are already in deficits. Mr. Platts. Absolutely. I will now yield to Mr. Towns for the purpose of questions. Mr. Towns. Thank you very much, Mr. Chairman. Let me thank all of you for your testimony. Let me start with you, Ms. Springer. You mentioned the fact that the Homeland Security Agency would create a substantial challenge. I was sort of looking at it differently. Maybe you could help me with this, that being it was a new agency, certain things would be put in place that would be able to prevent us from making the mistakes we made in the past. Am I looking at it wrong? Ms. Springer. No, you are not. I think it is just two aspects. I think starting with a fresh sheet of paper as you described, I think there is that aspect there but at the same time, we are bringing in agencies that have a legacy of history of challenges in their own financial management systems for example and we are not starting from the ground up necessarily with all of those pieces, at least for right now. In order to meet the financial reporting requirements that we expect of an agency that size and that type of responsibility to the public, we are going to have to use, at least in the interim, some of their own existing systems as at the same time we are building from that clean sheet of paper. I think both aspects are in play right now. Mr. Walker. Mr. Towns, I would say it is both a challenge and an opportunity. In the short term, it is a challenge because we have all these non-integrated legacy systems, different cultures, and numerous players that have to be involved, but it is also an opportunity because one would hope we could create enterprise architecture never mind keep the same basis from which you could end up building the future and making all your future IT decisions based upon that so they ought to be able to get to a better place quicker if it is handled the right way. Short term, it is going to be a big challenge, but it is also an opportunity, as well. Mr. Towns. Thank you. Why is it we have all this problem with DOD? Mr. Walker. I would respectfully suggest DOD is an ``A'' No. 1 in the world in its mission which is fighting and winning armed conflicts; it is a ``D'' on economy, efficiency, transparency and accountability. It is a ``D'' for several reasons. One, until recently, it really has not had sustained commitment from the top down. Deputy Secretary Hamry was very interested in this and some of their players. They got started at the end of the last administration but the level of commitment and attention from the top is very evident now, Secretary Rumsfeld down, on this issue. It is being made a priority, with a commitment from the top. In the past, they have had everybody kind of do their own thing. The Army did its own thing, the Navy, the Air Force, the military side as well as the civilian side. Furthermore, the culture was such that they focused on mission, war fighting. They didn't focus on basic management and accountability systems and they didn't have the right type of responsibility and accountability mechanisms in place in order to make sure the people were focusing on them. One of the things I think Defense needs to do in addition to what they are already doing is they need to think seriously about creating a chief operating officer position or a chief administrative or chief management officer, call it whatever you want, a level two position that focuses day to day on strategic planning and integration of these basic management type functions and activities because they are going to take years and are going to have to span different Secretaries of Defense as well as different Presidents of the United States. Mr. Towns. The privacy issue, how does this play into it? Does this create a problem for you in terms of ascertaining information? Does that issue come up? Mr. Hammond. Let me start as the collector of the governmentwide information. I think the information we collect for preparing financial statements either for budget-based reporting or for accrual-based reporting doesn't involve individual privacy concerns. It is done at a high enough level and without identification to individual issues that we have not seen privacy related issues with related financial reporting. Where we do find it and have to take it very seriously is with regards to the debt collection issues which are another part of the operations of the Financial Management Service, where you are dealing at a more individual level and sometimes dealing with tax-related information. With regard to financial reporting itself, no, we have not experienced any privacy issues. Ms. Springer. I would say that is also true at the general agency level as well, similar to the debt collection when we initiate some of these improper payment collection activities. That will be another place where we will have to be mindful about privacy issues. Mr. Walker. I don't think we have any problems from a financial statement standpoint. I would say one of the things we also have to look at if we are talking about incentives and accountability mechanisms, we need to look at the incentives for people we have overpaid to pay us back in a more timely manner. Right now, the way the law works, if we don't pay promptly, we have to pay interest and penalties but on the other hand, if they get overpaid and don't tell us, they don't suffer any penalty. I would argue that needs to be revisited. Mr. Towns. I see my time has expired, Mr. Chairman. Mr. Platts. Thank you, Mr. Towns. I will now yield for 5 minutes to our vice chair, Ms. Blackburn from Tennessee. Ms. Blackburn. Thank you, Mr. Chairman. Thank you all for being here today. I am new to this committee and new to Congress but I am an old hand at State government and led reform initiatives in Tennessee. I look forward to being here and working with you all to be sure that we move toward some efficiency efforts. Mr. Walker, if my little hen scratching serves me well, as I am sitting here and looking at your chart, which I thank you for, looking at consumption, our composition of spending and where we would be at 2050 and 2030, it looks like at 2030, we would be well over the 50 percent mark for the total expenditure of our citizens on State, local and Federal tax costs. Right now we are pushing the cost of government at about 45 percent when you combine the State, local and Federal cost of government, taxes being the largest budget. I would recommend and suggest with this in mind that we would soon be crossing that 50 percent threshold that we do have a market force that should be helpful in helping you achieve the goal of reducing the cost of government and that market force would be