<DOC>
[106th Congress House Hearings]
[From the U.S. Government Printing Office via GPO Access]
[DOCID: f:61840.wais]
CAN THE FEDERAL GOVERNMENT BALANCE ITS BOOKS? A REVIEW OF THE FEDERAL
CONSOLIDATED FINANCIAL STATEMENTS
=======================================================================
HEARING
before the
SUBCOMMITTEE ON GOVERNMENT MANAGEMENT,
INFORMATION, AND TECHNOLOGY
of the
COMMITTEE ON
GOVERNMENT REFORM
HOUSE OF REPRESENTATIVES
ONE HUNDRED SIXTH CONGRESS
FIRST SESSION
__________
MARCH 31, 1999
__________
Serial No. 106-73
__________
Printed for the use of the Committee on Government Reform
Available via the World Wide Web: http://www.house.gov/reform
______
U.S. GOVERNMENT PRINTING OFFICE
61-840 WASHINGTON : 2000
COMMITTEE ON GOVERNMENT REFORM
DAN BURTON, Indiana, Chairman
BENJAMIN A. GILMAN, New York HENRY A. WAXMAN, California
CONSTANCE A. MORELLA, Maryland TOM LANTOS, California
CHRISTOPHER SHAYS, Connecticut ROBERT E. WISE, Jr., West Virginia
ILEANA ROS-LEHTINEN, Florida MAJOR R. OWENS, New York
JOHN M. McHUGH, New York EDOLPHUS TOWNS, New York
STEPHEN HORN, California PAUL E. KANJORSKI, Pennsylvania
JOHN L. MICA, Florida PATSY T. MINK, Hawaii
THOMAS M. DAVIS, Virginia CAROLYN B. MALONEY, New York
DAVID M. McINTOSH, Indiana ELEANOR HOLMES NORTON, Washington,
MARK E. SOUDER, Indiana DC
JOE SCARBOROUGH, Florida CHAKA FATTAH, Pennsylvania
STEVEN C. LaTOURETTE, Ohio ELIJAH E. CUMMINGS, Maryland
MARSHALL ``MARK'' SANFORD, South DENNIS J. KUCINICH, Ohio
Carolina ROD R. BLAGOJEVICH, Illinois
BOB BARR, Georgia DANNY K. DAVIS, Illinois
DAN MILLER, Florida JOHN F. TIERNEY, Massachusetts
ASA HUTCHINSON, Arkansas JIM TURNER, Texas
LEE TERRY, Nebraska THOMAS H. ALLEN, Maine
JUDY BIGGERT, Illinois HAROLD E. FORD, Jr., Tennessee
GREG WALDEN, Oregon JANICE D. SCHAKOWSKY, Illinois
DOUG OSE, California ------
PAUL RYAN, Wisconsin BERNARD SANDERS, Vermont
JOHN T. DOOLITTLE, California (Independent)
HELEN CHENOWETH, Idaho
Kevin Binger, Staff Director
Daniel R. Moll, Deputy Staff Director
David A. Kass, Deputy Counsel and Parliamentarian
Carla J. Martin, Chief Clerk
Phil Schiliro, Minority Staff Director
------
Subcommittee on Government Management, Information, and Technology
STEPHEN HORN, California, Chairman
JUDY BIGGERT, Illinois JIM TURNER, Texas
THOMAS M. DAVIS, Virginia PAUL E. KANJORSKI, Pennsylvania
GREG WALDEN, Oregon MAJOR R. OWENS, New York
DOUG OSE, California PATSY T. MINK, Hawaii
PAUL RYAN, Wisconsin CAROLYN B. MALONEY, New York
Ex Officio
DAN BURTON, Indiana HENRY A. WAXMAN, California
J. Russell George, Staff Director and Chief Counsel
Bonnie Heald, Director of Communications/Professional Staff Member
Mason Alinger, Clerk
Faith Weiss, Minority Counsel
C O N T E N T S
----------
Page
Hearing held on March 31, 1999................................... 1
Statement of:
DeSeve, G. Edward, Deputy Director for Management, Office of
Management and Budget, accompanied by Deidre A. Lee,
Administrator, Office of Federal Procurement Policy, Office
of Management and Budget; and Donald V. Hammond, Fiscal
Assistant Secretary, Department of the Treasury............ 42
Walker, David M., Comptroller General of the United States,
General Accounting Office, accompanied by Gene L. Dodaro,
Assistant Comptroller General, General Accounting Office... 13
Letters, statements, et cetera, submitted for the record by:
DeSeve, G. Edward, Deputy Director for Management, Office of
Management and Budget, prepared statement of............... 46
Hammond, Donald V., Fiscal Assistant Secretary, Department of
the Treasury, prepared statement of........................ 61
Horn, Hon. Stephen, a Representative in Congress from the
State of California, prepared statement of................. 3
Turner, Hon. Jim, a Representative in Congress from the State
of Texas, prepared statement of............................ 7
Walker, David M., Comptroller General of the United States,
General Accounting Office, prepared statement of........... 18
CAN THE FEDERAL GOVERNMENT BALANCE ITS BOOKS? A REVIEW OF THE FEDERAL
CONSOLIDATED FINANCIAL STATEMENTS
----------
WEDNESDAY, MARCH 31, 1999
House of Representatives,
Subcommittee on Government Management, Information,
and Technology,
Committee on Government Reform,
Washington, DC.
The subcommittee met, pursuant to notice, at 10 a.m., in
room 2154, Rayburn House Office Building, Hon. Stephen Horn
(chairman of the subcommittee) presiding.
Present: Representatives Horn, Davis, and Turner.
Staff present: J. Russell George, staff director and chief
counsel; Bonnie Heald, director of communications/professional
staff member; Mason Alinger, clerk; Paul Wicker, Kacey Baker,
and Richard Lukas, interns; Faith Weiss, minority counsel; Jean
Gosa, minority clerk; and Earley Green, minority staff
assistant.
Mr. Horn. A quorum being present, the Subcommittee on
Government Management, Information, and Technology will come to
order.
Last year, the Nation's first ever governmentwide audit
provided a comprehensive accounting of a multitude of financial
problems with the executive branch of the Federal Government. I
am disheartened to report that the results of the fiscal year
1998 audits are equally dismal. Once again, billions of
taxpayers' dollars were lost to waste, fraud, and
mismanagement, or just can't be accounted for. This audit is
required by the Government Management Reform Act of 1994, a
bipartisan law in the 103d Congress.
The law specified that no later than March 31, 1998 and
each year thereafter, the Secretary of the Treasury, in
coordination with the Director of the President's Office of
Management and Budget, shall annually prepare and submit to the
President and Congress an audited financial statement for the
preceding fiscal year. The audited financial statement should
cover all accounts and associated activities of the executive
branch of the Federal Government.
The required audit conducted by the legislative branch's
General Accounting Office is being released today. The audited
report shows that the Federal Government is unable to report
accurately to the taxpayers or to Congress how it spent more
than $1.8 trillion in fiscal year 1998.
The audit report also shows that Federal agencies were
unable to safeguard an account for $1.6 trillion in government
assets, and estimates of future costs are off by billions of
dollars.
Also today we are issuing our second report card
summarizing the results of the 1998 audit reports on the 24
largest Federal agencies. As you can see from the grades, there
has been very little improvement. In fact, some agencies have
taken a step backward.
Of the 17 agencies that submitted the required report, 5
received F's, 6 received D's. Only two agencies, the National
Aeronautics and Space Administration and the National Science
Foundation, earned A's. Perhaps some of those distinguished
scientists could be loaned out to help unscramble the tangled
financial web which seems to plague the few other agencies.
The grades provide a summary status of these agencies that
have submitted their reports. But as of yesterday, 7 of the 24
agencies still had not submitted reports, even though it is 1
full month after the legal filing date and 6 full months after
the end of the fiscal year.
You will notice that these agencies, which include the
Departments of Commerce, Education, Interior, State, and
Transportation, received F's on their report card. It is
troubling to this subcommittee that they are unable to provide
this report in a timely way.
Both the General Accounting Office's audit report and the
individual agency reports weave a woeful tale of poor financial
management practices within the Federal Government and the
financial risks created by those weaknesses. We must pay close
attention to the details of these reports because of their
wide-ranging effects.
This report is our second warning. Next year there must be
significant improvement.
I thank our distinguished witnesses for being here today to
discuss the results of this comprehensive and important effort.
We are delighted to have the new Comptroller General of the
United States, Mr. David Walker, who is in charge of the
General Accounting Office. It is Mr. Walker's first time before
this subcommittee, and we welcome him. Accompanying him is
Assistant Comptroller General Gene Dodaro.
Also before us are a number of other key witnesses from the
Office of Management and Budget and the Department of the
Treasury, the Honorable G. Edward DeSeve, Deputy Director for
Management, Office of Management and Budget. We wish him well
as he moves to the private sector. This is his last day
technically on the job for the executive branch. He has done a
fine job in a very difficult circumstance.
He is accompanied by Ms. Deidre A. Lee, the Administrator,
Office of Federal Procurement Policy, Office of Management and
Budget. The other key witness is Dr. Donald V. Hammond, the
Fiscal Assistant Secretary of the Department of the Treasury.
I now yield to the ranking Democrat, Mr. Turner of Texas,
who will have some opening comments, and then to the gentleman
from Virginia, Mr. Davis.
Mr. Turner.
[The prepared statement of Hon. Stephen Horn follows:]
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Mr. Turner. Thank you, Mr. Chairman. The second audit of
the Federal Government's books submitted to us today reflects a
significant effort by the administration and the General
Accounting Office.
I want to commend the people who are responsible for the
second timely audit. It would not have been possible without
the dedication and hard work of a number of employees at the
General Accounting Office, the Department of the Treasury, and
the Office of Management and Budget.
The American taxpayers deserve to know when, where, and how
their tax dollars are being spent. The President in the
National Performance Review under Vice President Gore embraced
this principle early in their first term. In September 1993,
the National Performance Review recommended the preparation of
an annual consolidated financial report and the establishment
of comprehensive governmentwide accounting standards. These
recommendations became law as part of the Government Management
Reform Act passed by the Congress and signed by the President.
Government financial audits highlight a number of serious
financial management concerns and show the extent to which
certain Federal agencies have experienced difficulty in keeping
track of their property and equipment, which is significant,
because without maintaining reliable inventories, it is
impossible for agencies to make new purchases and purchase
supplies in a cost-effective manner.
As we have heard prior to today's testimony, the Department
of Defense, Department of Agriculture, and the Department of
Transportation have experienced similar property and equipment
accounting problems.
Another area of concern that has been revealed deals with
the various agencies' abilities to gain a clear picture of the
scope of their respective liabilities. Without a clear
understanding of the scope of liabilities, agencies cannot
adequately minimize costs to the taxpayers.
For instance, the Departments of Defense and Energy have
experienced difficulty in estimating among their overall
potential liabilities their respective environmental
liabilities. Initially, some of the largest credit agencies,
such as the Departments of Agriculture and Veterans Affairs,
still lack historical data on their credit programs, which is
required by the Federal Credit Reform Act of 1990 and by
Federal accounting standards since fiscal year 1992.
Simply put, these audits impose new financial discipline on
Federal agencies and provide new information relating to the
cost of Federal programs. For these reasons, there should be
bipartisan support for this audit effort and for the improved
financial management that they have rendered.
I notice that the majority staff has assigned grades to the
various audits. I notice there are a lot of D's and F's on the
report. I might offer a word of caution, because it is my
opinion, Mr. Chairman, that the letter grades may be an
oversimplified reflection of what is actually happening in
these various audits.
