<DOC>
[107th Congress House Hearings]
[From the U.S. Government Printing Office via GPO Access]
[DOCID: f:86451.wais]
H.R. 4685, THE ACCOUNTABILITY OF TAX DOLLARS ACT OF 2002
=======================================================================
HEARING
before the
SUBCOMMITTEE ON GOVERNMENT EFFICIENCY,
FINANCIAL MANAGEMENT AND
INTERGOVERNMENTAL RELATIONS
of the
COMMITTEE ON GOVERNMENT REFORM
HOUSE OF REPRESENTATIVES
ONE HUNDRED SEVENTH CONGRESS
SECOND SESSION
ON
H.R. 4685
TO AMEND TITLE 31, UNITED STATES CODE, TO EXPAND THE TYPES OF FEDERAL
AGENCIES THAT ARE REQUIRED TO PREPARE AUDITED FINANCIAL STATEMENTS
__________
MAY 14, 2002
__________
Serial No. 107-193
__________
Printed for the use of the Committee on Government Reform
Available via the World Wide Web: http://www.gpo.gov/congress/house
http://www.house.gov/reform
______
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WASHINGTON : 2003
____________________________________________________________________________
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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 MAJOR R. OWENS, New York
ILEANA ROS-LEHTINEN, Florida EDOLPHUS TOWNS, New York
JOHN M. McHUGH, New York PAUL E. KANJORSKI, Pennsylvania
STEPHEN HORN, California PATSY T. MINK, Hawaii
JOHN L. MICA, Florida CAROLYN B. MALONEY, New York
THOMAS M. DAVIS, Virginia ELEANOR HOLMES NORTON, Washington,
MARK E. SOUDER, Indiana DC
STEVEN C. LaTOURETTE, Ohio ELIJAH E. CUMMINGS, Maryland
BOB BARR, Georgia DENNIS J. KUCINICH, Ohio
DAN MILLER, Florida ROD R. BLAGOJEVICH, Illinois
DOUG OSE, California DANNY K. DAVIS, Illinois
RON LEWIS, Kentucky JOHN F. TIERNEY, Massachusetts
JO ANN DAVIS, Virginia JIM TURNER, Texas
TODD RUSSELL PLATTS, Pennsylvania THOMAS H. ALLEN, Maine
DAVE WELDON, Florida JANICE D. SCHAKOWSKY, Illinois
CHRIS CANNON, Utah WM. LACY CLAY, Missouri
ADAM H. PUTNAM, Florida DIANE E. WATSON, California
C.L. ``BUTCH'' OTTER, Idaho STEPHEN F. LYNCH, Massachusetts
EDWARD L. SCHROCK, Virginia ------
JOHN J. DUNCAN, Jr., Tennessee BERNARD SANDERS, Vermont
------ ------ (Independent)
Kevin Binger, Staff Director
Daniel R. Moll, Deputy Staff Director
James C. Wilson, Chief Counsel
Robert A. Briggs, Chief Clerk
Phil Schiliro, Minority Staff Director
Subcommittee on Government Efficiency, Financial Management and
Intergovernmental Relations
STEPHEN HORN, California, Chairman
RON LEWIS, Kentucky JANICE D. SCHAKOWSKY, Illinois
DAN MILLER, Florida MAJOR R. OWENS, New York
DOUG OSE, California PAUL E. KANJORSKI, Pennsylvania
ADAM H. PUTNAM, Florida CAROLYN B. MALONEY, New York
Ex Officio
DAN BURTON, Indiana HENRY A. WAXMAN, California
J. Russell George, Staff Director and Chief Counsel
Justin Paulhamus, Clerk
David McMillen, Minority Counsel
C O N T E N T S
----------
Page
Hearing held on May 14, 2002 1
Text of H.R. 4685............................................ 4
Statement of:
Engel, Gary T., Director, Financial Management and Assurance,
U.S. General Accounting Office; Mark A. Reger, Chief
Financial Officer, Federal Communications Commission;
Alison L. Doone, Deputy Staff Director for Management,
Federal Election Commission; Frederick J. Zirkel, Inspector
General, Federal Trade Commission; and Paul Brachfeld,
Inspector General, National Archives and Records
Administration............................................. 55
Toomey, Hon. Patrick J., a Representative in Congress from
the State of Pennsylvania.................................. 8
Letters, statements, etc., submitted for the record by:
Brachfeld, Paul, Inspector General, National Archives and
Records Administration, prepared statement of.............. 98
Doone, Alison L., Deputy Staff Director for Management,
Federal Election Commission, prepared statement of......... 83
Engel, Gary T., Director, Financial Management and Assurance,
U.S. General Accounting Office, prepared statement of...... 57
Horn, Hon. Stephen, a Representative in Congress from the
State of California, prepared statement of................. 3
Kanjorski, Hon. Dennis J., a Representative in Congress from
the State of Pennsylvania, New York Times article.......... 111
Reger, Mark A., Chief Financial Officer, Federal
Communications Commission, prepared statement of........... 76
Schakowsky, Hon. Janice D., a Representative in Congress from
the State of Illinois, prepared statement of............... 53
Toomey, Hon. Patrick J., a Representative in Congress from
the State of Pennsylvania, prepared statement of........... 10
Zirkel, Frederick J., Inspector General, Federal Trade
Commission, prepared statement of.......................... 88
H.R. 4685, THE ACCOUNTABILITY OF TAX DOLLARS ACT OF 2002
----------
TUESDAY, MAY 14, 2002
House of Representatives,
Subcommittee on Government Efficiency, Financial
Management and Intergovernmental Relations,
Committee on Government Reform,
Washington, DC.
The subcommittee met, pursuant to notice, at 2:01 p.m., in
room 2247, Rayburn House Office Building, Hon. Stephen Horn
(chairman of the subcommittee) presiding.
Present: Representatives Horn, Putnam, Schakowsky, and
Kanjorski.
Staff present: J. Russell George, staff director and chief
counsel; Bonnie Heald, deputy staff director; Henry Wray,
senior counsel; Rosa Harris, GAO detailee; Justin Paulhamus,
clerk; David McMillen, minority professional staff member; and
Jean Gosa, minority clerk.
Mr. Horn. This hearing of the Subcommittee on Government
Efficiency, Financial Management and Intergovernmental
Relations will come to order. We're here today to examine H.R.
4685, the Accountability of Tax Dollars Act of 2002, introduced
by Representative Patrick Toomey from Pennsylvania. Mr. Toomey
will present the merits of his bill as our first witness. This
legislation would extend the requirement of annual audits to
all Federal agencies with total annual budget authority of $25
million or more.
Since fiscal year 1996, the Chief Financial Officers Act,
as amended, has required the 24 major departments and agencies
in the executive branch to prepare annual financial statements
and have them audited. Although few of these Federal agencies
can provide reliable and useful information on a day-to-day
basis, the act's requirement for audited financial statements
has clearly brought agencies closer toward providing that
sorely needed information.
Few agencies dispute the benefits of the audit process.
Last year, the General Accounting Office surveyed 26 non-Chief
Financial Officers Act agencies and found that 21 of the 26
believe that it is beneficial to have audited financial
statements.
Our second panel of witnesses will include a representative
of the General Accounting Office, who will discuss that survey.
In addition, the panel will include representatives from four
of the 26 agencies that would be affected by the legislation.
We also have a written statement from the chairman of the
Securities and Exchange Commission which, without objection,
will be included in the hearing record.
I welcome all of our guests today and I look forward to
your testimony.
[The prepared statement of Hon. Stephen Horn and the text
of H.R. 4685 follow:]
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Mr. Horn. And we will first have the gentleman from
Pennsylvania, Mr. Toomey, explain his proposal.
STATEMENT OF THE HON. PATRICK J. TOOMEY, A REPRESENTATIVE IN
CONGRESS FROM THE STATE OF PENNSYLVANIA
Mr. Toomey. Thank you very much, Chairman Horn. I
appreciate you conducting this hearing today.
Specifically, I want to thank you for two things: one, for
giving me the opportunity to testify on H.R. 4685, the
Accountability of Tax Dollars Act, and for taking an interest
in the bill.
I'd also like to thank you for your leadership in the need
to improve financial management practices of Federal agencies
and for making agencies more accountable to taxpayers.