the taxpayers of the United States who will not stand for over 50 percent of the GDP going to support government. You each have mentioned material weaknesses in the reporting and accounting measures. My question to each of you is what are you doing to address the material weaknesses in being sure that the reporting and the accounting methods are cleaned up and that we are on the right track? What are your benchmarks, what are your penalties, what is the recommended course of action, and who is responsible for that recommended course of action? Ms. Springer. Let me take a first answer at that one. The CFO Act agencies in particular which comprise most of the financial statement information, the OMB is meeting with every single agency, every quarter at least and frequently as needed, but very specifically right now coming off this audit, we are asking each agency to give us in writing a plan weakness by weakness for how they are going to deal with it and how they are going to achieve reductions in those weaknesses. We are asking them for plans that have names of individuals who are accountable, we are asking for dates and an actual work plan for having achieved that. Admittedly, some of those are shorter term fixes that could be remedied within the 1-year horizon. A lot of them will extend a lot longer, particularly the ones related to financial systems. We also have put up a data base on-line that shows in real time the status of those weaknesses, so it is very transparent, very out in the open. If one of them gets remedied, we go right on-line and fix it but you can drill down from starting from the highest level of here is the total number of weaknesses to the type to a very detailed description and that is maintained. So again, it is very out in the open, there is nothing secretive about it. Ms. Blackburn. What are the penalties if something is not brought into compliance in a given period of time? Ms. Springer. I think the penalties from this standpoint differ from the private sector I think my colleagues would say as well, that it is not as if you are going out to the marketplace to raise capital and you need to have a clean opinion as if you are dealing with the SEC and you need a clean financial statement. At the same time, within the administration, I can tell you for a fact, the President will go into the Cabinet meetings and say to Cabinet officers, how come you are still at red. We have a scorecard process of red, yellow and green and one major component is the financial condition inclusive of the material weaknesses and audit opinions for each major Cabinet agency. That is known up to the highest level. There is no greater incentive for a Cabinet Secretary to get their house in order than to know that the President has it on his radar screen. Ms. Blackburn. Mr. Walker. Mr. Walker. I think one of the things that has to be considered is the Chief Management Officer/Chief Operating Officer concept at selected departments and agencies and I would respectfully suggest those type of individuals should be term appointments, probably 7 year terms with performance contracts. You would then have accountability for results in this area that span between administrations and I would be happy to talk further about this concept. The last thing is I agree we have a potential market force, namely the taxpayers. The problem is there are very few people talking about this. A lot of people don't want to talk about this. In fact, if you look at Congress' own budgeting mechanism, you will see decisions are made based upon 1 year and 10 year cash-flow implications, not economic present value, long term implications. As a result, what you get is that a lot of the things Congress is talking about doing will quite frankly make our long term fiscal situation worse not better. Ms. Blackburn. That leads me to another question. As you all can tell, I am one of those geeks who sits around and reads the budget. I really enjoy this stuff and I do want to work with you to be sure the taxpayers are getting a good buy on the government they have. I think that is incredibly important. I think there are far more people that are watching this. I think the Internet has been wonderful to help make government transparent. I applaud you all for trying to move toward a Web- based system, Mr. Hammond as you mentioned. I did have two questions. Ms. Springer, this may be better to you or to Mr. Hammond, I am not sure. What do you consider to be the true cost of a piece of legislation when we pass a bill, say like No Child Left Behind, or combining homeland security? As you look at the cost of implementation, do you work through this on a dollar basis or on a percentage basis if this is an $11 billion program, what is that going to cost you to change your accountability standards to put new bureaucracy in place, new management in place? How do you go about estimating that cost of all these good ideas we come up with? Ms. Springer. I think there are a couple of pieces to that answer. Obviously to the extent there is legislation involved, we would support the scoring process that the Congressional Budget Office has in assigning it a value and a cost figure to any kind of legislative action. To the extent that we have an investment that doesn't require legislation, an investment in a new system for example, there are case studies required by OMB that will essentially lay out the cost benefit as you would in any other business decision if you are a good business person, private sector trying to bring that same principle to light in the Federal Government so you would go through a very detailed case study to essentially prove the value of that investment. Ms. Blackburn. Right, but I think many times those estimates are quite low going back to what Mr. Walker was saying, that they look at it on a 1 year or 10 year basis and not run it out as you have done. Ms. Springer. Most of the ones that would come into my realm, if I saw a systems investment, a modernization investment that took 10 years, I would send it back to them and ask them to redo it. Most of mine don't have a very long timeframe. Mr. Hammond. I think if you are looking at entitlement programs or permanent programs, you need to build in an appropriate long-term planning horizon and then do a discounted present value calculation of the net cost based on the assumptions available. That really is what accrual-based reporting supports after the fact but I think the goal would be to try to bring something like that in at the beginning of the process. Mr. Walker. I think that is critically important, it is too late after the fact. One example is no matter what you