<DOC>
[110th Congress House Hearings]
[From the U.S. Government Printing Office via GPO Access]
[DOCID: f:37001.wais]
FEDERAL FINANCIAL STATEMENTS FOR FISCAL YEAR 2006: FISCAL OUTLOOK,
MANAGEMENT WEAKNESSES AND CONSEQUENCES
=======================================================================
HEARING
before the
SUBCOMMITTEE ON GOVERNMENT MANAGEMENT,
ORGANIZATION, AND PROCUREMENT
of the
COMMITTEE ON OVERSIGHT
AND GOVERNMENT REFORM
HOUSE OF REPRESENTATIVES
ONE HUNDRED TENTH CONGRESS
FIRST SESSION
__________
MARCH 20, 2007
__________
Serial No. 110-15
__________
Printed for the use of the Committee on Oversight and Government Reform
Available via the World Wide Web: http://www.gpoaccess.gov/congress/
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37-001 PDF WASHINGTON DC: 2007
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COMMITTEE ON OVERSIGHT AND GOVERNMENT REFORM
HENRY A. WAXMAN, California, Chairman
TOM LANTOS, California TOM DAVIS, Virginia
EDOLPHUS TOWNS, New York DAN BURTON, Indiana
PAUL E. KANJORSKI, Pennsylvania CHRISTOPHER SHAYS, Connecticut
CAROLYN B. MALONEY, New York JOHN M. McHUGH, New York
ELIJAH E. CUMMINGS, Maryland JOHN L. MICA, Florida
DENNIS J. KUCINICH, Ohio MARK E. SOUDER, Indiana
DANNY K. DAVIS, Illinois TODD RUSSELL PLATTS, Pennsylvania
JOHN F. TIERNEY, Massachusetts CHRIS CANNON, Utah
WM. LACY CLAY, Missouri JOHN J. DUNCAN, Jr., Tennessee
DIANE E. WATSON, California MICHAEL R. TURNER, Ohio
STEPHEN F. LYNCH, Massachusetts DARRELL E. ISSA, California
BRIAN HIGGINS, New York KENNY MARCHANT, Texas
JOHN A. YARMUTH, Kentucky LYNN A. WESTMORELAND, Georgia
BRUCE L. BRALEY, Iowa PATRICK T. McHENRY, North Carolina
ELEANOR HOLMES NORTON, District of VIRGINIA FOXX, North Carolina
Columbia BRIAN P. BILBRAY, California
BETTY McCOLLUM, Minnesota BILL SALI, Idaho
JIM COOPER, Tennessee ------ ------
CHRIS VAN HOLLEN, Maryland
PAUL W. HODES, New Hampshire
CHRISTOPHER S. MURPHY, Connecticut
JOHN P. SARBANES, Maryland
PETER WELCH, Vermont
Phil Schiliro, Chief of Staff
Phil Barnett, Staff Director
Earley Green, Chief Clerk
David Marin, Minority Staff Director
Subcommittee on Government Management, Organization, and Procurement
EDOLPHUS TOWNS, New York, Chairman
PAUL E. KANJORSKI, Pennsylvania BRIAN P. BILBRAY, California
CHRISTOPHER S. MURPHY, Connecticut TODD RUSSELL PLATTS, Pennsylvania,
PETER WELCH, Vermont JOHN J. DUNCAN, Jr., Tennessee
CAROLYN B. MALONEY, New York
Michael McCarthy, Staff Director
C O N T E N T S
----------
Page
Hearing held on March 20, 2007................................... 1
Statement of:
Campbell, James T., Acting Chief Financial Officer, U.S.
Department of Energy; William Maharay, Deputy Inspector
General of Audit Services, U.S. Department of Energy; David
Norquist, Chief Financial Officer, U.S. Department of
Homeland Security; and James L. Taylor, Deputy Inspector
General, U.S. Department of Homeland Security.............. 65
Campbell, James T........................................ 65
Maharay, William......................................... 73
Norquist, David.......................................... 83
Taylor, James L.......................................... 91
Walker, David M., Comptroller General of the United States,
Government Accountability Office; and Linda Combs,
Controller, Office of Management and Budget, Executive
Office of the President.................................... 4
Combs, Linda............................................. 47
Walker, David M.......................................... 4
Letters, statements, etc., submitted for the record by:
Campbell, James T., Acting Chief Financial Officer, U.S.