I first introduced the Accountability of Tax Dollars Act in
the 106th Congress as a good government measure to combat
waste, fraud and abuse at Federal agencies. I recently
reintroduced this legislation with bipartisan support,
including the support of one subcommittee member, Mr. Kanjorski
of Pennsylvania, as an original cosponsor. I decided to
introduce legislation when I learned, to my surprise, that many
Federal agencies are simply not required by law to prepare
audited financial statements, even though this is a fundamental
part of good management and oversight.
So why do we need this bill? Well, first, oversight of
Federal agencies is certainly a fundamental responsibility of
Congress, and it's a responsibility we should not shirk. But to
carry out that responsibility, we need to see audited financial
statements that can be relied upon.
Second, we also have a responsibility to the taxpayers to
monitor how their tax dollars are spent, but also to enable
them to see how their tax money's being spent and to ensure
that it is spent most efficiently.
Third, required audited financial statements is really a
reasonable standard of oversight. In fact, Federal law
currently requires publicly held private companies with budgets
of a lot less than $25 million, which is the threshold in my
bill, to file audited financial statements with the SEC.
Ironically, the SEC itself does not have to prepare their own
statement.
At my request, the GAO did a survey of agencies who are not
required to prepare audited financial statements in order to
determine several things: first, whether $25 million is a cost-
effective threshold for requiring audits; second, what degree
of effort would be required for agencies to comply with that
requirement; and finally, whether non-CFO agencies that
voluntarily conduct these audits have realized any benefits for
doing so.
The GAO survey say that overall the surveyed agencies
reported they either achieved significant benefits or they
anticipate achieving such benefits from auditing financial
statements. Twenty-one of the 26 agencies reported that Federal
agencies should, in their opinion, have their financial
statements audited. All of the surveyed agencies that have
voluntarily audited reported significant benefits from those
audits, including enhancing accountability, identifying
inefficiencies and weaknesses, improving internal controls,
meeting statutory requirements and monitoring assets and
liabilities.
I think one of the most convincing results of the GAO
survey was that 13 of the 14 agencies who do not currently
prepare audited financial statements reported that the absence
of a statutory requirement was a primary reason that they do
not do so. The list of agencies not required to audit financial
statements includes some very large agencies charged with
significant regulatory fiduciary responsibilities, including
the Federal Communications Commission, the Securities and
Exchange Commission, and the National Labor Relations Board.
As the members of this committee know, the Chief Financial
Officers [CFO] Act currently requires the 24 major agencies and
departments to prepare and audit financial statements annually.
This information provides Congress with valuable insight into
the agencies' financial systems and, most importantly,
performance results. H.R. 4685, the Accountability of Tax
Dollars Act of 2002, would simply extend the CFO requirements
currently imposed on the major agencies to all Federal agencies
with gross budget authority of at least $25 million. The
agencies that would be covered by this bill have a combined
annual budget of roughly $20 billion, a significant amount of
money that, frankly, should be accounted for more rigorously.
Now, understanding that some of the agencies will be
required to fully implement the requirements of the CFO Act,
H.R. 4685 gives the OMB Director discretion for the first 2
years of implementation to waive application of all or part of
the requirements.
In our current climate of budget constraints, a Federal
agency should being able to demonstrate measurable outcomes in
the budget process. Audits make agency transactions public, so
an agency can be evaluated on how well their programs performed
and whether the public received the benefits they're intended
to. And frankly, rewarding success can only be achieved with
complete and accurate financial information available. I
believe H.R. 4685 would take us one step closer to achieving
this goal of proper oversight.
I'd like to thank the GAO and Gary Engel, in particular,
who is testifying today for their work on this issue. I relied
on their expertise and insight regarding the benefits of the
audit process for affected agencies when crafting the bill. I
also look forward to the testimony of the representatives of
the agencies who would be covered by this bill, including the
experience of those agencies that have voluntarily submitted to
audits in the past and achieved good results.
Again, thank you for bringing attention to this bill and
for giving me the chance to make my presentation. I'd be happy
to answer any questions you might have.
[The prepared statement of Hon. Patrick J. Toomey follows:]
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Mr. Horn. Thank you very much. I will ask two questions and
then we'll have the statement of the ranking member.
How was the $25 million threshold determined?
Mr. Toomey. That was a subjective process, admittedly. I
think it must be necessarily so. If we applied the audited
financial standard to every agency, I think a case could be
made that for very small budget authorities, it might be more
onerous and more costly to comply with than the benefits that
would be accrued from having that.
We discussed this with the folks at GAO. We looked at their
report, and thought that $25 million was an appropriate point
to make that cutoff. As I mentioned in my testimony, any
publicly traded company with a security registered on the SEC
is required to comply with this; and of course, many of them
have smaller annual sales volumes. But we thought this was an
appropriate level.
Mr. Horn. Was a cost-benefit analysis performed in
determining the dollar threshold for the audits?
Mr. Toomey. I would refer to the GAO study on this. They
did take that into account and considered the costs that they
have estimated, the range of costs that would accrue in
compliance. It is difficult, admittedly, to know--to quantify
the benefits, in part because in some cases we may not know yet
what we might find when financial statements are properly
audited.
Mr. Horn. Did you have any questions, as well as your
statement?
Ms. Schakowsky. Thank you, Mr. Chairman.
I think there are some questions implicit in my opening
remarks, so maybe you'd like to, or not, respond to that.
I want to thank you, Mr. Chairman. The bill before us today
is a reasonable effort to require financial audits in those
agencies not currently required to do so. As the chairman has
often pointed out, the current law requires audits of 95
percent of the Federal authority. It is not clear to me how
much of the remaining 5 percent would be covered by this bill.
I do, however, have a few concerns about this bill that I
hope we can address before the bill comes before us to be
marked up. First, there is an issue of resources both for these
agencies that have an Inspector General and for those that do
not. These additional audits will not be free, and with the
changes in audit practices following the Enron disaster, audits
are more expensive than ever.
The bill before us today does not address either the
financial or personnel resources necessary to carry out the
functions it requires. Without adequate resources, this bill
will force the Inspectors General to divert funds that would
otherwise be used for investigations of fraud, waste and abuse.
It would be unfortunate if the unintended consequence of this
bill was to weaken the efforts to prevent the fraud, waste and
abuse of government funds.
I, too, want to raise a question about the $25 million
threshold in the bill. With time, it seems to me nearly all
agencies will be above this threshold. If that is the intent,
then we should just include those agencies today. If the intent
is to exempt small agen-
cies, then we probably should build in some correction for
inflation.
I want to thank you, Mr. Toomey, and all the witnesses who
have agreed to testify today. I look forward to hearing their
comments.
[The prepared statement of Hon. Janice D. Schakowsky
follows:]
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Mr. Toomey. If I could just respond to the points. I think
you certainly raised legitimate concerns.
I would point out, as to the cost of doing this, the
Federal Government imposes a very comparable requirement on all
publicly traded companies. We require that financial statements
be audited if you're going to list your securities with the SEC
on an exchange. That includes companies that have much lower
annual budgets than $25 million. It seems that if it's
reasonable to require this, for the benefit of private
investors, it's reasonable to have this taxpayer requirement.
Although in my bill we don't set a strenuous threshold because
we do have the $25 million cutoff.
Whether that's an appropriate level in the future, it's
something that could be addressed at a later date. If inflation
were to boost budget levels to the point where most or all were
above that level, then it might very well justify
reconsideration.
Ms. Schakowsky. Let me just say beacuse it's worthy doesn't
mean the money appears. I know that I have a number of worthy
things on my agenda, as well, and if you compared them to the
private sector, they would also be comparable. But the question
of resources, of personnel, of dollars is still an issue I
think, if we're responsible, we're going to have to consider.
Thank you. I appreciate it.
Mr. Toomey. If I could make just one other comment, and
that is to observe that the many agencies do voluntarily audit
their financial statements; although they're not required by
law. The overwhelming majority of them believe that it is
beneficial to the agency to do so. So that's their point of
view.
Mr. Horn. Mr. Putnam.
Mr. Putnam. I have no questions at this time, Mr. Chairman.
Thank you.
Mr. Horn. Delighted to have you.
Mr. Putnam. Mr. Toomey is on the right track.
Mr. Toomey. Thank you, sir.
Mr. Horn. Now, you're certainly welcome to come up here.
There's five witnesses we're going to hear from, and if you
have the time, just----
Mr. Toomey. I very much appreciate the invitation, Mr.
Chairman, but I have a conflict in my schedule which does not
allow me to do so. Thank you for inviting me to be here today
and for giving me the chance to testify.