think about the merits of this, the fact is that Congress passed a couple of years ago Tri-care for life for dependents of military personnel. Congress went to the CBO who scored it. They scored it based upon 10 year cash-flow, $50-$60 billion. We have to deal with discounted present value concepts which is how you ought to make informed decisions. When you look at it on that basis, when we issued the audit report on the financial statements at the end of the year, it wasn't $50- $60 billion in cash-flow, it was $297 billion. The Government would have to have $297 billion today invested in Treasury rates to deliver on that promise. Congress is thinking about doing the same thing with regard to the issue of not having an offset in connection with VA disability benefits. This is likely to cost even more money and yet Congress doesn't even have the numbers available to it. For prescription drugs, we are talking about 10 year numbers. Ten year numbers are small change compared to what kind of number we are untimately talking about here. They are just misleading. Ms. Blackburn. Thank you. Mr. Platts. We will come back for an additional round. I want to followup with Ms. Springer. Mr. Walker talked about a chief management officer and appointment of maybe a fixed term performance contract type position. I would be interested in knowing OMB and the administration's position on such positions specifically for DOD? Ms. Springer. I think from my perspective, we are interested in getting the right skill sets and the right capabilities applied to the effort. As far as the actual position whether it is a political position or a career position, whether it is a chief operating officer concept, I personally haven't reviewed it but I am sure the administration has a position but my main objective would be to assure that whoever that individual is, they have the right skill set to apply to the problems and get it resolved. Second, would be the structure, but I am sure there is an administration position on that. Mr. Platts. I agree that having the right people in place who have that drive and whether their political or career is important. If you could followup on what the administration's position would be on the non-political position at DOD that would be great. Mr. Walker. If I can provide some information that might be helpful to you and to Linda as well, I have had conversations with Mitch Daniels, with high level DOD officials as well as others on this concept. I know that the Secretary of Defense's Business Process Transformation Advisory Board has recommended the creation of this position. I don't know that the administration has a position yet. I think it would be great for them to have one. Obviously, they have had some changes in players. Mark Everson, who was involved in the conversation, is now going to be the IRS Commissioner. You have Clay Johnson coming on board. So I look forward to hearing what they have to say. Mr. Platts. It sounds like the Department is embracing it and that goes to the leadership from Secretary Rumsfeld at the top of the department and having that is certainly a good step in the right direction. Mr. Hammond, Treasury, Social Security and the Postal Service are to be commended for meeting the November 15 deadline 3 months early and really 2 years early. What would be your advice as to the other agencies as to how they could emulate and seek your success in providing that information in a more timely fashion? Mr. Hammond. I think it is an excellent question because what you look at initially is the daunting task of trying to speed up issuing the year-end report. The success story of each of these three agencies indicates it has nothing to do with what you do at the end of the year, but everything to do with what you do during the year. It really gets to changing the way you look at the data throughout the year, closing your books monthly, analyzing that information to check for trends or inaccuracies and in essence, isolating problems long before the end of the year so that at the end of the year, you are just compiling that which you already understand and know. You will find in all three of those organizations a strong culture of financial management, a serious commitment beyond just the accounting operations to understanding those numbers and recognizing what they are all about. They come from very different reasons but they share this common theme. If you look at the Postal Service, they are running a business. They have to know what is going on. Social Security has a huge stewardship responsibility to the American public. They want to have confidence people know their money is being properly managed. The Treasury Department issues the debt on behalf of the Government and collects all the tax revenues, again a huge public responsibility that needs to have credibility. That culture of financial management that kind of seeps throughout all three organizations makes it easier for program agencies to get good information and accept the additional monthly change in business. Mr. Platts. By that internal process, we are not having what Mr. Walker talked about, that end of the year labor intensive catch-up game being needed? Mr. Hammond. Right. Mr. Walker. There is still some of that going on at the IRS but they have come a long way and I commend them for their efforts. I will say one of the other common denominators you have with those three agencies, in addition to what Mr. Hammond said, is committed leadership from the top. For the record, let me note that former Treasury Secretary Paul O'Neill was a person of incredible ability and integrity and was very dedicated to this area. That should be noted. Ms. Springer. One other comment in this regard. The proof is in the pudding and we have had for the first quarter, for the first time across all 24 agencies, all getting first quarter financial results and financial statements submitted. This was the first year it was required and they all came in on time. Many of those agencies are now going to monthly and also doing full annual statement requirements with footnotes and everything else even though they are not required. It all will support being in a better position at year end. Mr. Platts. I know Mr. Towns is pressed for time and I am going to yield to him. If you need to, take more than 5 minutes to get through your questions. Mr. Towns. On that note, what does that really mean when you say they all got in on time? I am trying to figure out what does that really say? Does that mean they are more committed? What does that really tell you? Ms. Springer. In order to do just the year-end financial statements, it is