Clearly there have been improvements in the audited
practices and performance of these agencies in the last 3 years
that we have mandated to be performed. Agencies are showing
definite improvement in audit results.
Only 1 of the 24 major agencies had reliable financial
statements, which we call a clean or unqualified opinion, in
1993. However, by fiscal year 1997, 11 agencies received clean
opinions, and this year the Office of Management and Budget
anticipates that 13 agencies will receive clean opinions.
Overall, we clearly have witnessed steady progress from our
Federal agencies and improved audit results.
I have a chart that I think illustrates this very clearly,
which shows the results of the audits for the past several
years. You will note on there that there has been steady
progress. In 1993, as I said, only one agency received a clean
audit. In 1996, we had six. By 1997, we had 11. In 1998 we had
13.
I am pleased to see progress. That does not indicate that
there is not much work to be done, but I do want to underscore
that the results of grading the agencies may not fairly reflect
that there has been significant progress.
I also found it interesting that the minority staff, Mr.
Chairman, took the majority staff's grading approach and
applied it to the Congress. I have another chart that shows
these results. If we looked at the Congress itself and applied
the same standards applied to our 24 Federal agencies, we would
see that the Congress, measured by the three standards of the
grading system, would receive a D-minus.
I know the chairman is very much aware, as I am, that the
Congress has made significant progress in the last several
years in its auditing results. So while there is much work yet
to be done, we should at least acknowledge, I think, the fact
that there has been progress made, and we hope that progress
will continue.
Clearly we need to eliminate some of the obstacles that we
will hear about today that would result in a clean opinion, and
I hope all of us share, as I know the chairman does, the
importance of the auditing work that is ongoing and the
importance of approaching it in a bipartisan way.
Thank you, Mr. Chairman.
[The prepared statement of Hon. Jim Turner follows:]
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Mr. Horn. I thank the gentleman, and appreciate his
comments. I would merely say, with reference to Congress, after
210 years the first audit in the history of the Congress was
the one that the Speaker commissioned when we took over in
1995, and every Member was sent a complete audit of the
Congress for the first time in history.
I now yield to the gentleman from Virginia, Mr. Davis.
Mr. Davis. Thank you, Mr. Chairman. I am not sure whether
to argue if the glass is half full or half empty. I count, from
the material given to us, we have eight agencies that are in
compliance. We have a number of incompletes.
The ones that I have, for the record, in compliance are
NASA, National Science Foundation, GSA, Labor, the Social
Security Administration, FEMA, HUD, and the Nuclear Regulatory
Commission. We have others that are qualified, and we have had
no reports yet from Commerce, Education, EPA, Interior, Small
Business Administration, State, and DOT. Hopefully some of
these will bring themselves into compliance. That is eight.
Even if we had 13 clean opinions, that would mean 11 are
not clean opinions after several years of working with this. If
these were my kids and that was their report card, they would
be grounded and they would be getting some tutorial to try to
bring them up to snuff, even though progress may be slightly in
the positive direction.
Also, if this was a taxpayer and they submitted records
like this, it would be referred to the U.S. Attorney's Office.
This is just unacceptable in many of these cases with what is
coming forward.
Let me just say, I look forward to the testimony today. For
Ed DeSeve, I think this will be his last testimony before an
agency. Ed, good luck in the private sector. I have enjoyed
working with you on a number of projects, and I think I can
safely say for all of us that you have left this city a lot
better than you found it. When you leave government, that is as
good as it gets, I think.
And you have Dee Lee with you, and you have worked on a
number of projects in my neighborhood, and Don Hammond, so I
can't beat up on you too much.
But Ed, we really appreciate the efforts that you have
made. You have made a huge difference for the District of
Columbia and the Federal Government. You will be missed in
public service.
Mr. Horn. I thank the gentleman very much.
We will now start with the Comptroller General. We welcome
you, and since we are an investigating committee, all the
subcommittees of Government Reform have all witnesses sworn in,
so Comptroller General and Mr. Dodaro, if you will rise.
[Witnesses sworn.]
Mr. Horn. The clerk will note both witnesses have affirmed
the oath.
Your statement is automatically put in the record, as will
the other witnesses' statements, once we introduce you. Please
feel free to proceed, whether you want to summarize it, whether
you want to read it. I have read it all and it is a very
thoughtful statement, as we would expect. We would welcome your
comments.
STATEMENTS OF DAVID M. WALKER, COMPTROLLER GENERAL OF THE
UNITED STATES, GENERAL ACCOUNTING OFFICE, ACCOMPANIED BY GENE
L. DODARO, ASSISTANT COMPTROLLER GENERAL, GENERAL ACCOUNTING
OFFICE
Mr. Walker. Thank you, Mr. Chairman. It is a pleasure to be
here today. I will summarize my statement, since the entire
statement has been put into the record.
I might note, Mr. Chairman, that you obviously don't grade
on a curve, and that it is my understanding that if GAO had
been applied to your ratings, that we might have gotten an A.
At least that is my understanding. I think it is important that
we lead by example, because after all, we are the agency that
is overseeing others. I think it is important for us to do
that.
Mr. Chairman, members of the committee, I am pleased to be
here today to discuss our report on the U.S. Government's
financial statements for fiscal year 1998, and to underscore
the importance of continually improving how Federal departments
and agencies manage the finances of our National Government.
The Federal Government has underway the implementation of
important legislative reforms to promote greater accountability
in managing the finances of our National Government. Timely,
accurate, and useful information has not been available across
government to assure financial accountability and to help
continuously improve the economy, efficiency, and effectiveness
of our government.
It is essential to improve how Federal departments and
agencies manage our finances in order to achieve better
accountability at the Federal Government level.
Fortunately, the President and the Office of Management and
Budget have taken financial management in general and the
annual audit in particular very seriously, and they have made
it a priority. As a result, considerable effort is being made
by agencies to achieve the mandate of achieving a clean
financial statement opinion and eliminating material control
weaknesses from their financial reporting. Steady improvements
in financial accountability are occurring.
However, several major agencies are not yet able to produce
auditable financial statements on a consistent basis, and they
have major obstacles to overcome. Similar challenges exist in
producing reliable statements for the entire U.S. Government.
The historic, longstanding inattention to financial
management issues in the government, combined with the size and
complexity of government operations, make corrective actions
difficult, but imperative. Moreover, the pace of improvement
will be greatly influenced by the progress government
organizations are able to make in, first, modernizing their
information systems and internal controls; second, revamping
their human capital practices to enhance capacity; and third,
implementing change management strategies to achieve the
discipline needed to follow sound financial management and
reporting practices.
I might add a fourth, Mr. Chairman. It is absolutely
critical that there be sustained attention and commitment at
the very top of all the departments and agencies, as well as by
the President and the Office of Management and Budget, to get
this job done and to make continuous improvement.
The executive branch recognizes the extent and severity of
existing deficiencies. Addressing them will continue to require
concerted improvement efforts across government. With concerted
effort, the Federal Government can continue to make progress
toward achieving accountability and generating reliable
financial and management information on a regular basis.
It is critically important, Mr. Chairman, that we have this
information on a regular basis, not just at year end. I will
come back to that later.
The balance of my remarks, Mr. Chairman, will be focused on
several points: first, outlining the findings of our report and
the financial statements of the U.S. Government for fiscal year
1998; underscoring the critical need to fully implement
legislative reforms; emphasizing that unqualified or so-called
``clean'' opinions must be accompanied by timely and reliable
data, stronger controls, and better financial and management
information systems that will help to continuously improve the
economy, efficiency, and effectiveness of government.
Stated differently, receiving a clean audit opinion is not
an end in and of itself. It is an important and objective
milestone which we must strive for. However, we need to make
sure that the systems and controls are in place to assure
timely, accurate, and useful information to make informed
decisions, and to improve the economy, efficiency, and
effectiveness of government on an ongoing basis.
I would like to highlight the fact that human capital must
absolutely become a more critical part of the management reform
agenda in order to achieve the objectives of the Results Act
and to move toward a more performance-based government. I would
urge that the focus be on the term ``accountability,'' not
accounting. We are called the General Accounting Office, but we
are about accountability, and financial management is one
element of accountability, but there are others that are
important as well.
With regard to results, Mr. Chairman, last year the GAO
reported in the first ever report on the U.S. Government's
financial statements for fiscal year 1997, that because of
serious deficiencies in the government systems, recordkeeping,
documentation, financial reporting and controls, amounts
reported in the financial statements and related notes do not
provide a reliable source of information for decisionmaking by
the government or the public.
These deficiencies also affect the reliability of the
financial statements and the government's ability to measure
the full cost and financial performance of programs and to
manage related operations.
Our report on the U.S. Government's financial statements
for fiscal year 1998, which is being released today, has
reached the same conclusion. Specifically, due to these
deficiencies, we are unable to express an opinion on the
financial statements of the U.S. Government.
Major challenges include the Federal Government's inability
to: 1) properly account for and report on billions of dollars
of property, equipment, materials, and supplies, and certain
stewardship assets; 2) properly estimate the cost of most major
Federal credit programs and the related loans receivable and
loan guarantee liabilities; 3) estimate and reliably report
material amounts of environmental and disposal liabilities and
related costs; 4) determine the proper amount of various
reported liabilities, including post retirement health benefits
for military employees, accounts payable, and other
liabilities; 5) accurately report major portions of the net
cost of government operations; 6) determine the full extent of
improper payments that occur in major programs and that are
estimated to involve billions of dollars annually; 7) ensure
that all disbursements are properly recorded; and 8) properly
prepare the Federal Government's financial statements,
including balancing the statements, accounting for billions of
dollars of transactions between governmental entities, in other
words, intragovernmental transactions between one department
and another, and properly and consistently compiling the
information to present consolidated financial statements.
Overall, we have found significant financial systems
weaknesses and problems with fundamental recordkeeping and
financial reporting, incomplete documentation, and weak
internal controls, including computer controls. These
deficiencies continue to prevent the government from accurately
reporting a significant portion of its assets, liabilities, and
costs, and affect the reliability of the financial statements
and the government's ability to accurately measure the full
cost and financial performance of programs and to manage its
operations.
Mr. Chairman, you noted earlier the current status of
individual agency audit efforts, and Ranking Minority Member
Turner also noted the progress made over the last several
years, but we have still got a ways to go. I think it is
important to note that a number of agencies still have not
completed their required audits, and yet we are a number of
months past the fiscal year end.
This in and of itself serves to demonstrate the challenges
and the complexities that these agencies face, and the
underlying issues associated with the lack of adequate
management information systems to prepare timely, accurate, and
useful information for the audit, much less for day-to-day
decisionmaking and ongoing operations.
Producing audited financial statements by the March 1
statutory deadline is still a challenge, but improvements were
made this year by certain agencies; in particular, the
Department of Health and Human Services. In addition, some
agencies for the first time have received clean audit opinions
or unqualified audit opinions. I might note, the Department of
Housing and Urban Development, it is my understanding, has
received a clean opinion.
We have designated as high-risk certain agencies with the
most serious challenges: Financial management at DOD, IRS, the
Forest Service, and the FAA. All, however, have efforts
underway to address these deficiencies. Importantly, the
Customs Service was removed from our high-risk list due to
their concerted efforts and demonstrated progress in achieving
positive results.
Audited financial statements are essential to providing an
annual public scorecard on accountability. However, an
unqualified or clean audit opinion, while certainly being
important and an objective milestone, is not an end in and of
itself.