Mr. Horn. Thank you very much for coming.
Now we'll get to the five members of panel two. As you
know, we ask that the oath be affirmed by our witnesses and
that the people who are assistants to you also be affirmed and
take the oath.
We're now taking Mr. Engel, Mr. Reger, Mrs. Doone, Mr.
Zirkel, and Mr. Brachfeld. Raise your right hand. The clerk
will get those names.
[Witnesses sworn.]
Mr. Horn. The clerk will note five at the table and about
two or three behind the table.
So let us start the agenda with Gary T. Engel as the
Director, Financial Management and Assurance of the U.S.
General Accounting Office. We will go down the line and have
the various Members here ask questions.
So Mr. Engel, proceed.
STATEMENTS OF GARY T. ENGEL, DIRECTOR, FINANCIAL MANAGEMENT AND
ASSURANCE, U.S. GENERAL ACCOUNTING OFFICE; MARK A. REGER, CHIEF
FINANCIAL OFFICER, FEDERAL COMMUNICATIONS COMMISSION; ALISON L.
DOONE, DEPUTY STAFF DIRECTOR FOR MANAGEMENT, FEDERAL ELECTION
COMMISSION; FREDERICK J. ZIRKEL, INSPECTOR GENERAL, FEDERAL
TRADE COMMISSION; AND PAUL BRACHFELD, INSPECTOR GENERAL,
NATIONAL ARCHIVES AND RECORDS ADMINISTRATION
Mr. Engel. Thank you, Mr. Chairman.
Mr. Horn. Your statements automatically go in the record
when I call on you. We'd obviously like you to give a summary
of them in 5 minutes or so.
Mr. Engel. Yes, sir.
Mr. Horn. Thank you, Mr. Engel, for coming.
Mr. Engel. Thank you, Mr. Chairman and members of the
subcommittee. Good afternoon.
I'm pleased to be here today to discuss the proposed
Accountability of Tax Dollars Act of 2002, H.R. 4685. We agree
with the thrust of the proposed amendment to extend the
financial management audit requirements of the CFO Act to
additional Federal agencies.
GAO's long-standing position has been that the preparation
and audit of financial statements are important to agencies'
development of reliable, timely and useful financial
information. For agencies already covered by the CFO Act,
financial statement audits have been the primary catalyst to
increasing the reliability of financial data, improving
financial information and enhancing accountability.
In connection with work we did at the request of
Congressman Toomey in 2001, GAO surveyed 26 Federal agencies
not covered by the CFO Act to find out their views on having
financial statement audits. Twelve of these agencies had had
financial statement audits in the past 5 years. Overall, the
surveyed agencies reported that they had either achieved
significant benefits or expected to achieve such benefits from
having their financial statements audited.
As the exhibit shows, and you should have a document in
front of you, the most significant benefit cited by the 12
agencies that had had financial statement audits were enhancing
accountability and identifying inefficiencies and weaknesses.
Other significant benefits including improving internal control
and enhancing public perception of the agency.
The 14 surveyed agencies that had not had their financial
statements audited reported they would anticipate benefits from
audits, but to a much lesser extent than the achieved benefits
reported by the 12 audited agencies. Half of the 12 audited
agencies reported that the benefits of their first audits
outweighed the costs. And about three-fourths reported that the
benefits achieved outweighed the costs of subsequent audits.
According to the size and other characteristics of the
agencies, the level of effort to prepare financial statement
audits for the 12 audited agencies reported varied. The
reported number of staff days to prepare for the first audit
ranged from 50 to 750 days, and estimated fiscal year 2000
audit costs ranged from $11,000 to $350,000.
The 26 surveyed agencies responded that the most important
factors to consider in determining whether agencies should have
financial statement audits are: one, whether the agency has
fiduciary responsibilities; two, risks associated with the
agency's operations, 13 of the 14 unaudited agencies said that
the absence of a statutory audit requirement was a reason for
them not having audits.
Other reasons cited by six of the 14 agencies included an
insufficient number of financial management personnel and
insufficient funding. Twenty-one of the 26 surveyed agencies,
including all 12 that had audits, said that, in general,
agencies should have financial statement audits.
I would now like to offer two points for consideration.
First, using the fixed dollar threshold to trigger the audit
requirement has the benefit of simplicity. Over time, however,
agencies could move above or below this dollar threshold,
depending upon annual changes in their budget authority. Also,
as mentioned earlier, because of inflation the number of
entities that would meet this threshold are likely to increase.
One way to deal with these issues and still employ a dollar
threshold would be to give OMB the authority to add or exclude
agencies based in part on the factors identified during our
survey.
My second point involves the waiver that the proposed
legislation would authorize OMB to grant to agencies for the
first 2 fiscal years beginning after the date of enactment. We
support this waiver provision, and we would support making a
similar waiver available to OMB for agencies that do not
initially meet, but subsequently do meet the audit threshold.
The importance of having financial audits goes far beyond
obtaining an unqualified opinion. The preparation and audit of
financial statements contributes to reliable, timely and useful
financial information which helps management ensure
accountability, measure and control of their costs, will allow
timely and fully informed decisions.
Preparing audited financial statements also leads to
improvements in internal controls and financial management
systems. Therefore, we view much of the effort involved in
preparing financial statements and having them audited as an
integral part of effective financial management.
Mr. Chairman, this concludes my summary remarks. Again, we
agree with the thrust of the proposed bill and stand ready to
assist the subcommittee with the language and concepts in H.R.
4685. I would be pleased to answer any questions that you or
other members of the subcommittee may have.
[The prepared statement of Mr. Engel follows:]
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Mr. Horn. All right. We will move to Mark A. Reger, the
Chief Financial Officer for the Federal Communications
Commission.
Mr. Reger. Mr. Chairman and members of the Government
Reform Subcommittee on Government Efficiency, Financial
Management and Intergovernmental Relations, I appreciate your
invitation to testify concerning the Federal Communications
Commission's experience with compiling its auditable annual
financial statements.
I serve as the Chief Financial Officer for the FCC. The FCC
is committed to using the taxpayer's money responsibly and to
facilitating financial integrity and complete financial
reporting.
Let me begin by describing the Commission's financial
situation, which is different from many other small independent
agencies. We are an agency of 1,975 people. Our appropriated
budget is rather small, $26.3 million in direct appropriations
for fiscal year 2002 with a total budget of $245 million.
We generate 89 percent of that budget by our collection of
statutorily mandated regulatory fees. We also collect
approximately $25 million from statutorily mandated licensing
fees. Those, however, are not the only moneys included in our
financial portfolio. We also administer the auction of radio
spectrum and oversee the administration of other funds.
For example, in fiscal year 2001, the Commission collected
over $17.8 billion in auction receipts, managed a loan
portfolio valued at just over $5.9 billion, and oversaw the
administration of a fund which an annually collects and
disburses $4 billion.
These additional programs substantially increase the level
of sophistication of our accounts. It became apparent to us
that we needed to improve our financial recordkeeping process
to reflect this increased sophistication.
On its own motion, in 1998, the FCC initiated efforts to
compile auditable financial statements. We were not required to
do so by the Chief Financial Officers Act of 1990, but
nonetheless began efforts to prepare financial statements and
subject them to an audit, as would have been required under the
CFO Act.
Subsequently, in September 1998, the U.S. Treasury
Department directed the FCC to prepare certain auditable
information for inclusion in the Treasury's annual financial
statements. Treasury had directed the FCC to pursue the
compilation of auditable statements because of the financial
implications of the spectrum auction program on total receipts
recorded in the consolidated U.S. Government statements and the
value of the auctions' loan portfolio to asset values in those
same statements.
As a result of both the Commission's efforts and Treasury's
directive, the FCC compiled its first generally accepted
accounting principles balance sheet and accompanying notes for
fiscal year 1999. With that action complete, we generated a
full set of CFO Act-compliant financial statements for fiscal
year 2000 and subjected them to an audit.
We enlisted the aid of two professional accounting firms to
assist in these efforts. One firm provided credit subsidy
information concerning the Commission's auction loan portfolio,
which had not previously been treated under the provisions of
credit reform, and assisted the limited finance staff in
actually compiling the statements. The second firm audited the
results of the statement efforts on behalf of the FCC's Office
of Inspector General. Incidentally, the FCC received an
unqualified opinion on that first set of fully compliant CFO
Act statements.