possible to work through the course of the year and apply some of these heroic efforts and work over the course of the year's period to be able to get your statements compiled and submitted. You can't really employ and rely on that kind of effort on a 3-month repeating basis. It really means you have to go back and look at your processes and look at your methodology for developing statement entries because the timeframe is just so much shorter, only 3 months as opposed to 12. The significance of 3 months in getting those in on time is it forces the agency to really break out of that old culture and to adopt new processes. Even if they are still undergoing their systems modernization, there is a lot they can do on the process side. That is what that forces. Mr. Walker. One of the primary reasons the JFMIP Principals agreed to accelerate the due date for financial reporting is to take away the option for departments and agencies to engage in these heroic efforts after the end of the year. There is just no way you can engage in these herculean efforts and hit that November 15 date, so that forced them to be able to start dealing with some of the underlying systemic problems. That coupled with having them adopt modern financial management practices, it really isn't rocket science but pretty basic stuff, including quarterly reporting, and you can get a lot of progress pretty quickly. Mr. Towns. Mr. Walker, I think you outlined some of the major problem areas of the Federal Government in achieving a clean opinion. One of these areas, reliability estimating and reporting the liability the government has for environmental remediation and disposal of hazardous waste, this problem is primarily in the Department of Defense. How badly is this area under reported? Are we talking about $1 billion, $10 billion? Mr. Walker. Probably tens of billions. It is difficult to say. They have come up with an estimate now but we are not comfortable with their methodology, or the basis of their data. In fact, the DOD now has a process by which each year they have to make a statement to the Inspector General, the Congress and others as to whether or not they believe they are in a position to even have an audit. Last year, they said they were not. This is one of their major challenges, not their only challenge, but it is too early to tell how big the imbalance is. I would say tens of billions. Mr. Towns. I noticed the Department of Energy for a number of years also had problems estimating its environmental liabilities which it has actually corrected. How did they manage to correct their problem and can these solutions be used at the Department of Defense? Mr. Walker. I would be happy to provide some additional information for the record. I know they have made progress and would be happy to do that for the record. No doubt one of the things we ought to be doing is looking at where we have had some successes, where we have had progress and what can be done in order to share best practices, along with lessons learned so we can proliferate these throughout government. Mr. Towns. Do you want to add something? Ms. Springer. I would agree with that and I think we have also employed that best practices sharing in the committee of the CFO Council on Acceleration that Mr. Hammond chairs. We endorse that. Mr. Towns. I want to go back to the whole security privacy question. Are you comfortable with the security system actually being used in terms of the computers being used? Do you feel that is adequately secured in order for you to get the kind of information you really need? Mr. Walker. There is a difference between what type of information we need in order to do the audit on the financial statements or to prepare the financial statements which is the executive branch's responsibility. I would note for the record that information security is one of the material control weaknesses governmentwide. It is also an area that is on GAO's high risk list governmentwide as well. So there are issues associated with information security and privacy but they are really not issues that deal with financial reporting and auditing the consolidated financial statements of the U.S. Government. Mr. Towns. I was wondering if through that process inadequate information might come out? Mr. Walker. One of the real problems we have in some areas is the lack of timely, accurate and useful information. It is particularly problematic at the Department of Defense because they have thousands of systems by themselves, legacy systems that are non-integrated. For example, if you look at our high risk series reports, we have one that deals with information security, we have one that deals with DOD financial management, and anouther one that deals with DOD's information technology. It shows an example of how many systems you have to enter one purchase transaction into in order to be able to record it at DOD. I think it is something like 22 times. No wonder we have data problems. Mr. Towns. Are you having difficulty getting information from agencies? Are they cooperating? Ms. Springer. The level of cooperation is very high. There is no question about that. I would say it is probably at its highest level from what I can tell, but at the same time, they are constrained in providing performance information, if you will, financial performance information by virtue of the cumbersome processes they have in place and systems. So I think there is certainly a willingness to provide information. It is provided but it is the timeliness factor that is not always there. Some of these things took a long time to develop, they are going to take a long time to fix but we are seeing progress. That is what our job is going to be, to make sure that progress continues to completion. Mr. Towns. I guess I am trying to see if there is anything on this side we can do, from the Congress, in terms of any action we might take that might be helpful in terms of being able to obtain the information you need because I see this as being very serious? Ms. Springer. There is certainly no lack of statutory requirement and existing legislation and requirements for each of the agencies whether it is the Integrity Act and certification of systems, that they are timely and can produce the information and other certifications required by the agency heads around their control environment. I think Congress has certainly done its part in setting forth what the requirements are. The burden is on the agencies to be able to remedy these problems. Mr. Hammond. I think if you look at what the subcommittee is doing today and has done in the past is a great example of where Congress can help, continued