For some agencies, the preparation of financial statements
requires considerable reliance on ad hoc programming and
analysis of data produced by inadequate systems that are not
integrated or reconciled, and often require significant audit
adjustments. Some agencies undertake heroic efforts to obtain
reliable year-end data that can be audited, but these efforts
are not backed up by fundamental improvements in the underlying
financial and management information systems and control
mechanisms to support ongoing program management and
accountability.
As a result, these heroic efforts will not achieve the
intended results of the CFO Act over the long-term; namely, the
CFO Act is intended to enhance overall accountability, and
assure that the financial and management information systems
and controls are in place to continuously improve the economy,
efficiency, and effectiveness of government.
To do so, systems must provide timely, accurate, and useful
information for informed decisionmaking. Improving financial
and management information systems is essential.
For fiscal year 1997, agency financial auditors reported
that 20 of 24 major agencies' financial management systems did
not comply with the act's requirements. Similar results are
expected for fiscal year 1998. In addition, agencies face the
year 2000--Y2K--computing challenge of assuring that their
systems can function properly as we change to the new
millennium.
This task is appropriately taking priority, and will
temporarily sidetrack agencies from much needed other
improvements in their systems.
Strengthening computer controls is vital as well. We
continue to find serious and widespread computer security
weaknesses that place enormous amounts of Federal assets at
risk of fraud and abuse, financial information at risk of
unauthorized modification or destruction, sensitive information
at risk of inappropriate disclosure, and critical operations at
risk of disruption.
The GAO, as you know, Mr. Chairman, has done a tremendous
amount of work with the Congress to provide leadership, along
with working with the administration on the Y2K effort. It is
very clear that computer security will be fast on its heels
once we get past the new millennium.
Human capital, Mr. Chairman, is an integral part of
financial and information management reform, and indeed, any
management initiative. It involves acquiring, developing, and
retaining the human capital needed to achieve results.
Enlightened leaders understand that effectively managing
employees, otherwise known as human capital, is essential to
maximizing the effectiveness of any organization's performance.
Only when the right employees with the right skills are on
board and are provided with the training, tools, structure,
incentives, and accountability to work effectively, is
organizational success possible.
As it relates specifically to financial management, the CFO
Act recognizes the importance of leadership in creating CFO
positions throughout government and in establishing a goal of
improving the qualifications of financial management personnel
throughout government.
While some attention to delineating critical core
competences, needed skills, and appropriate training has
occurred in the government, a great deal more needs to be done.
We plan to give greater attention to recommending the ways
that the government can improve the strategic approaches to
human capital planning, the acquisition and development of
staff with skills to meet critical needs, and the creation of
performance-oriented organizational cultures, while protecting
reasonable merit principles.
Without a firm foundation of reliable, timely, accurate,
and useful financial and management information, the many
reforms underway across government to move to a performance-
based focus will never be successfully fulfilled. Only then can
the government assure adequate accountability to taxpayers,
manage for results, and help decisionmakers make timely and
well-informed judgments.
Experimentation is now underway across government to
develop single accountability reports on individual departments
and agencies. These reports will consolidate and integrate
audited financial statements and reporting under the Results
Act and other related laws, to show the degree to which an
agency meets goals, at what cost, and will aid the reader in
determining whether the agency is well run.
I might note that the Social Security Administration is
leading the way in this effort, and should be commended for it.
Reliable accountability reports, including information on the
full costs and results of carrying out Federal activities, will
help to correct the problem of a lack of complete and reliable
information that has been a source of concern for congressional
and agency decisionmakers for decades, and it will greatly aid
decisionmaking for our National Government.
Reliable financial information also is essential for
analyzing the government's financial condition and helping
inform the budget deliberations by providing additional
information beyond that provided in the budget.
In closing, Mr. Chairman, I would like to commend you and
the subcommittee for its diligent oversight and actions to
improve financial management of our Federal Government. Your
hearings have helped to underscore the critical importance of
the issue, and to make progress at a more rapid pace.
I look forward to working with you and the other members of
this subcommittee as we strive to enhance accountability and to
continuously improve the economy, the efficiency, and the
effectiveness of the Federal Government. Thank you, Mr.
Chairman.
[The prepared statement of Mr. Walker follows:]
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Mr. Horn. We thank you for that very fine statement.
What we are going to do now is alternate between Members
here of 5 minutes each, and as chairman, I will yield my first
5 minutes to the gentleman from Virginia, Mr. Davis.
Mr. Davis. Thank you, Mr. Chairman.
Mr. Walker, you talked about a clean audit opinion, while
certainly important and almost a starting point, is not an end
in itself. Could you just briefly elaborate on that?
Mr. Walker. Obviously, a clean audit opinion or an
unqualified opinion is generally recognized and is an objective
measure. It is one that we should strive for, and ultimately
should hope to achieve clean audit opinions on all agencies and
departments, as well as at the overall Federal Government
level.
However, it is possible to achieve a clean or unqualified
audit opinion and still have fundamental problems with regard
to the financial and management information systems, and have
material control weaknesses that subject the agency to
potential fraud, waste, abuse, and mismanagement.
As a result, while we want to get the clean audit opinion,
we want to make sure that structural improvements are made,
too, at the same time.
Mr. Davis. Without a clean audit opinion, though, it is
much more difficult to get at the core issues, isn't it?
Mr. Walker. I would say that one of the benefits of
striving for a clean audit opinion is it focuses you on these
underlying issues. However, it is possible and, in fact, it has
already occurred, as evidenced by the summary sheet; some
agencies that have clean audit opinions have not dealt with the
underlying problems and need to deal with the underlying
problems, because it is possible, through heroic efforts, to do
a tremendous amount of work as of the beginning of the year and
the end of the year to get a clean audit opinion, but yet the
agencies don't have the systems to make ongoing management
decisions.
Mr. Davis. Now, to make the governmentwide financial
statements balance, Treasury recorded a net $24 billion item
which it labeled unreconciled transactions. If this number is a
net number, what is the gross number or real amount of the
difference?
Mr. Walker. We can't tell you that, Congressman. If we knew
what the gross number was, I think we would be able to make
more progress in allocating it properly. That is the net number
and it is one of the reasons that we can't express an opinion.
Mr. Davis. But it could literally----
Mr. Walker. Gene.
Mr. Dodaro. We do know, for example, Mr. Davis, that in
just the intergovernmental accounts or transactions that
occurred, there was a net difference of about $250 billion. So
we don't know exactly what the total gross differences are, but
there are a number of problems that occur. One is the fact that
Treasury records do not agree with the agency records in all
cases, and there are a lot of unreconciled transactions. That
is No. 1.
No. 2 are these intergovernmental transactions. The
government does a tremendous amount of business among agencies.
Agencies cannot eliminate all of those transactions when it
comes to the Treasury level. Treasury thus has difficulty
reconciling those transactions. So the amounts that are out of
balance also includes adjustments to the agency statements that
come in. It is not yet clear that the data that are on these
agency individual statements is the same data that Treasury is
using to roll into the governmentwide statements.
Progress has been made this past year in providing greater
certification that that has happened, but that is why the
process of compiling these statements is still a problem.
Mr. Davis. If the taxpayers sent this kind of form up to
the IRS, what would be the reaction, do you think?
Mr. Walker. The IRS would probably be less lenient.
At the same point in time, one has to recognize----
Mr. Davis. It would spark an investigation if you sent
these kinds of records up, wouldn't it, if you were a normal
taxpayer, a corporate business?
Mr. Walker. I couldn't tell you that, Congressman.
Mr. Davis. You don't think it would; they would say, this
is fine, if the numbers don't add up?
Mr. Walker. I didn't say it was fine. They would be very
concerned about it, there is no question about it. We have to
keep in mind----
Mr. Davis. Very concerned? It could in fact be a referral,
couldn't it?
Mr. Walker. It could. I think we have to keep in mind that
unlike the private sector, where audits have been in existence
for decades, and even, frankly, in the State and local
government sector where audits have been in existence for a
couple of decades, the Federal Government rightly or wrongly is
a laggard in this regard. We are a fairly new player to having
audited financial statements.
I think that we should have had better financial and
management information systems all along. But the fact that we
are now having this audit demonstrates a lot of the challenges
that existed before that had not been brought to light.
Mr. Davis. I understand that the Department of Defense
Inspector General reported that the Department of Defense made
over $1.5 trillion in adjustments to its financial records in
an attempt to prepare financial statements.
Is that possible? Is that number accurate?
Mr. Walker. My understanding is that is correct.
Mr. Davis. What does this tell us about the state of
confusion over there?
Mr. Walker. I would say that the Defense Department
probably represents the single largest challenge in the area of
financial management. It probably represents also----
Mr. Davis. It is probably half the spending of all the
agencies, right?
Mr. Walker. It is half of discretionary spending, I think.
As you know, mandatory spending keeps going up every year.
Mandatory spending is about 70 percent of the Federal budget.
It is a major challenge, and it is not only a challenge with
regard to financial management, Congressman, it is also a
challenge with regard to virtually every other area of
management: strategic planning, human capital, information
technology, et cetera.
Mr. Davis. Let me ask just one last question. You talked
about human capital, effectively managing employees, and the
challenge in an information age.
There is a worldwide and certainly a national and regional
shortage of finding qualified people to do things. We see this
every day in the private sector, where they are bidding up
people. Of course, in private companies you have stock options
and a whole host of what we call golden handcuffs to hold onto
people and retain them.
The government does not have that available. Are current
government compensation levels adequate to attract key managers
in these areas? Or is that just something maybe you are not--
you haven't focused on?
Mr. Walker. I was in charge of Arthur Andersen's global
human capital practice, so compensation is something I know a
little bit about. Obviously, the Federal Government is not and
never will be competitive with the private sector with regard
to compensation. We rely to a great extent on getting
individuals who are dedicated to public service to come here.
There are, however, real, serious issues we need to look at
in the compensation area in the Federal Government, especially
for certain critical skills where there is a tremendous
imbalance. I think there is a need for comprehensive human
capital reform in the Federal Government, and compensation is
one of the areas we need to look at.
Mr. Davis. I would just note that I agree with that. We had
FEPCA a few years ago, the Federal Employees Pay Comparability
Act. Every year the administration has come in well under the
numbers that would have been recommended in keeping that up. It
seems in some of these very critical areas we are losing
people. In procurement we are losing people. We are losing
people in key management positions, where they can walk across
the street and get significantly more money, compensation, and
a career path, and the Federal Government today just doesn't
offer the same kind of opportunities.
Maybe we are asking our agencies to do things that, under
the current compensation formulas, are very, very difficult to
do. I would just leave that parting thought with you.
Thank you very much, Mr. Chairman.
Mr. Horn. I completely agree with the gentleman from
Virginia. We are delighted to have a number of dedicated public
servants before us today, both you in the legislative branch
and those that are to come in the executive branch.
I yield 5 minutes to the gentleman from Texas, Mr. Turner.
Mr. Turner. One of the things that I would like for you to
explain to put everything in context, I know when you do these
audits and come up with less than perfect opinions, that it
could mean that there was a lack of documentation and evidence
furnished by the respective agency, or it could be that there
is something there that would show us that there is some fraud
or waste and abuse.
Could you give me an example of something that is found in
these audits that would clearly show us that there is fraud or
waste or abuse in that agency, as compared to something that is
found that we really don't know until we look deeper?
Mr. Walker. I will start, and then ask Mr. Dodaro if he
wants to add to it.
I think the absence of effective internal controls is--
where you have material control weaknesses over disbursements,
for example--represents an area where you clearly have an
opportunity for waste, fraud, abuse, or mismanagement.