As a result of the efforts to prepare statements, the FCC
has: Compiled financial operating procedures; conducted a full
agency inventory of property; implemented an annual inventory
review system; redesigned the Commission's revenue systems;
implemented a customer numbering and tracking system; altered
the agency's financial record keeping to record transactions in
the U.S. Standard General Ledger formats; formalized financial
reporting processes and responsibilities; compiled loan files,
standardized loan processing functions and initiated the
transfer of loan servicing functions to an outside loan
servicer; implemented credit reform reporting; and initiated
efforts to link objectives and performance measures to the
strategic plan and annual financial statements.
This auditing process is still very new to the FCC. Fiscal
year 2001 is only the second year we have issued fully
compliant statements, and we continue to make improvements in
our financial accounting systems and safeguards. Complying with
the accounting reporting requirements of the CFO Act is a time-
consuming and expensive process. We were in a position to cover
most of these costs through the use of auctions generated
funding.
For the FCC, the preparation of an auditable financial
statement has been necessary and beneficial. Because of the
additional financial programs, we are not ``typical'' as
compared to other small agencies. I cannot speak to the
difficulty other agencies may experience in preparing annual
financial statements and having them audited, but I do know
from our experience that it is an arduous undertaking.
Again, thank you, Mr. Chairman, for the opportunity to
offer this testimony. The FCC is very proud of the financial
improvements it has made over the last few years. We still face
many formidable challenges in this regard.
[The prepared statement of Mr. Reger follows:]
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Mr. Horn. Alison L. Doone is the Deputy Staff Director for
Management of the Federal Election Commission.
Welcome.
Ms. Doone. Good afternoon, Mr. Chairman, and members of the
subcommittee. I serve as the FEC's Chief Financial Officer.
It's a pleasure to be here today to testify regarding the
utility of audited financial statements for the FEC. The FEC is
a small independent bipartisan regulatory agency charged with
administering and enforcing the Federal Election Campaign Act,
the statute that governs the financing of Federal elections.
In October 2001, the FEC responded to the GAO survey on
Expansion of Financial Statement Audit Requirements. The FEC
responses mirrored those of the surveyed agencies, as mentioned
in the November 30, 2001, GAO survey results.
The fiscal year 2002 FEC appropriation is $43.7 million and
362 FTE; 70 percent of the budget is spent on salaries and
benefits, 10 percent on information technology projects, and 8
percent on rent. The remaining 12 percent funds FEC operations
including contracts, travel, training, equipment and supplies.
FEC assets are nominal. As of September 30, 2001, FEC
assets totaled $9.4 million. Of that, $6.7 million, 72 percent
of the total, is the cumulative FEC appropriated fund balance
of unobligated and unexpended funds from fiscal years 1996
through 2001. Only $2.7 million is equipment.
FEC liabilities are also modest. As of September 30, 2001,
FEC liabilities totaled $2 million and consisted primarily of
accrued annual leave and accrued payroll.
Like other survey respondents, the FEC believes that an
agency's fiduciary responsibilities, risks associated with
agency operations, amount of liabilities, amount of assets and
amount of budget authority are all important factors to
consider in determining the need for audited financial
statements.
We note the survey respondents ranked fiduciary
responsibility and risks associated with agency operations as
the most important considerations, and placed equal weight on
the amount of assets, liabilities and budget authority as the
next most important factors. We agree with those rankings.
The amount of budget authority is not the most important
factor in whether an agency should prepare annual audited
financial statements and should not be the sole determinant in
the decision. Materiality is measured by more than just the
size of an agency's budget.
The agency operations and the types of programs
administered by an agency should be more important than size of
budget in determining the need for audited financial
statements. For example, an agency with a budget less than $25
million that has fiduciary responsibility for a trust fund,
administers a grant program or operates revenue-generating
programs may be the type of agency that should prepare audited
financial statements. Whereas, the FEC, with a budget greater
than $25 million with none of those features, with minimal
assets and liabilities and with a budget that primarily funds
personnel costs and rents, should not be required to prepare
audited financial statements.
The issue of whether audited financial statements would
increase internal controls also varies among agencies. The FEC
has strong internal controls and senior management review and
oversight of financial operations and allocation and
expenditure of funds. FEC audited financial statements would
not result in greater accountability or tighter controls.
Audited financial statements for agencies with the
characteristics that I just mentioned may be necessary. In
agencies lacking those features, like the FEC, preparation of
audited financial statements would increase costs with few or
no material benefits.
I would like to thank you, Mr. Chairman, and the
subcommittee for the opportunity to appear before you to
present our views. I would be delighted to answer any questions
you may have.
Mr. Horn. Thank you.
[The prepared statement of Ms. Doone follows:]
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Mr. Horn. We'll go to the next presenter, the Honorable
Frederick J. Zirkel, Inspector General, Federal Trade
Commission.
Mr. Zirkel. Good morning, Mr. Chairman and members of the
subcommittee. I am Frederick Zirkel, Inspector General of the
Federal Trade Commission. I'm pleased to testify before the
subcommittee today in support of financial statement audits.
The FTC is a non-CFO agency that has its financial
statements audited annually by the OIG. To accomplish its
competition and consumer protection missions, the agency was
authorized approximately $156 million and 1,074 work-years for
fiscal year 2002.
Funds are provided the agency from two major sources:
premerger filing fee collections and annual appropriations. For
financial statement reporting purposes the Financial Accounting
Standards Advisory Board defines the agency's premerger filing
fees as ``exchange'' revenue; that is, funds that the agency
has earned and can use with its annual appropriation to pay for
salaries and other operating expenses to achieve its mission
objectives.
The FTC also receives ``nonexchange'' revenues. For
example, the agency collects civil penalties. Civil penalties
cannot be used to pay for agency operating expenses, but
instead must be remitted to the U.S. Treasury. An agency with
substantial nonexchange revenue is expected to prepare as part
of its financial statement package, under the CFO Act, a
``Statement of Custodial Activity.''
I mention these accounting concepts and authorities because
the FTC, as part of its financial statement package, prepares a
custodial activity statement. During the years under audit the
FTC's nonexchange revenue has always exceeded its exchange
revenue. Yet, without a financial statement audit, this major
area of financial activity would receive little, if any,
scrutiny.
Furthermore, for the FTC, the preparation and audit of the
custodial activity statement has helped management integrate
its financial and program management systems. In addition, the
statement provides information that interested third parties
could use to judge how well the agency is meeting its basic
mission responsibilities.
A word about audit approach: At the FTC, the annual
financial statement audit is performed by an audit team
comprised of OIG staff and an independent public accounting
firm under contract to the OIG. As IG, I sign the audit
opinion. In each of the 5 years the audit has been conducted
the agency has received a clean opinion.
A word about audit benefits: I believe that annual audits
are worth the expenditure of agency funds for many of the
reasons stated in the GAO survey. The benefits specific to the
FTC include improvements of internal control, strengthening of
financial management systems and enhanced accountability.
Of course, obtaining a clean audit opinion is not an end in
itself, but merely the first step to improving agency financial
management. It is also, I believe, a necessary step if an
agency is to fully implement GPRA, that is, tie performance
measures and/or objectives to audited costs contained in the
Statements of Net Cost.
A word about audit cost: The OIG at the FTC is provided
with an annual budget of 5 work-years and contracting dollars
of about $100,000. The OIG budget, when adjusted for inflation,
has stayed relatively constant over the past 5 years for the
time span we have been conducting financial statement audits.
From this budget, my office commits approximately $60,000 per
year to an IPA contract to perform the financial statement
audit.
In addition, my office also applies approximately one-half
to three-quarters of an FTE, or work-year, to the audit.
Consequently, conducting a financial statement audit is a major
commitment of my office. Yet, I believe the resource commitment
is a wise expenditure of taxpayer funds.
A few comments on management cost: A financial statement
audit should be, or I view it as, a quality control activity
that is an integral part of the overall management process. It
provides needed feedback to management. The absence of such
audits in past years may explain in part why government
financial management is often viewed in low esteem.
Finally, when considering management costs, I think it is
important to distinguish between the incremental cost that an
audit requires managers to incur from the need to incur costs
to correct a procedural weakness or respond to a system
breakdown.
These points lead me to a general statement about auditing
costs. All other things being equal, the better managed the
unit or organization being audited, the lower the cost of the
audit will be for the management team. The more knowledge the
audit team has of the organization being audited, the lower the
cost will be for the audit organization.