oversight and interest in these important issues. It is one thing to have a statutory requirement; it is another thing to have periodic reporting and measurement against the progress to doing that. Certainly agencies are all interested, focused and committed to doing this but I think continued oversight is a very, very helpful way of keeping that focus. Ms. Springer. If I could add one other thing. Last year, the passage of the Improper Payments Information Act gave, I think, the force of law to the efforts of the executive branch which will improve on that effort significantly. I think that is a good example of a particular area where the legislative support will help us get to the problem a lot sooner. Mr. Towns. I don't want to be guilty of blaming everybody. I think we are all in this together and we have to work together. That is the reason I asked that question. I yield back, Mr. Chairman. Thank you. Mr. Platts. Thank you, Mr. Towns. I would note this committee does plan oversight in the near future on SBA and USAID and DOD later this year as well to try to bring some additional oversight to those specific agencies as they work toward their clean audits. I want to get to the improper payments issue a little, but I want to come back to the DOD issue. Mr. Walker, in your opening statement you talked about being 4\1/2\ years into your 15 year term and your hope and expectation that we will have a clean record before your term ends. Clearly, DOD is critical to that achievement. What is your best guesstimate of the process with the leadership we have there now of how soon we could expect DOD to have a financial management system in place that will allow an unqualified audit to begin? Mr. Walker. It is going to take several years. The fact of the matter is there is a lot of focus on this, not only within DOD but also within OMB. I participated in more than one meeting on the subject matter within the last several months. DOD is in the process of trying to put together a plan which will be a multiyear plan of what they plan to do in order to address this area. We are coordinating in a very constructive fashion with the executive branch because obviously they can put together a plan but we are ultimately the ones that have to issue the opinion on the consolidated financial statements of the U.S. Government, so we have to be comfortable with what they are proposing to do as well as the Inspector General of the Department of Defense. I would note for the record the Inspector General was in the last meeting as well. Unless and until that plan is completed and reviewed by all the appropriate parties, it is tough to say but it is going to be several years. Mr. Platts. Does appointment of the Chief Management Officer reduce that in a substantive manner? Mr. Walker. It could help but it could help not just in the area of financial management. It could help with regard to providing sustained attention and focus on a range of management issues and to take a more integrated approach to addressing these issues which I think is needed not only within administrations but between administrations. DOD has been in existence for over 56 years and has been on the GAO's high risk list from the very beginning in 1990. It is going to take sustained attention over a period of time to really get to where they need to be. Ms. Springer. If I could add to that. Having participated in those meetings as well, I have found them to be a good first step. There would be a big leap from no opinion to a clean opinion. The first step, is if we could get this, it would be a fantastic achievement, just to get to a qualified opinion. It is important to recognize there are steps along this process. The DOD system itself is targeted to go live in 2007, so certainly before that it would be a great challenge to be able to make significant progress overall toward getting a qualified opinion. The planning has started now, you don't wait until you get there to plan. You have to look over a period of time. Mr. Walker. I think realistically that has to be the plan. You need to try to work toward a qualified opinion before you get to a clean opinion. To note the challenges at DOD, for example, Jeff Steinhoff, our Managing Director for Financial Management and Assurance, just gave me a note saying, ``80 percent of the financial information that is needed to do the audit for DOD comes from non-accounting systems.'' It is all the more important that you take an enterprise-wide, integrated approach to this and you need somebody focused beyond just accounting and financial management. You have to focus on a broader perspective in order to really get the job done. That chief operation officer position would allow that to better happen, bringing all that together. That is not a slight to the people who are there. Dove Zakheim is truly committed, and Secretary Rumsfeld and Deputy Secretary Wolfowitz are truly committed but they have other things they have to do, too. Realistically, it is going to take a while and we can't keep on changing the players. We must assure that we are making progress and have appropriate accountability for results. Mr. Platts. Taking the DOD experience to DHS, and some of the previous questions touched on not getting behind the eight ball with DHS, while acknowledging that we are bringing together a lot of existing agencies that have problems. DHS is not covered under the CFO Act. Would it be your recommendation that they should be statutorily required to further comply with that act? Ms. Springer. DHS, as other agencies not covered by the CFO Act, are subject to the Accountability of Taxpayers Act enacted last year. So they do have a requirement to produce audited annual financial statements. In that respect, they are not exempt. I think whether it is that act or whether the CFO Act, for an agency of that size there is a very high bar and standard they need to meet. So we have talked with them about producing the quarterly financial statements that are required of the CFO Act agencies every bit as much as if they were. They do have a reporting requirement. Mr. Platts. Having that quarterly requirement I think goes to Mr. Towns' comment that we up front start on the right foot instead of trying to play catchup. Mr. Towns, did you have other questions? Mr. Towns. No. Mr. Platts. I am going to turn to the Improper Payments Act and implementation of that. We heard $20 billion, $35 billion. Is there any additional insight on the amount? As a guy who lives in a community where you can still get a 99 cents breakfast special, $35 billion every year of improper payments is staggering to me. Mr. Towns. Where is that? Mr. Platts. Come