One area where progress has been made in this regard is
Medicare, where they have estimated for the last several years
the amount of improper payments.
A lot of reasons can lead to an improper payment. Part of
this was because of the focus that was placed on this issue as
a result of the audit of HCFA and HHS. The amount of improper
payments, fortunately, has come down from about $20 billion a
couple of years ago to I think about $12.6 billion this year.
So HCFA is making progress, but a lot of the reasons
improper payments are possible is because of the lack of
adequate internal controls. But again, one of the benefits of
this audit is that agencies are now focused on it, and they are
trying to make progress.
Gene.
Mr. Dodaro. I think the area of improper payments that the
Comptroller General was just noting is probably one of the most
vivid examples where the financial audits have served to
quantify how much money is going out of those programs that
should not be.
The area of Medicare is a clear example. The reason is it
ranges from inadvertent error to fraud and abuse. We know in
the Medicare area that there is a significant amount of fraud
and abuse of that system.
Other areas have been rent subsidies for the Housing and
Urban Development program, the Supplemental Social Security
program, the SSI program. They have been able to quantify
overpayments, so that has been very effective.
Also in the computer security area, we know, for example,
the SSA IG found employees stealing, identity fraud, that led
to the creation of false Social Security forms and subsequent
issues. We also know at DOD that they and we have found in a
number of cases where embezzlements have occurred.
The other area is in safeguarding assets. The Federal
Government has a tremendous amount of inventory, property, and
sometimes those assets are not properly safeguarded and could
be subject to theft or unnecessary deterioration.
So it is a combination. We certainly have those items that
you mentioned. There is an awful lot of documentation that is
not there so that leaves a lot of questions unresolved. So it
is a combination of both issues.
Mr. Turner. Mr. Walker, are you satisfied that once these
audits are done, that the agencies actually take the results of
them seriously and begin to try to resolve the problems that
the audits reveal?
Mr. Walker. It is clear to me that by the President making
financial management a priority and setting goals for having
clean audit opinions for all the agencies, as well as the
Federal Government, and with the Office of Management and
Budget's followup, that they are taking it a lot more seriously
today than they were several years ago. Progress is being made.
However, we have a ways to go. One of the challenges we
face is that agencies have to deal with new reporting standards
and new accounting standards that have become effective. Some
have a difficult time being able to deal with that because of
some of the inherent weaknesses in their financial and
information systems.
Mr. Turner. One of the things that disturbs me the most
about the results that we are looking at today is the seven
agencies that have failed to complete their audit by the March
1st deadline.
I guess I could reserve this question also for Mr. DeSeve,
but I would like to know why these agencies did not meet the
statutory deadline.
Mr. Walker. I think it is best to direct that question to
Mr. DeSeve. It is my understanding that several of these
agencies had difficulty in dealing with some of the new
accounting standards and the new reporting requirements that
were effective for this year. That could be one of the reasons.
But I would suggest that you ask him about that.
I think it is a problem, however, that here we are, March
31st, and the fiscal year end was September 30, and we are 1
month past the deadline for the agencies to present their
audited financial statements, and they still haven't done that.
That shouldn't happen. If that was the case in the private
sector, you would have serious problems with getting credit and
your stock price would probably be adversely affected.
Mr. Turner. I look forward to hearing those explanations.
Obviously, some of the reasons may be understandable, but when
we talk about--one significant portion of this audit is to
determine whether the agency has complied with Federal laws and
regulations, and obviously one of them is this deadline of
March 1st to complete this audit. I would hope the agencies
would take that seriously.
One other question that I would have for you. When we look
at the intergovernmental transfer issue, which you threw out a
big number a moment ago, I think it would be helpful if you
would just explain to us what an intergovernmental transfer is,
give us an example of one, and then from that example, explain
how that cannot be properly accounted for and why we have that
kind of problem.
Mr. Dodaro. A good example would be the Internal Revenue
Service purchases a lot of goods from the Government Printing
Office for the tax forms that are sent to the public. The IRS
records may indicate an amount that they owe the Government
Printing Office.
Part of the problem is rooted in the fact that years ago
agencies were having difficulty with one another actually
recouping the amounts that were owed them, so the Treasury set
up a process--and Mr. Hammond can explain this because they are
trying to fix this right now, where in this case, GPO could go
to Treasury and say the IRS owes us a certain amount of money
for these tax forms that we have printed and mailed directly to
the public, for postage, et cetera, and take the money out of
IRS's account at the Treasury, because the Treasury maintains
fund balances. The agencies do not have, by and large, cash
accounts where they write checks. It is all done through
central banking functions, pretty much, by and large, except
for some defense activities.
In this case, the IRS accounting records may show a
different payable that would be different than what would be on
the GPO's books. When those records then go up to the Treasury
Department, they are unable to reconcile them. On one hand the
IRS would show a payable to GPO, GPO's records might show not a
com- pensating receivable, and then you wouldn't be able to
eliminate that.
Those types of transactions go on all across the
government. For example, Social Security Administration
performs a lot of services for HCFA in the Medicare area, in
actually issuing Medicare cards. Then Social Security charges
HCFA. HCFA basically then pays them.
We have situations where the General Services
Administration operates a lot of government buildings and
actually charges the agencies rent. So the rent that is on the
GSA books might not necessarily correlate to the amounts that
the agencies say that they owe GSA.
A lot of agencies buy equipment from the Federal prison
system. It just goes on and on throughout the government. There
are estimates of several hundreds of billions of dollars of
buying and selling that goes on among the agencies.
Right now there is not an identification in the systems,
and this goes back to a systems problem, that would allow
Treasury to properly consolidate that the way you would in the
private sector if you had a large holding company with several
subsidiaries, and you need to be able to consolidate.
Mr. Horn. I thank the gentleman.
Let me ask a few more questions, and then we will go to our
next witnesses. I believe--can you stay with us, Comptroller
General?
Mr. Walker. Yes, we can, Mr. Chairman.
Mr. Horn. Let me get into the trust funds for a minute.
Comptroller General, your General Accounting Office's report
states that the trust fund investments and liabilities, which
amounted to $1.8 trillion as of September 30, 1998, are netted
out to zero in the statements.
Could you explain to me what that means and what is the
significance of those amounts being, in essence, eliminated?
Mr. Walker. Basically, it represents a practice that is
consistent with what would happen in the private sector. Let's
take Social Security as an example. Under current law for trust
funds, to the extent that you end up having excess receipts
over disbursements in a given year, the excess must be invested
in U.S. Government securities. That, obviously, represents an
obligation of the U.S. Government.
So, you have a situation where, on one hand, you have a
budget account known as the trust fund that has obligations of
the U.S. Government. That is a receivable. On the other hand,
you have the U.S. Government, the operating entity, that owes
money to the trust fund, which is a liability or a commitment
to that trust fund.
Intergovernmental transactions get eliminated in
consolidated financial statements. So as a result, the only
debt that you have in these consolidated financial statements
is debt held by the public, which is third-party debt.
One point I would like to make on this, Mr. Chairman, if I
can, is our report was issued today. Yesterday the trustees'
report for Social Security and Medicare was released.
Some of the information which I think is important that it
receive more prominent disclosure in the annual consolidated
financial statement audit is stewardship information with
regard to Social Security and Medicare.
The fact is, the information that we have in the 1998 audit
is based on last year's trustees' report, because this had not
been released, and yet they are coming out one day apart.
I think one of the things that really needs to be
considered is whether the consolidated financial statement
audit might come possibly a couple of weeks later, such that
significant information like this could be incorporated into
the consolidated financial statements, so we don't end up
confusing the public by, in a matter of days, talking about
different numbers or different dates on programs as important
as Social Security and Medicare.
Mr. Horn. Having heard your answer to that, I guess I would
ask this: ``Does it provide us with the proof, when you take a
look at the Federal Government as a whole, that is, the
consolidated financial statement, that indeed there is no money
set aside to pay for those future costs of programs supported
by those trust funds?'' How does that work?
Mr. Walker. Basically, under current law, the trust funds
are invested in government securities. Those government
securities are backed by the full faith and credit of the U.S.
Government. They are guaranteed as to principal and interest.
In effect, they represent a first call on general revenues in
the future. They do not represent what you and I would normally
refer to as a normal trust fund that is a separate and distinct
legal entity with hard assets in it, that are invested in the
markets, that are subject to fiduciary responsibilities, so the
Federal trust funds are a claim on future general revenues.
Mr. Horn. One of the things that concerns me is the money
that comes in from FICA, Social Security, and Medicare. Is it
sort of just dumped in a general pot? It doesn't come in and go
to a FICA trust account, Social Security, or Medicare. It
simply goes into the nearest bank designated by the Department
of the Treasury, and there is a group in the IRS, sort of an
office of estimates, where they somehow just speculate as to
what amount of that money really ought to go into the ``Social
Security trust fund,'' because there really isn't much of a
trust fund.
I just wonder what you as a new Comptroller General think
you ought to look at with regard to this--how they do it? Let's
take Social Security. Where the employer is responsible for
half the payments, the employee is responsible for half of the
payments. The employer is really taking both payments of the 15
percent and sending a check for maybe two times the number of
employees, maybe times 2,000 or 200,000, to the Internal
Revenue Service. And yet, we really aren't sure that every
check that said, well, this is my FICA contribution on the
quarterly reports, we don't know if it is ever in the right
place.
Mr. Walker. There are some challenges here, Mr. Chairman,
that I think both the executive branch and we need to keep our
eye on.
For one thing, the information that is reported as far as
revenues that are received, as you properly point out, are
really handled by the Treasury and the IRS. The amounts used by
Social Security for benefit payments are different and,
therefore, there can be circumstances in which individuals are
getting paid for benefits that the government never, ever
collected the taxes on the underlying wages.
This is one of the areas that we pointed out in our report
that needs to be focused on to a greater extent. I would ask
Gene to speak on that.
Mr. Dodaro. Yes. The issue of allocation to the trust fund
is one that we have focused a lot on in doing the audit of the
consolidated statements, and we have been working with other
auditors.
It is a fairly complicated process, and part of the reason
that there are estimates and allocations made emanates from the
fact that the IRS believes it would create an undue burden on
taxpayers to have them identify all the different types of
taxes at the time the taxes are deposited.
Right now the only basic separation are among income and
payroll taxes, because they are withheld at source, by and
large, and are deposited by companies into financial
institutions and then flow to Treasury. So there is a category
they check, we sent in $100 million this month. Of the $100
million, $70 million was for income taxes that we withheld for
individuals, as well as Social Security withholdings and
Medicare withholdings, and $30 billion was for excise taxes
that we owe.
Then that--because that money is not identified at that
point in time--is the only information comes in when the tax
return is filed by that company. Then the IRS uses that
information on these tax returns from the companies to
determine how much is apportioned to the trust funds, and then
it goes back and double checks the estimates, and makes any
sort of adjustments at the end of the year.
As you point out, the adjustments are given by the Office
of Tax Assessment at the Treasury Department. They give the
amount of allocations on how to distribute the revenues to the
Treasury Financial Management Service, and they make the
allocations to the trust funds during the year in terms of the
appropriate securities that should be credited to the trust
funds.
The excise taxes are a little bit different, since they are
supposed to be allocated based on collections, rather than
assessments. We have pointed that out as a problem in the past,
and the IRS has come up with a new approach on how to handle
that. But we strive to look at this issue from the inception
from the revenue coming to the government, how it is allocated
through this process to the individual trust funds, and to make
sure they are properly credited.