A word about lessons learned: First, the process is
evolutionary. It improves with age. As you go through it, you
get better. Second, I think you need to stay the course. It
instills a discipline and improves the systems as years go on.
That's the experience that we have had at the FTC, and I
believe the systems are stronger and the information is better.
I would like to thank you, Mr. Chairman, for this
opportunity to provide my comments. I would be happy to answer
any questions.
Mr. Horn. We thank you.
[The prepared statement of Mr. Zirkel follows:]
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Mr. Horn. Our last presenter, and then we'll go to
questions, is the Honorable Paul Brachfeld, Inspector General
for the National Archives and Records Administration.
Mr. Brachfeld. Good afternoon. I am Paul Brachfeld, the
Inspector General of the National Archives and Records
Administration. I thank you for the opportunity to testify
before this distinguished subcommittee.
I must first apologize for not having presented a written
statement prior to my testimony, as I was just called upon
yesterday to join this distinguished panel. However, I am
pleased to be here to lend my support to this proposed
legislation.
I speak as the Inspector General of the National Archives
and Records Administration and in my former capacity as
Assistant Inspector General for Audits at both the Federal
Communications Commission and the Federal Election Commission.
In fiscal year 2002, NARA was appropriated an annual budget
of approximately $289 million and 2,794 full-time equivalent
positions, or FTEs. The $289 million includes appropriations
for operations, repairs and restoration of facilities and
grants.
NARA operations are spread throughout 37 facilities
nationwide to include archives and records services facilities
and Presidential libraries. NARA also publishes the Federal
Register, administers the Information Security Oversight Office
and makes grants for historical documentation through the
National Historical Publication and Records Commission.
In addition to our annual appropriation, Public Law 106-58
established the Records Centers Revolving Fund on September 29,
1999. The enabling legislation authorized NARA to charge
customers for records storage and services. Income from these
operations in fiscal year 2002 is estimated to be approximately
$107 million.
NARA also maintains a gift fund with estimated fiscal year
2002 availability of approximately $9.2 million, and Trust
Funds with estimated fiscal year 2002 operating income of
approximately $15.9 million.
I am pleased to report that in the 2 years that I have
served as the IG at NARA, the components of the agency which
are subject to financial audit have received clean or
unqualified opinions. These audits of Revolving Fund and Gift
and Trust Funds were performed under the control and direction
of the OIG. While no material weaknesses were detected, the
Independent Professional Accounting Firm [IPA], did identify
opportunities to strengthen financial accounting practices and
procedures and enhance internal controls, most notably as
related to information technology controls and continuity of
operations.
Currently, NARA does not perform a financial statement
audit over our appropriated funds. The OIG does not have any
funding or resources to oversee or perform this work.
As you know, the GAO transmitted a survey to my agency
dated September 28, 2001, focusing upon whether financial
statement audit requirements should be expanded to certain
agencies, including NARA. Question 54 of the survey was ``Why
has your agency chosen not to have its financial statement
audited?''
In response, the NARA Director of Financial Management
Services checked all four boxes provided. They were as follows:
Not statutorily required; insufficient funding; insufficient
financial management staff; insufficient expertise in preparing
financial statements.
I think that ``choice'' should be removed from this
equation and that the OIG should be provided the necessary
staffing and resources to perform in work.
At NARA, the proposed price for this first option year of a
multiyear contract with an IPA to provide financial auditing
services to the Revolving Fund and Trust and Gift Funds is
approximately $260,000. The OIG does not have any dedicated
financial auditors on staff to administer the contract and
performance; thus, this collateral part-time duty is shared by
myself, the Assistant Inspector General for Audits and an
information technology auditor. I do not consider this to be an
optimal staffing solution.
Financial accountability and stewardship over funds is too
important a matter to compromise due to a lack of enabling
resources. I believe that this office should have the necessary
resources to accomplish our mission and that defined by
Congress and Public Law 100-504, the Inspector General
amendments. Thus, should this legislation be ratified, there is
a critical need to provide funding and resources to support the
intent of Congress.
I continue to face a critical shortage in resources, and in
this semiannual reporting period, I have continued to alert
Congress to the situation. I firmly support the adoption of
this legislation, but I'm well aware that without funding and,
more importantly, auditors on staff with financial statement
auditing expertise, the task of performing this work will be
daunting.
Over a decade ago, when I served as the Assistant Inspector
General for Audits at the FCC, I met with the chairman to brief
him on the results of my limited financial statement audit of
selected balance sheet accounts that I had single handedly
performed. The balance sheet line items I looked at were
accounts receivable, accounts payable, and property, plant and
equipment. In this audit, constrained by lack of resources and
staff I was all alone, I identified significant deficiencies.
When I met with the former chairman and attempted to
explain my findings, he confessed that he could not follow my
presentation. Thus, I simplified them by asking him whether he
would invest in a company that couldn't track its receivables
and payables, and didn't place a valuation on their property,
plant and equipment. He laughed and said, ``Of course not,'' at
which point I congratulated him on being the CEO of that
company.
Since that meeting I held in, I believe, 1991, the FEC has
moved quite a distance as OIG auditors, with the support of the
CFO, are now performing full financial statement audits and
received unqualified clean opinions. However, this progress may
not be shared by all agencies.
I believe that we owe it to the taxpayers to demonstrate
proper stewardship of our assets and account for how we budget
and spend our money. We owe it to them to guarantee that we in
the public sector are using timely, reliable and comprehensive
financial information when making decisions which impact upon
them and the welfare of their loved ones.
It's not logical to me that certain Federal agencies are
required to perform annual financial statement audits while
others are excluded from these requirements. I believe that
sound financial auditing practices, as required by the CFO Act,
can and do provide tangible benefits to our customers and
should be extended to a broader range of agencies as called for
in this proposed legislation.
Mr. Chairman, this concludes my remarks. I would be happy
to answer any questions you or any member of the subcommittee
may have about my office's experience related to financial or
related matters. Thank you very much.
Mr. Horn. Well, thank you.
[The prepared statement of Mr. Brachfeld follows:]
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Mr. Horn. We're now going to go to questions. It will be 5
minutes for each of us. We'll just start with myself and then
the ranking member, then Mr. Kanjorski.
Let's start with Mr. Engel, Director of Financial
Management and Assurance for the U.S. General Accounting
Office. Mr. Engel, your testimony generally supports the thrust
of H.R. 4685. From your experience, what do you see as the
primary benefits to an agency to prepare agency-wide financial
statements and having them audited?
Mr. Engel. Yes, Mr. Chairman. My experience with the CFO
Act agencies, as well as in the private sector, prior to coming
into the Federal Government, was very similar to the results
that we had seen from the surveyed agencies and that is
displayed on the chart over here.
Enhancing accountability is certainly an experience that
many of the CFO Act agencies have had during these initial
audits since the CFO Act was passed. Identifying inefficiencies
and weaknesses and improving internal controls, we've seen that
while, as you had mentioned earlier, a lot of the agencies
still are not receiving unqualified opinions, we have seen
improvements in the number of weaknesses and reportable
conditions that are being identified out at the agencies.
The agencies are being alerted to where the real problems
are, which is one of the benefits of having a financial
statement audit by an independent auditor; and actions are
being taken to address these.
The reliability of financial information is also a key
result of having a financial audit. When you recall, back to
the early years of the CFO Act and the audits of the IRS
financial statements, I believe in front of this subcommittee,
there were various hearings and there was a lot of discussion
about the amounts of taxes receivable.
There were large amounts that were originally on the books,
but it was through the financial statement audits that it was
determined that many of those amounts were not valid
receivables. In many cases, we had duplicates, even triplicates
of amounts being counted as receivables. So we really were not
reacting to an amount that we could go after and collect.
We also did not have a very good idea of what the
collectability of those receivables were. It's been through the
audit process that we're getting a better handle on how much we
could expect to go after and collect so that we can plan future
decisions down the road.
These would be some of the key things I'd identify.
Mr. Horn. Mr. Engel, what changes, if any, would the
General Accounting Office propose making to H.R. 4685?
Mr. Engel. I think some of the key ones relate to
discussions we've had here today.
We had a lot of discussion about the dollar threshold. As
our survey had identified, one of the factors was using the
budget authority. But there were several other factors that we
felt important and the respondents, I believe, felt important
as well. These included the fiduciary responsibilities and the
risks of the operations themselves.