on up, Mr. Towns. My guess is if that is what we are thinking, it is probably more. Would you hazard to guess how much higher we may find it to be? Ms. Springer. I will give you some figures that helped me put it into perspective and I think would lead you to the answer. The $35 billion was based on a base of payments of about $900 billion, so the rate is roughly 3.9 percent, close to 4 percent. There is a budget of $2 trillion, so there is another $1.1 trillion that hasn't even been measured yet. Admittedly that is not all going to be erroneous but if you apply that same type of percentage, there is a lot more money yet there that is likely to raise that $35 billion. Mr. Platts. Maybe another $15-$20 billion if you applied the percentage? Ms. Springer. I think that is conservative. I think we are going to see that number go higher but you have to diagnose the illness, not before but as you are curing it, you need to know the extent of the illness. We find that number is going up and I think it will go up. Mr. Platts. With your efforts in addressing that, I know with every agency having to identify what their improper payments are, OMB is working, and in your testimony you talked about proposed common sense approaches for student financial assistance. How far along is OMB with each agency in trying to get them in good shape for making that more definitive identification occur? Ms. Springer. Two things. For the budget, the 2004 budget is part of that process. We asked agencies kind of in advance or in anticipation of the act for identifying their baseline of erroneous payments and what efforts are being made. The response was mixed. I would say about half the agencies had things in the works. So there is a long way to go there. OMB is also on target to issue its guidance related to the act. That is due by the end of May. We will get that out and that will require some very specific action steps related to estimating and showing progress. Mr. Platts. The end of May? Ms. Springer. The end of May is the due date. Mr. Walker. I think there is no question it is higher than $35 billion. I think the act passed by the Congress last year will only help us to ascertain what the number is but I think it is important to note that progress is being made. For example, at the Center for Medicare/Medicaid Services, when the first improper payment estimate was done, that agency was over $20 billion. I think last year it was down about $12-$13 billion, still unacceptable and still too high but they have made a considerable amount of progress in that regard. So we need to know what the base is to have focused attention on it. I think it is also important to note what improper payments are and what they aren't. Some of these are duplicate payments you need to recover; some of these are payments where we don't know whether they were proper or not because we don't have the adequate documentation. So it is not all fraud, waste and abuse. It is not money that is down the drain. Some of it is, but we need to focus more attention on this area in order to solve the problem. Mr. Platts. Ms. Springer, you identified with the earned income tax credit that the proposal to spend $100 million to try to better explain the tax credit so we can save the $9 billion that we think we are overpaying and if those efforts are successful, those are going to be great. When you talk about the proposals with eligibility for applicants for student financial aid, you say you proposed those. How have they been received? Ms. Springer. Some of those are still in the works. For example, where there is an opportunity to have access to a tax data base or where there is an opportunity to have access to a new hires data base. So some of those just in the past month have come up to the Hill for discussion. Mr. Platts. So you are still kind of in the early stage? Ms. Springer. Early stage, yes. They have been met with good receptivity. Mr. Platts. This is a question for all three but it starts with Treasury. In your 2001 and 2002 consolidated financial statements, there was roughly $17 billion each year that was unreconciled transactions and that is how the $17.1 billion and $17.3 billion amounts in each year were identified to really reconcile the Treasury books. What does that mean? Is that money that was lost, we just don't know what happened to it, is it part of improper payments? What is your best estimate of what that accounts for? Mr. Hammond. We think that it is the various balances that are misidentified between the agencies dealing with business taking place between themselves. When you are pulling together a consolidated financial statement across various organizations, you have to make sure you eliminate the activity that takes place internally because otherwise, you will be overstating to the public the net results of the joint activity. As we go about that, it is inherent on proper data quality and data identification coming into the system. To give you an example, this year we put together a system to be able to compare based on trading partner information, the various components of activity between the various parts of agencies. When we went back and forth and looked at what agency A said they did in business with agency B and what agency B acknowledged they did in business with agency A, when we compared all that, we had a net difference of $55 billion. That gives you a rough order of magnitude of the idea that the data coming in isn't properly classified and in many cases, frankly, isn't booked the same way on both sides of the transaction. Mr. Platts. Does that go to the internal control issue, if they are $55 billion off? Mr. Hammond. There is an internal control aspect to it, there is also a data identification aspect to it. Some agencies look at other agencies as being the same thing as the public, so it is hard for them to pull out of their systems and differentiate between activity they do outside the government and activity they do inside the government. The third piece of it is they treat data differently. For example, some agencies will book a receivable for business they are doing with other agencies but the other agency may not book a payable. Mr. Platts. It is comparing apples and oranges, how the different agencies look at the same information. There is not a unified analysis of how they credit it which accounts for different treatment in their books. Mr. Hammond. Exactly, so we have done a couple of things over the years to narrow that problem as well as to try to isolate the differences and then deal with those. We have with regard to the large dollar components, the investment activity that