So we are trying to cover that and every year we get a
little bit better at making sure we have the total picture
covered. But that is one area we think is very important, Mr.
Chairman, and we have been focusing a lot of attention on that.
Mr. Horn. Well, what you are saying is of the 15 major
trust funds, you would like to see all of them in a real, true
trust fund relationship where money is earmarked if it is to go
into the trust fund and you don't have an office of estimates
on this or tax assessments?
Mr. Dodaro. We think with modern computer systems now that
it would be very beneficial to have the information in
electronic form, if most taxpayers could submit it, a break-out
of the specific taxes at the time those taxes are actually
deposited by the organizations into the Treasury accounts. We
have pointed that out in every audit we have done of the IRS.
We have had this area on the radar screen with them for a while
now. Unfortunately, they have been sidetracked because of their
preparations for the year 2000 problem. They have also had, as
you know, some major systems failures over the past few years.
Treasury has a new electronic tax deposit system now that has a
lot greater capability and we plan to work with Treasury to try
to identify a way to do this that doesn't impose any undue
burden on the taxpayers. But that is the only way to really
make sure that you track it as it is being deposited into the
Treasury account, and then it can flow through the process
without an estimation approach.
Mr. Horn. What would be the impact on the Presidents?
Regardless of party, we know that Presidents have dipped into
the general revenue of the Treasury, much of which was being
sent to be in Social Security or Medicare.
What would be the economic impact and the political impact
if what you say and what a lot of us up here say, we ought to
isolate these funds so that they are clearly set aside and we
can say to the American people on the unfunded liabilities that
we have the proper amount in there to cover the unfunded
liabilities? Is there any danger in that in terms of future
Presidents, current Presidents, it doesn't matter what party
they are in; they have all dipped into the Treasury funds to
some extent, to show that we have less of a deficit, shall we
say? If we isolated that off, would that be part of the
national debt deficit, or would it just be on its own and
sitting out there, to be invested, obviously?
Mr. Walker. There is a difference obviously between the
economic, the investment and the accounting aspects of this
issue. It is a very, very complicated issue. We have stated on
the record that we believe that reducing, from an economic
standpoint, debt held by the public is a good thing to do
because it ends up helping build future economic capacity. We
have also stated that obviously, with regard to Social
Security, a lot of the current unified budget surplus, in fact
all of it this year, is coming from Social Security. I think it
is a separate issue as to what the investment policy ought to
be, but the only kind of debt that is going to be appearing on
the consolidated financial statements of the U.S. Government
under current accounting principles is debt held by the public.
We do, however, believe that it is important to more
prominently disclose in the consolidated financial statements
of the Federal Government, information with regard to Social
Security and Medicare because every American cares about those
programs. This audit report is not just for the Congress and
not just for the Federal Government, it is for the American
people too.
Mr. Horn. All right. I now yield 5 minutes to the gentleman
from Texas, and after that we will call up the Treasury witness
and the OMB witnesses, and then you will be sitting with them,
and we can in any case get back to more questions for
everybody.
The gentleman from Texas.
Mr. Turner. Mr. Chairman, I yield back my time. I don't
believe I have any further questions.
Mr. Horn. OK. Mr. Turner is going to yield his time until a
future occasion after the Treasury and OMB have testified. So
if we can have those witnesses come forward. The Honorable G.
Edward DeSeve, the Deputy Director for Management, Office of
Management and Budget, accompanied by Administrator Deidre A.
Lee, head of the Office of Federal Procurement Policy, Office
of Management and Budget; and Mr. Donald V. Hammond, Fiscal
Assistant Secretary of the Department of the Treasury.
[Witnesses sworn.]
Mr. Horn. I would like to note that all three witnesses
have affirmed the oath.
We will begin with the distinguished gentleman. This is the
last day of government service for this round, and Mr. DeSeve,
we are glad to have you here. We wish you well. You have done a
fine job for the administration and for the people. So we hope
you will do as very fine a job in the private sector.
STATEMENTS OF G. EDWARD DeSEVE, DEPUTY DIRECTOR FOR MANAGEMENT,
OFFICE OF MANAGEMENT AND BUDGET, ACCOMPANIED BY DEIDRE A. LEE,
ADMINISTRATOR, OFFICE OF FEDERAL PROCUREMENT POLICY, OFFICE OF
MANAGEMENT AND BUDGET; AND DONALD V. HAMMOND, FISCAL ASSISTANT
SECRETARY, DEPARTMENT OF THE TREASURY
Mr. DeSeve. Thank you very much, Mr. Chairman, members of
the subcommittee. I am here today to discuss the progress made
during the last year in financial management, and particularly
as reflected in the financial report of the U.S. Government. I
am also here to describe the challenges that still face us.
In his transmittal of the audit report, audit of the
financial report, Comptroller David Walker said, ``These
financial reporting requirements are prompting steady
improvements in financial accountability and there has been
good progress toward meeting legislative objectives. At the
same time, major departments are not yet able to produce
auditable financial statements consistently.''
The requirement for a governmentwide financial report began
with fiscal year 1997 and a similar requirement extending
coverage of the Chief Financial Officers Act to all major
agencies that was contained in the Government Management Reform
Act. Chart one shows the progress under these statutes over the
last 6 years. It is very similar to the chart that Mr. Turner
showed you earlier, although not quite as colorful as his
chart.
In addition, the GAO report--actually, I want to stop for a
second and congratulate the Department of Housing and Urban
Development, the Federal Emergency Management Agency, and the
National Science Foundation who, for the first time, received
unqualified opinions on their financial statements.
In addition, the GAO report of the financial report of the
U.S. Government for fiscal year 1998 stated that ``Action is
now underway across the government to address pervasive,
generally long-standing problems discussed in this report.''
Chart two depicts our expectations. Mr. Turner asked, what
progress do you expect to continue? What you see is what we
anticipate for 1998. The blanks are disclaimers for qualified
opinions. What we see in 1999 is that we expect 20 of 24, and
then finally 23 of 24 in the year 2000. The lone exception will
be the Defense Department, which does not expect a clean
opinion at this point until beyond the year 2000.
While agencies have made substantial progress, challenges
remain. Recognizing these challenges, President Clinton issued
a memorandum to all agency heads on May 26, 1998, directing
agencies to develop corrective action plans for addressing
these challenges and to submit quarterly reports of progress.
Agencies submitted these plans and reports to OMB. They formed
the basis for discussion between senior agency officials,
including the Inspectors General, and senior executives from
OMB, Treasury, and GAO on the process the agencies were
employing to meet planned goals and their prospects for
success. The team's assessment is that while the challenges
facing certain agencies are daunting, the commitment of the
agencies is reassuring.
Chart three, please. I would like to show you these
challenges by functional area and by department for those
agencies that do not have clean opinions. The departmental
challenge is primarily in the Department of Defense, with the
Department of Agriculture and a couple of others having some
challenges. But the functional area that faces us with the most
difficult problems is the one that we talked about earlier,
intragovernmental payments. The Defense Department has taken
significant steps to deal with its problem. The department
believes that lasting effective solutions to its difficulties
in producing reliable information in the form of audited
financial statements requires a Defensewide management
information overhaul, and they have embarked on such an effort.
Over the last few years the department has streamlined its
numerous incompatible finance and accounting systems by
eliminating over 200 systems that did not collect information
needed to comply with current accounting standards.
More recently, the department has been developing a
blueprint for financial management reform and in the fall
released the first comprehensive financial management
improvement plan. We and GAO, and Treasury and the department
Inspectors General have worked with them to review and refine
that plan.
IRS revenue collection and public debt receive clean
opinions is my next headline. In addition to the progress
previously referred to in terms of the number of unqualified
agency financial statements, for fiscal year 1998, the GAO
reported on the results of the audits in the Internal Revenue
Service and the Bureau of Public Debt. The Internal Revenue
Service's statement of custodial activities, which the chairman
referred to earlier, received an unqualified opinion. The
schedule of public debt reflected a similar unqualified
opinion. The amount of money that the IRS covered was about
$1.8 trillion and over $5.5 trillion of public debt was
similarly included.
GAO also points out in addition to the qualification in
opinions a series of areas that need ongoing attention. These
are the management internal control weaknesses that the
Comptroller General talked about earlier.
The administration for the past several years has been
putting out a report on priority management objectives. I would
like to get the next chart, please. These priority management
objectives are chosen, as the President said in his budget, to
reflect ``areas in need of real change that will receive
ongoing attention for the administration.'' We didn't put these
out in response to last year's report or the report of the year
before. We put them out because they are things that the
administration wants to get done. You can see that heading the
list is managing the year 2000 problem, followed closely by
improving the results orientation of program management. That
is PGPRA.
Next, audited financial statements, improving financial
management information. These are things that were formally
committed to, were managed with a monthly planning process in
response to these.
I don't need to tell you, Mr. Chairman, where we are in
Y2K. We last night gave you the results of the flash reports
from the precincts, the flash reports from the agencies that
show that more than 92 percent of the financial systems are
compliant. We expect that the committee will want a full review
of that, and we will be happy to provide that information as it
comes in.
We agree with the Comptroller General that protecting
critical infrastructure and particularly computer security is
the next Y2K challenge. In fact, we are using the techniques
that we have developed in Y2K to begin that process. The
President issued PDD-63 last year, requiring agencies to
prepare plans and requiring a national plan for computer
security to be prepared. Sector groups, going out into the
private sector, led by Federal agencies, just as we are doing
in Y2K, will be mobilized in the computer security area.
Another area that the Comptroller General pointed out in
his report is better managing financial portfolios. We agree
that loan portfolios in particular need to have improved
management. Working with this committee, the Debt Collection
Improvement Act has given us some new tools, and my formal
statement gives you the ways that we are implementing those
tools.
Next, verifying that the right person is getting the right
benefit. We also agree with the Comptroller General that for
fiscal year 1997 we had a 14 percent error rate in the Medicare
program. Unacceptable. Totally unacceptable. The current error
rate of about 7 percent is similarly unacceptable, but it is
half the previous rate, and that is because we have been trying
to manage that problem that was identified through auditing.
Throughout the government, there are a series of report
cross-cutting groups that are working together to set
standards. The Federal Accounting Standards Advisory Board, the
Joint Financial Management Improvement Project and the Chief
Financial Officers Council, as well as the Chief Information
Officers Council are bringing agencies together to prepare
standards that give us the ability to tackle some of the
challenges that don't exist just in one agency. One agency
doesn't have an intragovernmental payment problem. It takes at
least two to have such a problem.
In summary, Mr. Chairman, I would like to again quote the
Comptroller General by saying,
The executive branch recognizes the extent and severity of
the financial management deficiencies and that addressing them
will require concerted improvements across government. The
administration has set goals for individual agencies as well as
government as a whole to complete timely audits and receive
unqualified opinions. With concerted effort the Federal
Government as a whole can continue to make progress toward
generating reliable information on a regular basis.
Mr. Chairman, and members of the subcommittee, the
administration has demonstrated from the President on down that
it recognizes the need for continued concerted action to
continue to make progress. Given where we were in 1993 and the
obstacles we face, the progress we have made to date is
extraordinary. Notwithstanding the formidable nature of the
remaining challenges we set a high bar for ourselves and will
redouble our efforts to improve the reliability of financial
information provided by agencies and the government.
Thank you very much, Mr. Chairman.
[The prepared statement of Mr. DeSeve follows:]
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Mr. Horn. We thank you. We now go to Mr. Hammond, the
Fiscal Assistant Secretary of the Department of the Treasury.
You are a career member as I recall, is that correct?
Mr. Hammond. That is correct, Mr. Chairman.