The idea of using a dollar threshold certainly makes it
more simple to design the law itself. One way around that--
again, that I had mentioned in my testimony--if you wanted to
stick with that, but still build in the factors, is to give OMB
the authority to make decisions as to adding or excluding
agencies that meet the dollar threshold; but maybe they do not
meet some of the other factors that have been identified as
important in making a decision as to whether or not an audit
should be done or not.
That would be one mechanism I think should be considered.
Another is the waiver authority that's being authorized.
The way the legislation is drafted right now would identify and
give a transition period. I believe it's typically needed for
entities that have not been through a financial statement
audit. The waiver authority allows OMB to waive the first 2
years of audit to the agencies, but if you do have agencies
coming on subsequent to what the initial cut-off of agencies
are, we need to build something for those agencies to be able
to have a transition period.
Mr. Horn. I'm going to have to move to the third question
with you. Other than the dollar threshold, what factors should
be considered in deciding whether an agency should be included
in the legislation?
Mr. Engel. Some of the most important ones, I think, are to
take a look at that agency and determine if they are
responsible for fiduciary responsibilities. Are they handling
funds on behalf of others? Do they have retail operations--
let's say, more risky operations that involve the collection of
funds? Do they provide insurance, do they make loans, or loan
guarantees?
Those types of factors I think would be important to
consider in determining whether an agency should be audited.
Mr. Horn. Good.
Five minutes and 5 minutes, Ms. Schakowsky.
Ms. Schakowsky. Thank you, Mr. Chairman.
Mr. Engel, can you give us any kind of an estimate of the
financial or personnel resources that might be necessary to
carry out the provisions of the bill?
Mr. Engel. I can give you some of the information that we
had from the surveys themselves. There really was a range
depending upon the size of the agency.
One of the dependencies is whether you have multiple
offices. Nonintegrated systems can contribute to what it could
cost; the range was actually from $11,000 as a low up to
$350,000 for the audit cost itself.
Now, in between there--and those really did range from an
agency that had less than $25 million of budget authority,
didn't have a lot of assets or liabilities, to one that was up
over $6 billion of budget authority----
Ms. Schakowsky. You didn't just look at agencies over the
$25 million?
Mr. Engel. We actually included in this survey some
agencies that were less than $25 million. They were all above
$10 million, but there were some that were under $25 million.
Ms. Schakowsky. OK.
Ms. Doone, you raised some questions about the $25 million
threshold. What were your discussions about how we might be
able to setup some sort of other criteria by which we gauge
whether someone would fall under this act?
Ms. Doone. I noted in Mr. Engel's testimony, and then in
his response to the questions, giving that authority or giving
some room to OMB to make that determination based on assets,
liabilities and risks of the agencies. I think that would be an
appropriate course. That way you would be looking at budget
authority as well as assets, liabilities, and fiduciary
responsibilities. That I would give a more complete picture as
to the need for audited financial statements.
Ms. Schakowsky. Do you have any problem with the $25
million number being static? Even if we were to use $25 million
as the threshold and then make other kinds of criteria?
Mr. Engel.
Mr. Engel. Yes. Again, what I was proposing in my statement
was that you could get around the inflationary effect of that
having a static number, again through OMB's allowance of having
the authority, if all they saw was the reason that an agency
was coming on to meet the threshold was because, over time,
inflation had gotten them there, they could exclude that agency
and explain to Congress that they don't believe that agency
should be added.
Ms. Schakowsky. Mr. Reger, I was interested, you indicated
that the Federal Communications Commission still has a number
of formidable challenges in complying with the audit
requirements.
Can you describe those challenges?
Mr. Reger. Integrating financial systems is probably one of
the largest challenges. We have a number of systems, and trying
to make them all work in a timely manager--you're aware that
the financial CFO Act requires ever-decreasing timeframes now
for providing audited financial statements.
Those timeframes are difficult for us as we try to gather
information from many systems, just as an example.
Ms. Schakowsky. And so, what do you conclude with that? Are
you in support of that legislation?
Mr. Reger. The Commission hasn't taken a position, ma'am.
Ms. Schakowsky. But you're saying right now you would not
be in a position to comply?
Mr. Reger. No, we do in fact comply. We currently generate
auditable financial statements.
Ms. Schakowsky. But it's hard?
Mr. Reger. It is very difficult.
Ms. Schakowsky. Mr. Brachfeld, you indicated that the
burdens of an audit requirement would strain your office's
resources.
Do you have some idea of the number of staff positions and
the budget authority you'd need if this bill were to pass?
Mr. Brachfeld. Based upon my past experience in the Federal
Communications Commission, where I served as AIG and actually
worked with Mr. Reger, I would estimate at least two people,
two OIG staff financial auditors; and then the financial
dollars, if we brought in a contractor.
Right now, we pay, I think approximately--I quoted
somewhere, I think, about $180,000 or so for the larger part of
the Revolving Fund financial statement audit. To incorporate
our appropriation, I would guess we'd probably look--say we'd
have to bring in a vendor for probably $300,000 more, or
something along those lines.
Ms. Schakowsky. Let me ask this last question. Anyone can
answer.
Since this legislation does not include any increase in
either personnel or financial resources to--so that you could
comply, what would happen to your agencies were it to pass
without that, those resources? Would you have to make cuts
elsewhere? What would you cut? What would you do.
Mr. Brachfeld. On the IG's side, we would have to honor the
request of Congress and honor the law; and we would, therefore,
have to borrow or take staff away from other projects.
But not only would we have to take staff from other
projects, we would have to have the staff in house that would
have that expertise, because converting an IT order or a
contract order to do financial statements is a completely
different discipline.
So not only would it be a staffing in terms reallocating
staff, we may not have the skills on board to conduct this type
of work.
Mr. Zirkel. I think for the Federal Trade Commission--since
we already go through this process, I don't believe that as a
result of passing the law, there would be any additional cost
associated with this mandate.
I also looked at this when the original CFO Act was passed.
We at non-CFO agencies were provided an opportunity by Congress
to move forward at our own pace into this area, realizing that
this was a basic accountability responsibility or obligation
that management had to the taxpayers.
And so, I know that audits and the cost of audits, whether
it's management that's incurring the cost or whether it's an IG
that's incurring the cost, there are more important things that
people see being done. But in the long list of different
priorities, even if it's not the highest priority, I just
believe it shouldn't be ``no priority'' or off the list. It
should be somewhere in there, so that, in fact, management is
held accountable to the public.
And there was one chart that I found interesting from the
GAO study, and that was a list of all of the legislation over
the years where financial statement audits were mandated. It
started, I guess, in 1934 with the Securities and Exchange Act.
And while people always question financial statement audits, it
doesn't seem like we've found another alternative to meet this
obligation.
So it's one thing to say, well, you don't have enough
money, but what are you doing to fulfill your responsibility
there? That's sort of the middle ground here. I mean, you have
to almost move to do it until you find an alternative that is
better, more cost-efficient. Then, if you do, I'm sure a lot of
people might run to that.
Without that alternative, I think what we have here seems
to work. Even if it's not the highest priority, it should
certainly fall somewhere in the whole scheme of things.
Mr. Horn. Five minutes to the gentleman from Pennsylvania,
Mr. Kanjorski.
Mr. Kanjorski. Thank you very much, Mr. Chairman.
I guess to the full panel, if this piece of legislation is
passed, do you anticipate any savings that may occur by doing
the auditing process that would, therefore, pay for and justify
the audits, or is this just duplicative?
Mr. Zirkel. My experience is that--for example, I mentioned
that we have an IPA, and we also put in about a half a work-
year on our staff. The IPA is a CPA firm under contract to the
OIG for around $60,000 a year.
In the year 2000, for example, we found an overpayment of
rent at the FTC that totaled $189,000. The FTC had closed some
regional offices and, in fact, the landlord was continuing to
bill the agency. When we located that, then they went--the next
year, they went back and got a refund for the overpayment.
Well, this $189,000, in essence, would pay for 3 or 4 years
of my audit.
I am not one to justify a financial statement audit based
on savings. That puts a lot of pressure on the system, and it
sort of sets-up the wrong relationship between management and
the auditors. Nevertheless, and particularly in small agencies,
savings will be intermittent, but they will help. And this was
just one example.
In most years we always have some savings and, most years,
they're smaller. So I think that savings are a very real
benefit. It's just difficult to say that those savings in all
cases will offset all of the costs. So in fact this is a cost-
efficient approach.
In most cases, I believe it will be.