agencies have buying Treasury securities, the funding for the Civil Service Pension Program, isolated those and resolved or explained virtually all of those differences. We are now left to the routine activity between the agencies and to do that, OMB issued some intergovernmental business rules this summer that have gone into effect to create standardized business practices all agencies will have to follow. The second piece is that there is a joint agency effort building a system for the commercial activities between agencies that will hopefully capture and record all that information at the point of initiation and go a long way to solving that. It is a fairly daunting task. Mr. Platts. Hopefully as we get to more transparency and credible testimony or evidence because to the person looking at that, you balance, but there is this $17 billion sum that is unreconciled. The more we can reconcile; the more credible the balance statements will be. Mr. Walker. In accounting parlance, it is referred to as a plug but it is a $17.1 billion plug, which is a net number. We don't know what the gross number is. It is the net number, the net difference. It is something that has to be resolved. I do agree with Mr. Hammond it is primarily dealing with these intragovernmental transactions we need to get our arms around and that is too high. Mr. Platts. Ms. Springer talked about the formal process of having across the board treatment of those intergovernmental transfers. Ms. Springer. Right and that was a large part, and I can't take any credit for it, but getting out these rules and getting the system support for catching all those things. Mr. Hammond. It may be a small sense of comfort, and I prefer the term my Canadian colleagues use for their plug in their financial statements which is a harmonizing entry. [Laughter.] Mr. Walker. It is a plug. You can't make it sound like it is not. Mr. Hammond. You will notice it is actually an addition, not a cost, actually a negative cost in the statements, again providing some sense that it is intragovernmental activity, if properly eliminated, would hopefully explain that. Mr. Platts. I apologize; I am listening. I am supposed to be in a mark-up and they are telling me that I am voting but now they tell me the vote is over, so I don't have to run off, the usual of being in two or three places at once. Harmonizing plug? Mr. Hammond. It is the same thing. Mr. Platts. And we all share the hope that we stop plugging but just reporting and certainly steps like the uniform approach to these transfers is a step in the right direction so we are all on the same page. Mr. Hammond, with that part sounding more specifically related to the transfers, when we talk about improper payment specifically with Treasury as far as your history, are there any obstacles Treasury sees to having more success in avoiding improper payments? Mr. Hammond. The biggest improper payment I am familiar with at the Treasury Department deals with the earned income tax credit at the IRS. I think that is a very daunting task because part of the reason there is a level of improper payments with regard to that category has to do with the design of the program itself. It is driven the way it is statutorily created and the way it has to be administered in the Tax Code puts certain barriers on the effective management of the actual improper payment amount. One of the questions you have to look at as we dig deeper into improper payments and look at them with regard to various programs is the cost benefit analysis related to reaching a point of zero or minimal improper payments. If you look at any business today, you will find they have certain losses. There is an unacceptable level of loss and an acceptable level of loss. They make that judgment based on the cost related to get below that threshold. The Government is not to that point I don't think in being able to assess the various programs on improper payments but at some point we will have to get there and understand at what point do you say, it will cost so much more to go from this level to this level that we have to live with that or alternatively, redesign the program. I think the EITC is kind of a case study in that. Mr. Platts. With the hope to spend the $100 million to address that, are we going to be closely scrutinizing the cost benefit of that $100 million, is it actually going to reduce that $9 billion in improper payments? I assume that would be part of that process? Ms. Springer. That is right. Actually before that even got into the budget, I had the opportunity to sit in and kind of audit that session. Clearly the expectation on the investment of $100 million, while it is not a small number, is to make a significant dent in what right now is a $9 billion problem. Mr. Platts. For all three of you on the Medicare fee for service, $12 billion, 6.3 percent of improper payments identified, while we want to aggressively go after any improper payments, Mr. Walker you kind of identified this, some of that may not be improper. We just don't know. I spend every couple of months, and it is harder to do now than when I was in the State House, but a day on the job with a constituent. I have had great experiences with truck drivers, postal workers, teachers, you name it. One day I spent in an emergency room with a physician and staff nurses for a 12-hour shift. Part of that day was watching the emergency department physician do recordkeeping for Medicare. The concern he expressed about improper payments is that while we are trying to identify them that we do so in a responsible way. His point was he was sitting here today identifying what he believes is a proper treatment and that translates to where they fall as far as reimbursement. Nine months from now Medicare would come back and say you were intentionally defrauding the government and it should have been level 3 not level 4 and the burden is on the physician to prove they were right. Do you see anything that raises concerns as we go after improper payments that we need to keep our eye on that we are not doing in a wrongful way and being overzealous and maybe trying to recoup money not improper but not appropriately identified? Ms. Springer. That situation is certainly not the intent of any of these programs. It is just to go after whether it is fraud, waste or abuse, or inefficiencies or just getting better information to know where we stand. It certainly wouldn't be to comprise the integrity of any of the programs or the intent of the mission of the programs. Mr. Walker. The other thing you have to look at is that obviously the act passed last year was intended to increase the amount of