Mr. Horn. How many years have you had with the Treasury?
Mr. Hammond. Fifteen.
Mr. Horn. Well, you are going on 30 then, right?
Mr. Hammond. We are off to a good start.
Mr. Horn. I knew Bill Parsons, who was about 30 years ahead
of you and one of the great fiscal assistant secretaries and
management secretaries down there. So welcome.
Mr. Hammond. Thank you very much. Mr. Chairman and members
of the subcommittee, I appreciate the opportunity to appear
today to discuss matters involving the second annual financial
report of the U.S. Government. First, I would like to take this
opportunity to thank the chairman, the ranking member, and
other members of the subcommittee for your continued support
and encouragement to improve financial accountability and
reporting in the Federal Government. Last year was the first
year in its history in which the government prepared
comprehensive financial statements covering all of its diverse
activities. While a great deal of work has been done and
progress made over the last year, there are still significant
challenges and obstacles that must be overcome to enhance and
improve the reliability of the accrual-based financial
information presented for the U.S. Government.
The Government Management Reform Act of 1994 requires that
not later than March 31 of each year, the Secretary of the
Treasury, in coordination with the Director of the Office of
Management and Budget, shall prepare and submit to the
President and the Congress audited financial statements for the
preceding fiscal year, covering all of the accounts and
associated activities of the executive branch. This is the
second time such audited financial statements have been
prepared on a governmentwide basis. The financial report of the
U.S. Government for fiscal year 1998 provides the President,
the Congress, and the American people with information about
the government's assets and liabilities, its cost of
operations, and its sources of financing. The financial report
is prepared on the accrual basis of accounting as prescribed by
Federal accounting standards. These differ from the cash basis
of accounting used in the preparation and reporting of budget
results. Each method is a useful tool in its own right for
looking at the government's operations for different purposes.
Since the passage of the Government MRA, we have been
working very closely in cooperation with OMB, GAO, and the
Federal program agencies to create the standards and systems
necessary to create and implement an entirely new system of
identifying and tracking all of the operations of the U.S.
Government.
This past year, Treasury focused much of our attention on
three important areas: first, increasing the consistency of
information reported to us by program agencies; second,
identifying and reducing inaccurate eliminations of
intragovernmental transactions; and third, assisting agencies
in reconciling their fund balances with Treasury records. I
will briefly summarize our efforts in each of these three
areas.
It is essential that the information used by Treasury to
prepare the governmentwide statements be consistent with the
information contained in the respective agency-level financial
statements. The agency-level financial statements are
separately audited and the audit of the governmentwide
financial statements relies heavily on those audits.
Consistency problems need to be addressed by the agencies
working in very close cooperation with OMB, Treasury and the
GAO.
This past year, Treasury initiated actions to provide
agencies with ongoing support, guidance and training. We issued
written guidance to program agencies in an effort to improve
consistency. Treasury has also conducted both formal and
informal training with agencies directed at the specific
consistency problems associated with their respective financial
systems.
As a result of our close work with the agencies this year,
we achieved a 20 percent increase in consistent reporting; 25
of the 32 entities so reported this year. We will continue to
work with the program agencies on this important issue and,
based on our experiences this past year, we are very optimistic
that future reporting will improve. Both last year's and this
year's audits of the financial statements disclosed
transactions between agencies for governmentwide reporting. If
these transactions are not properly eliminated, total
government assets, liabilities, revenues and expenses will be
misstated by the amount of those transactions.
Treasury, OMB, and GAO have been actively working together
in a governmentwide task force to find methods and solutions
for the elimination problem. The task force has looked for
solutions that not only help the agencies identify and
reconcile transactions among themselves, but also improvements
to the Treasury's process of creating the governmentwide
financial statements. After careful analysis, the task force
identified several detailed categories which can be summarized
in two broad categories of intragovernmental transactions:
Investment and loan transactions and all other activity between
the agencies.
During fiscal year 1998, we focused most of our attention
on resolving the intragovernmental issues for investment and
loan transactions. These investment and loan transactions are
primarily the types of transactions discussed earlier occurring
between the trust funds and various government agencies, and at
least at one endpoint involves the Treasury Department. They
involve trillions of dollars on an annual basis. In December,
Treasury, after consultation with the agencies, issued
elimination guidance for the preparation of the fiscal year
1998 statements. As a result of these efforts, significant
progress, as detailed in my written statement, was made in
fiscal year 1998 in reconciling these intragovern-mental
investment and loan transactions. We plan to make even more
progress in fiscal year 1999.
In addition to assisting the agencies with other
transactions, Treasury provided two digit identification codes,
the use of which is absolutely critical to the ability to
eliminate and reconcile the purchase and sale and other
activity between the agencies. In fiscal year 1998, 24 of the
32 agencies required to use these partner codes were able to
identify 80 percent or more of the dollar value of their
transactions. That is good progress. We are not there yet, and
we need to do considerably more to deal with this issue.
The third issue has to do with our activity of reconciling
fund balances. Since Treasury acts as a banker for the
government, as agencies request payments to be made or receive
funding, their account balance with the Treasury will change.
This fund balance amount is an agency-level asset account that
reflects the agency's available budget spending authority. Both
the agency and Treasury independently track the account
balance. Treasury notifies agencies of discrepancies in their
fund balances as determined from our records, and agencies are
then responsible for resolving these differences. We have made
significant efforts to assist agencies in reconciling their
fund balance amounts with the amounts reported by us, including
surveys of their information needs, the issuance of standard
operating procedures, training, improved communication between
us and the agencies, and the provision of technical assistance.
We are expecting continued and significant improvements in
agencies' abilities to reconcile fund balances again for this
year.
However, we are facing many challenges as we go forward. As
Secretary Rubin stated, ``A great deal of work has been done,
but the development of this new method of reporting is an
immense task and a great deal of additional effort will be
necessary to create and implement an entirely new system of
reporting on the operations of the U.S. Government.''
We at Treasury are committed to this effort, and we have
both short-term and long-term actions underway to address them.
In the short term, we will continue to make those changes
necessary to continue to improve the preparation of the
financial report. In the long term, we are embarking on a
project to make fundamental changes in the way we do business.
Our most significant short-term challenges are in three
specific areas. First, we need to continue to make substantial
progress in eliminating intragovernmental transactions. Second,
additional improvements are needed to make data reported to
Treasury for the financial report consistent with the agency's
audited financial statements. And third, we need to enhance the
process of identifying the data needed to do a complete
reconciliation of the budget results reported on the cash basis
with the financial statements' results of operations.
Regarding the elimination of intragovernmental
transactions, Treasury intends to put in place additional
procedures and processes to ensure that progress in eliminating
transactions in the investment and loan category continue, but
most of our efforts this year will be spent working with OMB
and the program agencies to identify and put in place processes
to effect the other types of intragovernmental transactions. We
feel confident that by continuing our focus on attention in
these areas we can again make more progress.
With respect to ensuring consistency of reporting, this
year's report, or this year's process has identified areas
where we can continue to improve and make reporting less
burdensome on the government agencies. We have also identified
several problems agencies had in verifying their financial
statements with the detailed information sent to us. These
problems relate to the need for additional information,
formatting issues, and the reporting of changes in opening
balances. Building from this base, we will take further steps
to again show improvements in consistency next year.
Finally, regarding reconciliation of the budget results
with the financial statements results of operations, a team of
Treasury staff with assistance from private contractors will
develop the necessary information requirements and procedures
to accomplish this reconciliation. Our plans are to ask for the
necessary information in next year's report process, and our
goal is to make significant strides in identifying all of the
information necessary to complete such a reconciliation next
year.
While making short-term changes to improve the financial
statements process is important, we have also committed and
recently initiated a major project to fundamentally rethink and
redesign our central accounting system and processes. We will
be working with OMB, GAO, the program agencies, and the Federal
Reserve System in developing new processes that will provide
more timely, accurate, accessible accounting information,
follow established accounting standards, and support the
control of resources and management decisionmaking. Goals of
the new processes include reducing the reporting and
reconciliation burden on program agencies.
We also intend to develop processes that maximize data
accuracy at the time of collection and capture information once
at the earliest time possible to meet multiple reporting
requirements. Improving financial management and accountability
is a Treasury priority. We have taken and will continue to take
actions to correct weaknesses and problems in the preparation
of our governmentwide financial statements. We are working hard
to resolve these problems, but much work remains to be done.
Treasury will also continue its leadership role in providing
guidance, assistance and support to the agencies in their
ongoing efforts to improve their accounting practices and
financial management systems.
Thank you very much, Mr. Chairman. That concludes my
remarks this morning.
[The prepared statement of Mr. Hammond follows:]
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Mr. Horn. We thank you. We would now like the Comptroller
General, Mr. Walker, and the Assistant Comptroller General to
come forward and join the panel, so that we will have the
concluding questions over the next 20 minutes.
The gentleman from Texas, Mr. Turner, will begin.
Mr. Turner. Mr. DeSeve, you heard me earlier ask the
question about the seven agencies that failed to meet the March
1st deadline for failing to meet the financial statements
requirements. Could you give the reasons that they failed to do
so?
Mr. DeSeve. Yes, sir, I think I can. Let me first describe
the process that we use throughout the year. We meet with the
agencies, their Inspectors General and their financial staffs
in their agencies and spend a considerable amount of time
talking with them about the very specific problems that they
are having. And then literally weekly and sometimes daily, we
talk to them about what the status of their audit reports are.
We are finding two major problems this year. One is a new
set of auditing standards and financial statements that the
agencies did not have to deal with before, particularly the
statement of budgetary results. It is a new one, and it is
giving some of them problems. As a result, whenever you have a
problem in this circumstance, you will have an independent
auditor or sometimes an outside auditor and an Inspector
General and the financial folks who together have to agree that
the information that is put together is, in fact, correct. So
getting agreement on these new statements is a big challenge
for some.
Of the seven, we expect that five will have clean opinions,
and that relates to the second issue. Some of them are the
heroic efforts that the Comptroller General talked about where
they are in the midst of doing special studies on things like
loan portfolios that have taken them beyond the deadline. We
expect them to be clean, but not timely. We, like you, share
the desire to have them be both clean and timely and we have
been encouraging them in that direction.
Mr. Turner. So it is not a lack of sensitivity to meeting
the March 1st deadline, and you feel every agency is working
diligently to get the work done?
Mr. DeSeve. Yes, sir. It is not unwillingness, it is
inability to in this case.
Mr. Turner. One of the things that Mr. Hammond mentioned in
his written statement, you were referring to the progress that
the Treasury has made in reconciling intragovernmental
investment and loan transactions. I was noticing in your
written statement you said with regard to that, specifically
for investments and Federal debt securities, the difference
last year was $3.1 billion. The difference this year was $3.9
million for interest receivable and interest payable, the
difference last year was $3.2 billion, the difference this year
was $855 million. For interest revenue and interest expense,
the difference last year was $8.5 billion; the difference this
year was $214 million. And for loan receivables and amounts due
the Treasury, the difference last year was $7 billion. The
difference this year is $353 million.
That seems to be significant progress. What accounts for
the dramatic reduction, and do you feel you are going to even
move beyond the progress you have made?
Mr. Hammond. We do feel that that is significant progress,
but obviously those numbers need to come down to zero.
What accounts for that progress this year are two things.
First, we learned a lot from last year's process and were able
to build in enhancements in this year's process that allowed us
to plan for those types of transactions. We focused a lot of
time and attention on the investment and loan accounts.