Mr. Kanjorski. To a large extent, an audit would determine
whether or not the agency is performing its mission?
Mr. Zirkel. Yes.
Mr. Kanjorski. And it is a way of Congress and the
executive branch knowing where it's going; is that correct?
Mr. Zirkel. I believe for agencies that have custodial
activity statements that where we get into these fiduciary
responsibilities, that moves into the mission of the agency.
And I believe it also will help in terms of--there's another
statement called the Net Cost Statement, and then that cost
statement, I think, is audited costs that can be used with
GPRA. So in that respect, a financial statement audit with net
cost will help and make sure that management is not coming up
with costs to tie to a performance measure that is not tied to
anything.
Mr. Kanjorski. Just for the efficacy, do you fear this may
put pressure, external pressure on your agency since you
regulate those of us who sit up here?
Ms. Doone. I don't think we would be concerned about
external pressure, but going to your previous question and the
one from the last round, we don't think there would be any cost
savings for us, because we believe our internal controls are
quite tight, and we do think there would be, in fact, an
increased cost. We have a very small IG office, a staff of
four. Either they would have to stop work on existing projects
or we would have to contract out.
Mr. Kanjorski. We may like you to have them stop work on
certain projects. Mr. Engel, I am particularly interested in
the Endowment for Democracy. Are you aware of that
organization? That's funded by Congress, too, at about $33
million a year, and is a recipient of incredible amounts of
money that they send out around the world. And it is
structured, as I understand it, as a nonprofit 501(c)(3)
corporation established by Congress to, I guess, aid and assist
the State Department, CIA and other agencies of the Federal
Government, but they practically--I have been in Congress 18
years and I can't find out everything they give their money to.
But Mr. Chairman, I have a piece from the New York Times I
would like to make part of the record of their most recent
activities in Venezuela.
Mr. Horn. Without objection, this will be put in the
record.
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Mr. Kanjorski. Do you think we ought to extend the group
that we are looking at auditing and since this nonprofit
organization that is a part of the U.S. Government carries on a
portion of our foreign policy and invests in elections to
unseat democratically elected presidents sometime; that it may
be worthwhile to audit some of these independent agencies or
quasi-governmental agencies that expend government funds?
Mr. Engel.
Mr. Engel. I think that could be considered. It could
actually be considered and part of this legislation. If so, it
would be probably on an agency-by-agency or entity-by-entity
basis and looking at the risks.
Mr. Kanjorski. You wouldn't see anything that the crook
here is the fact that the agency or bureau or a quasi-
government agency is using Federal funds. That justifies our
reason why to have an audit performed?
Mr. Engel. Yes.
Mr. Kanjorski. And so it wouldn't be inconsistent with this
act or general good principles of government if we included an
agency like the Endowment for Democracy to be audited also.
Mr. Engel. To cover the government funding.
Mr. Kanjorski. You are with the General Accounting Office?
Mr. Engel. Yes.
Mr. Kanjorski. And you never heard for the Endowment for
Democracy? Well, anybody else?
Mr. Horn. Nobody would do it from GAO unless we request it.
Sometimes you dig it up yourself. But actually, it's is a
rather fine group. And as I remember, the leaders came mostly
out of the American labor movement because they were upset by
the Stalinist, Marxist, Soviet type of labor.
Mr. Kanjorski. It did grow out of the cold war, Mr.
Chairman, but I think the cold war ended sometime in the last
decade. But it carries on----
Mr. Horn. It hasn't ended in Cuba at this point and it
hasn't in some of the types of--well, even in the party now in
control in part of the Duma is Communist. As I remember when I
was in the Department of Labor, that basically was to get----
Mr. Kanjorski. So the record is clear, it just doesn't fund
the labor movement. It is an uncanny organizational structure
that has four basic institutes: It funds the National Chamber
of Commerce and it funds the AFL-CIO Institute, so they balance
off labor and big business and they get their portion of the
funds.
It also funds the Republican Institute, Republican party so
it can have a travel agency; and it funds the Democratic Party
Institute so it can have a travel agency. But above and beyond
that, and far beyond the appropriated funds, it receives
actually unknown funds from aid and other Federal agencies that
get channeled. And it just strikes me the last time I raised
this issue, the Endowment for Democracy funded a poll against
the President of France, for the purpose of creating some
democracy, I am not sure. But there are a great deal of funds,
almost $1 million are channeled into organizations that brought
about, or attempted to bring about the fall of the democratic-
elected president in Venezuela. I don't necessarily support the
policies of that democratically elected president. But I begin
to wonder if we have an audit that we're talking about here
with quote, executive agencies that exist out there, maybe we
ought to start auditing some of these agencies that are below
the radar screen.
Mr. Horn. Well, as I remember, they also try to get fair
elections and go as pollsters and observers and see if----
Mr. Kanjorski. All functions could be performed by the
State Department or other executive agencies of the United
States.
Mr. Horn. Well, I would think somebody's knows that a
precinct is a lot better than a lot of the people in the
Department of State. They can analyze it. They can read the
newspapers. They do a very fine job, but if you are going to
talk to real people, we ought to be getting people from
Chicago, Jan, and they would know how an election ought to be--
and hopefully it wouldn't be a resurrection day which has been
in places like Pittsburgh, Philadelphia, Boston, so forth. But
it is very interesting. Was that a recent part of the New York
Times?
Mr. Kanjorski. Last week, I believe.
Mr. Horn. OK. We will startup again now and use 5 minutes.
And Ms. Doone, in your testimony, you mentioned your agency
already has strong internal controls and that audited financial
statements would not result in greater accountability or
tighter controls. What type of controls does the Federal
Election Commission currently have in place?
Ms. Doone. We have a Finance Committee composed of
commissioners who determine and propose to the full commission
the allocation of our budget authority among offices and
projects. Once that is established after we have received our
appropriation, we have monthly budget execution reports which
show the moneys that have been obligated and expended for each
object class for each division within the agency.
Further, on the lowest level there must be supervisory
approval for all obligations and expenditures within each
office. There is further approval going all the way up into the
administrative office as well as the finance office who puts
these together. Further, when invoices are received, the
invoices go back to the procuring office where they assign to
the people who have procured the services or goods to sign-off
and certify that the amount is correct.
Before the payment is made, we have a certifying officer
independent of the whole process reviewing the invoices to
ensure everything is in order before payment is made. Further,
when we submit our quarterly SF133s to Treasury, we must
balance with our balances over at the Treasury Department. We
do this quarterly, and annually we submit a SF 2108 so that we
know our balances are in order.
With respect to contracting, the Commission must again
approve all FEC-issued contracts. We believe from the lowest
level to the highest level we have checks and balances
throughout our budgetary and expenditure process.
Mr. Horn. But basically, your agency ensures financial
accountability and effective internal controls without
independent verifications by auditors.
Ms. Doone. That's correct.
Mr. Horn. You have an internal auditor situation. Has there
ever been an audit in the history of the Federal Election
Commission? Has it ever been under an audit by an outside
accountant?
Ms. Doone. In terms of the financial statements, no.
Mr. Horn. That's right.
Ms. Doone. For the financial statements.
Mr. Horn. So that is part of the good government that we
passed here about 10 years ago. Is your statement that the
Federal Election Commission doesn't conduct outside audits, but
conduct internal controls are the equivalent?
Ms. Doone. As I mentioned, we have an IG whose audits,
because the IG is not auditing programmatic issues at the FEC,
most of their audits are confined to the administrative side.
We do have IG audits that are performed on our procurement
policies, training procedures, how we procure training. But
yes, it's correct that we have never had audited financial
statements.
Mr. Horn. How would your agency fund the cost of a
financial statement audit?
Ms. Doone. Our IG office consists of four employees. It is
unlikely that they would have the resources among the current
staff to do the audited financial statements themselves. If
they were to, they would have to stop working on other
projects. If that is not a desirable outcome, we would have to
fund it from the rest of our budget, and at this point, I don't
know where the Commission would decide to take the funds.
Those funding decisions are made initially by the Finance
Committee, and then the recommendations are submitted to the
full Commission for approval. So I don't know at this point
where we would take the funds, but they would have to come from
some program area.
Mr. Horn. What is the budget now for the Federal Election
Commission?
Ms. Doone. For fiscal year 2002, our appropriation is $43.7
million.
Mr. Horn. Now I think about eight to 10 years ago, Congress
gave the FEC about $3 million to computerize your operation.