transparency, the amount of light associated with these amounts. You manage what you measure, so until you start measuring it, you are not going to be able to effectively manage it. The other thing we have to do is look at what types of incentives and accountability mechanisms can be put in place if it turns out that there were behaviors or actions that were inappropriate. I come back to what I said before. If we made a duplicate payment, after a certain period of time I would expect that if somebody economically benefited from that, we ought to be able to recover some of that benefit. Maybe for some major contractors, we ought to require them to tell us after a period of time. Also to the extent it turns out there is improper upcoding, what that refers to, if it is innocent it is one thing but if there is intentional upcoding, I think you have to more sanction than just getting the money back. That is not enough to prevent undesirable behavior. There has to be reasonable transparency, appropriate incentives for people to do the right thing and assured accountability when they don't do the right thing. If you don't have that, the system is not going to work. Mr. Platts. There has to be a consequence. I am going to wrap up with a final question. Mr. Walker, talking about us getting to maybe 10 years that clean, consolidated financial report, I would be interested with OMB and Treasury if you want to guesstimate from your perspectives and in a broad sense what is the biggest hurdle or obstacle that it is going to take 10 years? Is it just because DOD is such a big part of getting our arms around that it is going to take so long? Mr. Walker. First, since we are the ones who have to express the opinion, I would say I hope and expect that no later than the end of my term we will be in a position to issue a clean opinion, but that is going to require sustained commitment and attention not only within the executive branch but also in the Congress in order to make that happen. We have made a lot of progress over the last several years. At the same point in time, that progress could quickly wane if the executive branch or Congress do not continue to be dually committed to this effort. People could easily go back to where they were before. It could be quicker than that. I think realistically we are going to see a qualified opinion before we get to a clean opinion and it is too early to tell when it is going to be. Ms. Springer. One week into this position, I am certainly not going to go out on a limb with a date but I would say it will take a consistent sustained effort by certainly the executive branch. Plans are in place. Clearly the first objective is going to be a qualified opinion. To the extent we can lay the groundwork for a qualified opinion, then we go to a clean opinion. The challenge is there. DOD understands. We understand what our material weaknesses are. We would like to think within a couple of years we could be talking or planning for working with GAO toward getting that qualified opinion, within a shorter timeframe than 10 years. Qualified is within our sight. However, that is not to say it isn't a major task. It is a cultural issue. You can have the best systems in the world, the best processes in the world, but unless you have a culture that is the best of the private sector approach for this thing, you couldn't achieve it. I think it is doable. I think a qualified opinion is certainly within the next couple of years or so. I think we could be planning toward that. Mr. Hammond. As my colleagues will tell you, I have been known for my unbridled optimism, so I will continue to be optimistic. It is my sense that as we are working to resolve the governmentwide issues dealing with preparation of the report and the intergovernmental transactions and data quality, DOD will continue to make progress in specific areas. The combination of those two items should position us within the next few years to get a qualified opinion. The state of those remaining DOD issues will then determine how qualified that opinion may be, but I think that it is certainly not going to be 2003 but I do believe we can see a qualified opinion in a realistic time period. Mr. Platts. I share the optimistic approach day in and day out and hope we are right. I will tell you as the new Chair of this committee, I am encouraged by things like the Improper Payments Act that everybody now is going to put a number for their agency, what is it so we can, as you say, manage once we think we know what the number is. The President's Management Agenda in total, the PART program evaluation are all positive signs that encourage me to be optimistic that we are heading in the right direction. As a committee, we certainly look forward to working with each of you and the administration to have more transparency and more accountability. As we started the meeting with Mr. Walker's testimony, it is a necessity for what is coming down the pike in the years to come when my children and future generations are going to be challenged financially to deal with the needs of our citizens. In closing, I want to thank our great staff on both the majority and minority side for their work in putting together this hearing. Again, let me thank each of you for your written testimony, your comments here today and the followup materials you will be sharing with us. Based on the testimony we have heard today and also at the previous two hearings, it is evident that agencies are increasingly placing more emphasis on financial management. Today we are especially pleased with the Treasury Department's example of accelerating the issuance of its audited financial statements to November, 2 years ahead of the required timeframe. It is my hope that other agencies are going to follow and we don't have to wait for 2 more years. One year out maybe we will have a few more not just the three that were ahead of the game this time. We are moving in the right direction but we all remain concerned about the financial management practices of agencies that did not receive unqualified opinions. As I mentioned earlier, later this month we will be having a hearing with the Small Business Administration and in early May, with USAID to try to bring some more light, some more attention and get to the bottom of what their challenges are. It is my hope these agencies will give us some insight from within of how they are working to rectify their inability to receive unqualified opinions. We will hold the record open for 2 weeks from this date for those who want to forward submissions for inclusion. This meeting stands adjourned. 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