In addition, Treasury has the advantage of being at one end
of pretty much every one of those transactions. As a result,
because of the clean opinion we received on the statement of
the public debt, we have great confidence in the numbers that
we produce and are, therefore, able to go back and work with
the individual agencies, note differences, and be able to work
to resolve them. The progress you see there really reflects
that close cooperation with the agencies who hold the trust
funds for their program needs, and to be able to walk through
the appropriate transactions.
The differences that remain typically result from timing
differences on behalf of the agencies, as well as circumstances
where they may be doing certain technical adjustments to
interest accounts such as accruing interest receivables or
amortizing discount and premium over different periods or using
different accounting methods. We need to get a consistency of
approach between the agencies and we think those numbers will
then go to zero.
Mr. Turner. You know, it is really hard to imagine what it
must have been like before the Chief Financial Officers Act was
passed in 1990 and the Government Management Reform Act passed
in 1994, because prior to that, we wouldn't even be here having
this discussion today. I want to commend the chairman on his
diligence in making sure that both of those pieces of notable
legislation are working by continuing to hold the agencies
accountable for the implementation of both of those Federal
statutes.
One of the things that struck me about your testimony, Mr.
Hammond, was your reference to the goals that the Treasury has
for reducing the reporting and reconciliation burden on
agencies. It seems to me that with these new laws and
requirements for reporting, there are probably many a Chief
Financial Officer who is feeling a tremendous burden of all of
the various reporting that takes place. It would be helpful, I
think, to give us an example of some of the burden you are
talking about and what you are thinking about doing that would
reduce the burden of all of this multitude of activities that
they are charged with performing.
Mr. Hammond. I would be happy to. I think that is in fact a
very significant area of stress for a number of agencies of all
of the various reporting requirements. As we look at the
compilation of the governmentwide financial statements,
fundamentally what we have done is we have tried to accomplish
the production of these statements by using information that
comes from systems that weren't designed to produce the
information needed for an accrual-based financial report. The
result is that we ask agencies to take budget information,
present it to us in a different format, and then provide it to
us in a way that then has to be reconciled back to the
information they are using to present their own financial
statements, as well as the information that they are doing for
their budgetary reporting. Given the short-term horizon and the
need to produce these statements, it is the best we can do in
the short term and we continue to work around the edges to
enhance that. But fundamentally, the systems needed to supply
information to produce these systems shouldn't be the type of
situation where you have system A coming in, system B coming
in, system C, and creating the need for all of these
reconciliations as you move along. They should, in fact, come
from a common source of information, and then simply present
that same information in different formats. That, in essence,
is the principal goal or one of the principal goals of our
longer-term effort to redesign the central accounting system.
Mr. DeSeve. Mr. Turner, may I add to that and make a small
commercial here. The Comptroller General earlier referred to
accountability reports of the Social Security Administration,
the Veterans' Administration, and others have produced those.
Those are an attempt to consolidate information from GPRA,
FFMRA, FFMIA, the GMRA, the CFO Act and even some other
statutes, and potentially the IG semi-annual reports into a
single location in a readable form so people can actually use
them as a corporate annual report is used.
Right now there are pilots under the Government Management
Reform Act for accountability reports. We would like to work
with the committee to propose extending those pilots, and
encouraging agencies, if not making those kinds of reports
mandatory for agencies, because we think it will give them the
ability to have a single report that contains lots of different
information. I would think we could even add some Clinger-Cohen
information to it as well.
Mr. Turner. Thank you.
Mr. Walker. Mr. Chairman, we have supported these pilot
projects and we believe that the idea of expanded
accountability reports where you end up getting valuable
information on a consolidated basis in plain English with
charts and graphs is a good idea.
Mr. Horn. I want to pick up on that, Comptroller General.
On page 10 of your statement you refer to the Brown Act which
was Senator Brown from Colorado, now retired, and who really
knew a lot about this type of audit and accounting, and that is
the Federal Financial Management Improvement Act of 1996. And
then you also note the difference in conformity here between
1997 and 1998, and that similar results are expected for fiscal
year 1998.
I would just ask this question. Are some of the problems
with these agencies that they don't have a full-time Chief
Financial Officer where either the Assistant Secretary for
Management or somebody else there has said, ``I am the Chief
Financial Officer?'' That bothers me. I know the people that
work in OMB. Mr. Hammond, these are 18 hour-a-day jobs, often 7
days a week. It just seems to me when they bury the CFO under
some of these other agency rubrics like Assistant Secretary for
Management, I realize they might not want to give up all that
power they have as Assistant Secretary for Management, but
somebody has to focus strictly on the financial aspects, and
that is why Congress put into the law Chief Financial Officer
with a direct reporting relationship to the appropriate
executive, the Deputy Secretary or the Secretary. I just wonder
what your thinking is on that.
Mr. Walker. Well, I think there is little question that--
given the challenges that we face in the financial management
area, and given the fact that the objective is not just to get
a clean opinion, but to have underlying financial management
information systems that will be continuously improved to
improve economy, efficiency, and effectiveness--the CFO for any
major department or agency is a full-time job. I might ask if
Ed has any comments.
Mr. Horn. Does anybody else want to comment on that?
Mr. DeSeve. We would be delighted to, Mr. Chairman. We have
seen different organizational structures in different agencies.
The Justice Department has the Assistant Secretary for
Management structure, the Department of Housing and Urban
Development has the stand-alone CFO structure. The act permits
either, as you know, as long as the reporting requirement is
clear.
I think the decision made by the reporting agency to give
the appropriate amount of responsibility is even more
important. We strongly support budget authority in the hands of
the CFO. There is still at least one agency and there may be
two where budget authority is not in the hands of the CFO. We
have been very active in trying to move them in that direction.
We also find though that the role of the career Deputy CFO
is terribly important. When we and the CFO counsel merged the
two groups--the groups of Deputies and the CFOs--into a single
body, it became much more apparent to us that that career
Deputy in many cases was the go-to guy, go-to gal in lots of
places. Where we had career CFOs who would come and go over a 2
or 3-year period, the Deputies were the continuity. So it is
the strength of the organization up and down the organization.
My own preference would be in most cases, in most departments
to see a single CFO in those departments. It has always been my
preference, and that person should be at least at the Assistant
Secretary level. There may be some departments where the Under
Secretary level could be an appropriate focus for the CFO
organization.
Mr. Horn. I am certainly not against a Deputy CFO, and it
ought to be a career person, without question. We want a strong
CFO in that agency and we want to see a different result next
year.
Now, you are not going to be here next year. You might be
on contract, but----
Mr. DeSeve. Mr. Chairman----
Mr. Horn. You may be working as a contractor.
Mr. DeSeve. I have been working in-house and out-house for
many years.
Mr. Horn. I don't want to followup on the in-house and the
out-house.
Mr. DeSeve. I realize we are on TV, so we both have to be
circumspect about that. But I think the desire that I have and
that the administration has is that the Chief Financial Officer
responsibilities are well done in each agency and we have tried
to make that case time and time again to some of the agencies.
Mr. Walker. Mr. Chairman, I think one other thing has to be
emphasized in addition to the importance of the CFO. There has
to be an active partnership between the CFOs and the CIOs in
this regard, because we are looking to a move toward integrated
systems that will provide key financial and other management
information. The CIO job is a big job too. Eventually we are
going to have to end up looking to something else, and that is
CHCO, chief human capital officer, because people are the most
valuable asset we have, and we don't pay enough attention to
it.
Mr. Horn. Let me move to one that everybody has mentioned
at one time or another, and that is the computer security
control weaknesses that have been found and reported across the
government, and there are various instances where auditors were
unable to gain authorized access or penetrate the systems.
These weaknesses affect the integrity and reliability of the
government's financial and programmatic information. I guess I
would ask all of you how pervasive are these weaknesses, and
are you able to penetrate a lot of these systems, and what are
the agencies and OMB needing to do to correct these weaknesses?
Mr. DeSeve.
Mr. DeSeve. I think the statutory framework that we have at
this point is probably a pretty good one. I am satisfied that
from the Computer Security Act of 1987 to the Paperwork
Reduction Act of 1995 and on to Clinger-Cohen, we have the laws
in place. What we have had to do is increase awareness within
the departments and agencies, especially when they were
overtaken with the idea of Y2K. Y2K in some ways is a security
problem. It is a problem that we created for ourselves, it is
not an external problem. The Defense Department, working with
the rest of the intelligence community, has engaged, and Gene
can tell you more about this than I can in some ways, has
engaged in a very major review of the external threats to the
Federal Government from cyber terrorism. We would be happy to
get you a briefing on cyber terrorism. It is very real, it is
something we are very concerned about, and with the National
Security Agency and DOD, they have been building a set of
scanning systems and deflection systems. Much of that
information is classified, but again we would be happy to get
you a briefing on it.
Mr. Horn. Comptroller General, do you want to comment on
that?
Mr. Walker. Mr. Chairman, we are doing a lot of work in
this area, because obviously there are many aspects that are
troubling when you deal with computer security. It is not just
getting accurate, timely and useful financial information, it
also involves issues that deal with national security, defense,
as well as economic security, as well as personal privacy. We
spent a fair amount of time in this area already. We anticipate
that this area will be our No. 1 area of focus in the
information management area after we get past Y2K. Gene might
have some comments on anything in specific that he might think
might be appropriate here.
Mr. Dodaro. Basically, this is a serious pervasive problem
across government we have computer systems that are more
integrated, more accessible. We have seen examples in just the
last day or two of how vulnerable computer systems are through
the introduction of some of these viruses. There are two types
of problems. One is vulnerability of people outside the
agencies being able to hack into the systems, and there are
vulnerabilities there. There are also vulnerabilities of
authorized users within the systems that have too much access,
and both problems are plaguing the Federal Government. We
raised this as a high-risk area across the government in
February 1997. As Mr. DeSeve pointed out, in October of that
year the President's Commission on Critical Infrastructure
Protection said, this is not only a problem for the Federal
Government, it is a problem across all sectors. They have taken
some initiatives to address this issue. We suggested the CIOs
made computer security a priority. They have done that. GAO has
gone out and studied best practices in the private sector. We
have issued those. The CIO counsel has endorsed those best
practices and are in the process of putting them in place. We
think each agency needs a comprehensive risk assessment
approach and followup process. Also, there needs to be
coordinated efforts at the governmentwide level of OMB, the
National Security Council and others, and we have made those
recommendations. They are beginning to do that, but there is a
long way to go. I do think there is a need to reexamine the
basic statutory framework, and the Computer Security Act was
issued in 1987. It has been a long time since that has been
looked at. We are in the process of thinking about ways to
strengthen those requirements.
Mr. Horn. Thank you very much.
I yield to the gentleman from Texas, Mr. Turner.
Mr. Turner. Mr. Chairman, I have only a brief remark. I
just really think it would be appropriate for us to acknowledge
the good work that Mr. DeSeve has given to the administration
since its inception in his role at the Office of Management and
Budget. His service to the administration has been commendable,
and his willingness to endure the vigorous oversight of this
Congress also is to be commended. We wish you well in your
transition to the private sector, and we appreciate the
contributions that you have made to us all.
Mr. DeSeve. Thank you.
Mr. Turner. I know there are many people listening today
who are probably in the same position I am in. I am beginning
to start my work and fill out my tax return, and I had it all
spread out on the kitchen table the other night. And you know
the way it always is, you always find something you know you
have to go retrieve before you can actually do it. So I am at
that stage now.
There is one question that was on my mind as I began my tax
return preparation, and I know it is going to be on the minds
of a lot of taxpayers, and I am sure, Mr. DeSeve, you can
answer this question as one of your final responses to this
subcommittee.