They didn't do it. And I remember the Appropriations Committee
saying I will never do anything for that agency again, which I
can understand when a group says this is what we need it for,
we give it to them, they don't use it and just hire more
people. And the question was, how to get the clients to see the
various financial matters that we have to put as people running
for office and the citizens need to be able to access that
computer base.
What can you tell me about that computer base now? What
kind of satisfaction are you giving to either reporters, to
politicians, to staff, to every citizen that wants access?
Ms. Doone. Mr. Chairman, over the past few years, we have
been working very closely with the House Appropriations
Committee who have been very supportive in funding our
information technology projects and in fact has been earmarking
funds for us over the past few years to accomplish that. We are
in the midst of converting to a client server system for our
disclosure data base to which you were referring where the
financial disclosure reports are placed. We are converting into
the new environment now.
As you may know, we implemented mandatory electronic filing
in 2001, so that now over 80 percent of our transactions are
coming into the Commission electronically. We are moving in the
right direction to move toward using technology to give a more
complete picture of disclosure.
Mr. Horn. Well, we will move from you to Mr. Zirkel on the
Federal Trade Commission. In your testimony, you indicated that
the Federal Trade Commission has been audited for the past 5
years; is that correct?
Mr. Zirkel. Yes, that is.
Mr. Horn. And describe the level of effort that went into
preparing and having audited financial statements for the first
time.
Mr. Zirkel. The first time, the first and second year was
much more difficult because what we found is that the audit
team had to work much more closely with management in
developing reconciliations. And when we would ask for, let's
say for a list of judgments, how much was the agency's
judgments for the year, that would have to be in fact created
because those lists didn't exist. As the audits went on over
the years, what happened with the discipline of the audit was
that all of a sudden systems begin to develop and the next
year, the reconciliation was there. The system was in place and
we learned that the program people would discuss and reconcile
matters with the finance staff. So as the years went on, the
cost of the audit from the IG standpoint--it's around $120,000
a year but the cost of the audit would stay the same. The
quality of our audits is improving every year. And again,
intermittently throughout the years we would find some savings
in the audits to offset the cost of the audit, but we don't
focus on that.
I think the IG also has the responsibility to make use of
this financial statement in order to, not just a throw it to
management when we find something where we think additional
benefits are, we will schedule another audit outside the
financial statement audit to look in that area. We have done
that over the last few years and that has paid some dividends.
Mr. Horn. Now you went through this. There are other
agencies that might go through this as well. What problems, if
any, did your agency encounter during that first year audit?
What would you advise other commissions and agencies?
Mr. Zirkel. I think you start with the proposition that
management is rather nervous about this whole process. They
don't know what the costs are or what the outcome is going to
be. I think even in the finance units they are afraid that they
are going to fail. You have to start out with the proposition
that you are there--that as a result of this effort, we're
going to improve management at the agency and we are working
together, even though we're independent and we are still all
working for the taxpayer.
I think with that idea and also saying that we are going to
provide some accounting expertise, the development and creation
of the financial statements requires a high-level of
professional accounting. It requires FASP standards and
understanding of OMB's form and content standards. I think the
audit team can bring some expertise and help management in
these areas.
If they are willing to commit the resources to do that,
then in the first year, it will be successful; it will be
trying but successful. From there, you can build on that. I
believe if you get into an area where you have an agency where
there is a custodial activity statement involved, this is the
fiduciary side, that it's important for an IG auditor to work
with an IPA auditor and because a lot of these agencies have so
many unique programs. If you want to be efficient, you have to
know the program and IG staff know the program. So a
partnership between IPA and IG audits would keep the audit
costs down from the side of the OIG. Those were some of the
lessons we learned.
Mr. Horn. The 24 Chief Financial Officer Act agencies are
also required to issue a report on internal controls and
compliance with laws and regulations, and to state whether the
agency is in compliance with the Federal Financial Management
Improvement Act. Have the Federal Trade Commission auditors
prepared these reports for your agency? If so, what were the
results?
Mr. Zirkel. Yes. We go through the--in the opinion, the
overall opinion, we not only certify to the financial
statements, but we certify to internal controls. We go through
that process and we do note problems with compliance when staff
reports the information, so we have done that and the agency is
generally in compliance with its various laws and regulations.
Mr. Horn. Would you propose any changes to Mr. Toomey's
bill, H.R. 4685?
Mr. Zirkel. No. I don't have a personal opinion on the
level or the size that it should be. I know there has been some
discussion here today. I would say, though, that to the extent
that an organization or an agency has no fiduciary
responsibility, it has a small budget and it has good controls.
The cost of a financial statement audit should not be
excessive. My experience is that to the extent that the
financial offices are operating effectively, the cost of the
audit is way down. The extent of agency problems really raise
the cost of an audit. So getting back to answering the
question, I don't have a limit or a dollar limit so I can't
really add to that.
Mr. Horn. Mr. Brachfeld, what about your thoughts on Mr.
Toomey's bill? Is there anything else that we ought to look at
there?
Mr. Brachfeld. Again, I want to reemphasize that I think it
is very valuable to do this work. I should say some Federal
agencies contract out most of their accounting to a larger
agency or larger component, and then they basically minimize
their own accounting staff. They believe that because somebody
else is doing their bookkeeping, they don't need to have
seasoned financial auditors or accountants, I should say, on
their staff.
That leads to a climate where I believe fraud can take
place. I have identified that on a number of occasions in my
career where, again, they think that somebody else is--they are
paying the good money to GSA or Department of Agriculture. One
of the big guys is handling their accounting and they basically
go to sleep and forget about internal controls and forget they
need to have an external audit oversight.
So I support the context of this bill, and again, I am just
reemphasizing that I am already sinking under a volume of work,
and I would support any opportunity to put a strong reliance
that the IG should be given sufficient resources to do these
audits properly.
Mr. Horn. That is an excellent point, and we will take that
into account because you can't just have ``accountants.'' You
have to get those documents if the leadership of the agency is
going to use it for management purposes. I think you're right
about making sure that anybody that is handling cash or
anything else, or any way of--people, citizens, whatnot, that
is a real problem. We shouldn't hire auditors. I had an auditor
when I was president of a university. I had him practically
stationed at my door. When they moved in, sometimes people
started running and it worked.
So the question is what do you do? Anything else we have
here? I have enjoyed what you have done. Is there anything else
you want to add on the Toomey bill itself?
Mr. Engel. I would like to point out since we had a lot of
discussion about costs and benefits, I want to call attention
to the results of our survey, figure 3 in my testimony where we
did discuss that there was, for most parties, reported back
that the benefits outweighed the costs. I think that's
consistent with what we've seen in those CFO Act agencies as
well. I know Ms. Doone had mentioned that she feels they have
strong internal controls at her agency. When a lot of the CFO
Act agencies were first being audited, they were self-
supporting, and many of them were identifying some weaknesses
and controls. But when you started to get external auditors
coming in and really scrutinizing the processes, you started
identifying more critical control problems.
For example, you're aware of all the problems with computer
security. That is a critical issue that has been identified
through these financial audits, which you may not be able to
point to a dollar savings, but you could point out there's been
the prevention of some losses as a result of improvements made
to systems controls.
So, I would say we need to take that into account. These
were the results of actual agencies that have gone through the
audit process, many of which volunteered to do this and they
are saying that in many cases, the benefits substantially
outweigh the costs. We have seen those types of benefits as
well on the CFO Act agencies.
Mr. Horn. Any of you have any other thoughts? Going, going,
gone. All right, I am going to thank all those besides the
witnesses which were excellent. This is our staff: J. Russell
George our staff director and chief counsel was here; Bonnie
Heald, deputy staff director; Henry Wray, our senior counsel
was also here for awhile. And we have Justin Paulhamus. He is
the majority clerk, and Michael Sazonov is the professional
intern. And the GAO detailee, we are thankful to have here. She
is on my left, and your right, Rosa Harris, is doing a great
job. And she will go back to the GAO and say, ``boy, let me
tell you how those people on Capitol Hill do.'' She will start
giving seminars, I think, down there.
And now we have David McMillen, professional staff, long
time excellent person; and Jean Gosa, the minority clerk. And
we thank you both. And the court reporters are Julie Thomas and
Nancy O'Rourke. And we thank you also. It is tough in these
rooms and whatnot to hear everybody. So thank you very much all
and we are adjourned.
[Whereupon, at 3:25 p.m., the subcommittee was adjourned.]
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