I noted that this year I have to make out my check to pay
my taxes to the U.S. Treasury instead of the Internal Revenue
Service, and I wish you would explain to us why we are changing
who we pay our taxes to, and perhaps that will relieve the
minds of a lot of us taxpayers.
Mr. DeSeve. I am really going to let Mr. Hammond from the
Treasury Department handle the question. I think the vigorous
oversight of this committee has talked to Commissioner Rossotti
and other folks in the IRS about the major restructuring that
is going on there. I think that we will see over the next
several years perhaps not a kinder, gentler IRS, but one that
is more customer-oriented and one that understands better how
to deal in an electronic age with taxpayers, where they live,
and in the kinds of organizations in which they find
themselves.
But I am going to kick the question on IRS versus the
Treasury to Mr. Hammond. You are sending the check to Mr.
Hammond.
Mr. Hammond. Hopefully not personally.
Mr. DeSeve. Of course not personally.
Mr. Horn. Is your fax machine going to be jammed?
Mr. Hammond. That's right. No. I think there are two
reasons, actually. One is that the payee information of the
U.S. Treasury better indicates that the taxpayer is, in fact,
not supporting the operations of the Internal Revenue Service
by their payment, but is, in fact, making a tax payment on
behalf of the entire government. In addition, I think it also
helps deal with some of the characterizations, when the address
``Internal Revenue Service'' lent itself in some cases to
people putting IRS on check payee information which, in some
cases I believe was eligible to be forged or manipulated, and
so I think there is also a corrective action attached to this.
Mr. Dodaro. Mr. Chairman, I might add that our audits of
IRS, as this committee has heard, that last point that Mr.
Hammond raises is a valid one. A lot of people would change the
IRS abbreviation. Even though the instructions would say
``Internal Revenue Service,'' to spell it out, if they put an I
in there, they changed the I to an M, and then it became
``Mrs.'', and put a name on. That issue has been a problem in
the past with people basically taking some of those checks and
falsifying them. So we are pleased to see that change.
Mr. Turner. Well, I thought somebody was going to tell me
that we had eliminated an intragovernmental----
Mr. Dodaro. That is one of the few where everything is
working well.
Mr. Turner. What I think I learned is that we are just
paying our taxes to a friendlier payee.
Mr. Walker. The amount doesn't change, though.
Mr. Turner. Right.
Thank you, Mr. Chairman. It has been a pleasure to have all
of our witnesses before us today.
Mr. Horn. Well, I agree with you on that, and I must say I
have suggested this in the past, but I don't get too many
followings in the House on this. All Members of Congress should
sit in the House of Representatives on April 15th with no tax
advisors and make out their own 1040 Form, and file that one
with a check. I think we would reform the tax laws so fast we
wouldn't know what hit us. But you know, we are all getting a
little comfortable with the Beardsley Rommel idea of
withholding its source which, if we had to pay one big check at
the end of the year with no withholding, that too would create
a tax revolution. But apparently those ideas aren't acceptable
to a majority here.
Let me just mention a few comments that I want to get out
of you and your thoughts. One of our problems in these various
financial statements that are before us involve the nuclear
cleanup liability. Comptroller General, in your testimony you
say the executive branch has significantly underestimated the
future costs that will be needed to clean up environmental
contamination and the disposal of hazardous waste.
What is the amount that GAO has picked on this particular
area?
Mr. Walker. Mr. Chairman, it is difficult for us to
estimate what the exact amount is. That is one of the reasons
that this is a problem area. But we know that it is in the tens
of billions of dollars range.
Mr. Horn. Would it be more than $100 billion? Because we
are talking nuclear reactor waste, we are talking nuclear
submarines being chopped up and their waste, and as I
understand it, a lot of this occurs in the State of Washington,
and we know nationwide we have this in the nongovernmental
sector, hospitals, nuclear waste piled up waiting for disposal.
Mr. Walker. It could be, but it is probably not, because
there have been increases that have occurred over the last
several years to increase the estimate of that liability, and I
think as you know, Mr. Chairman, there is a range of issues
here. It is not only with regard to the defense industry, for
example, the decommissioning of nuclear subs, but it is also in
the utility sector, the energy field with regard to nuclear
power plants. It is a very serious issue, especially in light
of base closings and other things where you have things that
aren't nuclear, that there can be environmental issues
associated with that as well that aren't nuclear related.
Mr. Horn. Well, I think we had the problem throughout the
executive branch. One, the Department of Defense has a strong
program in terms of cleaning up the environment on bases that
have been closed. But I must say, I don't see much action in
that area, and I think there should be a lot more. And we also
have the problems in other agencies on their own assets that
they really can't account for them and put a dollar figure on
them, which is very hard. What is the dollar figure on
Yellowstone? It is priceless. You don't have--$100,000 or $100
million wouldn't be relevant. How are we going to handle
objects like that?
Mr. Walker. Well, I think that is why we have to look at
what is meaningful financial information to the Congress, to
the President, and to the American public, and to the extent
that it provides meaningful financial information, then we
ought to express it in dollar amounts. To the extent that it
really doesn't and it is more of a stewardship responsibility,
there needs to be accountability--the numbers don't necessarily
mean anything. We have to keep in mind what the purposes of
these financial statements are and who the users are when we
are thinking about things like heritage assets, such as
monuments, national parks, even weapons systems. It is
appropriate to have some accountability for the cost of weapons
systems, but how significant is it to know what the discounted
amortized cost of a B-2 bomber is? What are we going to be able
to do with it? I doubt that we are going to have an alternative
use for it.
Mr. Horn. Of all of the agencies that the General
Accounting Office looked at, which agencies have the worst
inventory records on their supplies and all the rest?
Mr. Walker. DOD.
Mr. Horn. And that is known as the Department of Defense?
Mr. Walker. That is correct, the Defense Department.
Mr. Horn. And they tell us they are low on munitions. So do
they just not have a system that tells us where they have in
warehouses all over the world, or what?
Mr. Walker. They have real challenges with regard to the
inventory area. Our high-risk report noted that there was about
$22 billion, is that correct? It was about $22 billion worth of
inventory items that they may have, they just don't know where
they are. Now, obviously that creates difficulty in trying to
decide how to utilize inventory when you need it, whether you
ought to order any additional materials to replace it, how you
can effectively secure it, a range of issues. And a lot of this
is normal inventory items rather than major weapons systems.
Mr. DeSeve. Let me take the department's part in this in
two ways. One, the department had systems for logistics and
inventory that were controlled at various levels, they weren't
necessarily centralized, and they didn't talk to their
financial systems. Why? Never asked them to. We have never
asked these questions before. So the department feels that it
has good controls; they are not perfect controls, but good
controls over its inventory and over its property. It has never
had to do valuation before. The challenge of valuing
Yellowstone is similar to the challenge of valuing Fort Ord or
valuing some of the other properties that the department
operates. So the valuation challenge remains and they are in
the process of solving that problem.
But second, I think we have to be careful not to mix apples
and oranges here in the sense of a field commander knowing
where his inventory is, being able to get a logistics system to
get him that information or get him that material quickly is
one test. Having that under control, under good asset control,
having a central agency or a subordinate--a superior officer
being able to see several inventories is also very important.
But the department I think would tell you that they believe
they have adequate controls in lots of different places. GAO
would suggest that controls could be better, the efficiency of
the department and its effectiveness would be improved by
having better visibility of these assets. I agree with both
things.
Mr. Walker. Mr. Chairman, if I could add on that, I think
DOD, the Department of Defense is a good example. As I look at
government, there are two dimensions--the business of
government and the mission of government. Missions vary,
depending upon what department and agency you are dealing with.
But all aspects of government need to run from an economical
and an efficient basis. If you look at DOD from an
effectiveness standpoint, some of the logistical issues that Ed
is talking about are clearly an ``A'' on effectiveness. We are
No. 1 militarily, we have proved it time and time again. On the
other hand, from the standpoint of economy and efficiency, at
best they are a ``D.'' We need to place a lot more time and
attention on getting that grade up and freeing up billions of
dollars for readiness, to close the delta on the needs versus
wants versus affordability issue on critical weapons systems.
Part of DOD's problem is that they have so many silos and mini
silos and so many different systems nobody talks to each other.
That is a management problem which can affect effectiveness as
well. Fortunately, it hasn't to a great extent.
Mr. Horn. I agree with you on that.
Mr. Dodaro. Mr. Chairman, I might add, on the inventory
area, the DOD inventory area, we at GAO have had that as one of
our high-risk areas since 1990. There are problems in terms of
keeping accurate inventories, and in some cases this is a
contributing factor to over-purchasing in order to make sure
everything is on hand. We are working with the department to
try to improve their inventory-taking procedures to make sure
that they have accurate perpetual inventories. They have so
much inventory it is very difficult to use conventional end-of-
the-year, wall-to-wall, inventory-taking type techniques. So
they need to improve that.
The one positive thing I would say is that for the first
time this past year, the logistical community and the
acquisition community have engaged with GAO, the IGs, in
undertaking efforts to work with the financial management
community to support and fix some of these systems. Eighty
percent of all of the information to prepare DOD's financial
statements comes from outside the financial services arena, and
in many cases their logistical records and some of the
documentation and support of logistical records is not there as
well.
Mr. Horn. I thank you.
I want to wind this up now. We might send a few questions
to each of you for the record, and without objection, the
question and answers will be put in at this point.
Let me first thank the staff that has worked on this
hearing. J. Russell George, the staff director, chief counsel
for the Government Management, Information, and Technology
Subcommittee; Bonnie Heald, the director of communications,
professional staff member; to my immediate left, the person
that has had the most work on this particular subject is Larry
Malenich, the detailee from the General Accounting Office; and
Mason Alinger, the clerk for our subcommittee; and then our
faithful interns, Paul Wicker, Kacey Baker, Richard Lukas; and
for the minority we have Faith Weiss and Jean Gosa. Faith is
the counsel, Jean is the clerk for the minority. Willie Green
is staff assistant; and our two court reporters, Lee Dotson and
Julie Bryan.
Let me just say in closing a few words. The financial story
that we have portrayed over the last 2 hours probably is
disconcerting to various taxpayers in the Nation, and I think
we should all share with them, while progress has been made
over 5 years. When we passed the act in the 103d Congress, we
gave the executive branch 5 years to prepare for the first
balance sheet in the history of the country. Well, progress is
coming, but we sure have a lot more to do, and I will look to
the Comptroller General, the Director of the Budget, and the
Secretary of the Treasury working together, despite two
branches of the Constitution being involved. I think our work
has just begun in a lot of ways and we have a long way to go.
In terms of the ongoing series of financial oversight by
this subcommittee, we have already held hearings on the
Internal Revenue Service, on the Federal Aviation
Administration, on the Department of Justice, and on the Health
Care Financing Administration. We will be going into this with
other agencies, and health care financing in particular is one
that concerns us, just as it concerns the administration. We
would rather have all of that money that sometimes is
overpayments or sometimes fraud, waste, and abuse in the
program helping people, rather than sort of a loss to the
Nation.
We will continue our oversight on the financial
accountability of the Department of Defense next month. We have
them scheduled for then. Clearly, we need strong leadership in
this area, and often, as we all know, financial accountability
sort of wears people out and they sort of start dozing and
their eyes droop and all of that. But it is very important.
This is the taxpayers' money, and we want to make sure it is
put to good use.
I want to thank you again for coming and testifying and
wish you all well. With that, we are adjourned.
[Whereupon, at 12 p.m., the subcommittee was adjourned.]