Department of Energy, prepared statement of................ 69
Combs, Linda, Controller, Office of Management and Budget,
Executive Office of the President, prepared statement of... 49
Maharay, William, Deputy Inspector General of Audit Services,
U.S. Department of Energy, prepared statement of........... 75
Norquist, David, Chief Financial Officer, U.S. Department of
Homeland Security:
Followup questions and responses......................... 113
Prepared statement of.................................... 85
Taylor, James L., Deputy Inspector General, U.S. Department
of Homeland Security, prepared statement of................ 94
Walker, David M., Comptroller General of the United States,
Government Accountability Office, prepared statement of.... 6
FEDERAL FINANCIAL STATEMENTS FOR FISCAL YEAR 2006: FISCAL OUTLOOK,
MANAGEMENT WEAKNESSES AND CONSEQUENCES
----------
TUESDAY, MARCH 20, 2007
House of Representatives,
Subcommittee on Government Management,
Organization, and Procurement,
Committee on Oversight and Government Reform,
Washington, DC.
The subcommittee met, pursuant to notice, at 2:55 p.m. in
room 2154, Rayburn House Office Building, Hon. Edolphus Towns
(chairman of the subcommittee) presiding.
Present: Representatives Towns, Murphy, Welch, Platts, and
Bilbray.
Staff present: Michael McCarthy, staff director; Rick
Blake, professional staff member; Velvet Johnson, counsel;
Cecelia Morton, clerk; Kristina Husar and Alex Cooper, minority
professional staff members; and Larry Brady, minority senior
investigator and policy advisor.
Mr. Towns. The subcommittee will come to order.
Welcome to today's hearing on the Federal Government's
fiscal year 2006 consolidated financial statement. This hearing
addresses a very important issue for the Congress and the
Oversight Committee. As stewards of taxpayers' dollars, we owe
American citizens no less than full transparency and
accountability over the Federal Government's operations and
fiscal condition. We need to be certain that Federal assets are
protected from loss or misuse. It is imperative that we fully
understand the cost of the Government's operations and the
implications of our financial commitments.
I am pleased that the Government is continuing to make
progress on improving financial management. For the second
consecutive year, every major Federal agency issued their
audited financial statements within 45 days of the end of the
fiscal year. Of the 24 CFO agencies, 19 received a clean audit
opinion. In addition, OMB reported improper payments were
reduced by $9 billion over the past 2 years.
However, as in previous years, the 2006 audit demonstrates
that, although many agencies have improved their financial
management practices, there is still much work to be done.
This marks the 10th consecutive year that GAO was unable to
render an opinion on the Government's consolidated financial
statements. This situation is due to longstanding financial
management issues at the Department of Defense, the
Government's inability to reconcile accounting between
agencies, and the Government's ineffective process for
preparing its financial statements.
Good financial management is more than just a paperwork
exercise. Weak financial management can directly impact
Government operations and security.
Last year financial problems at the Defense Security
Service caused that agency to abruptly stop processing security
clearances for Government contractor employees. Because of
this, thousands of employees were at risk of losing their jobs
because their clearances were expiring and contractors had to
increase salaries to retain employees with clearances, costs
that were eventually passed along to the taxpayers.
Similarly, problems with finances at the Federal Protective
Services are threatening the security of our Federal buildings.
Government departments failed to properly reimburse FPS for
guarding the buildings, which caused FPS to delay payments to
contract guards and pay millions of dollars in interest. Now,
FPS is cutting back the number of officers and security
coverages at Federal buildings, and it can be traced back to
breakdowns in the financial accounting and funds transfer
between departments.
Today's hearing will look at the progress that has been
made in improving financial management and the challenges that
remain. We will examine the problems that some agencies have
experienced to see how to solve them and how other agencies can
avoid the same problems. Specifically, we will explore problems
with installing new financial systems, and with
interdepartmental accounting, and we will look at the bigger
picture of how the Government measures its long-term assets and
obligations.
I look forward to hearing from our witnesses and gaining
their perspectives for making our Government a more effective
and accountable institution.
I now yield to Mr. Platts on the minority side.
Mr. Platts. Thank you, Mr. Chairman. I would just like to
say, one, thank you for holding the hearing and continuing the
important work of this committee and oversight responsibilities
with our Federal Government's financial management practices
and the well-being of our finances, and in advance thank our
witnesses, both this and the following panel, for their day-in
and day-out work on this very important issue that, as you and
I have joked, I think, in the past that we were going to have
our witnesses admit to steroid use, because if we did we would
have the room filled with cameras, as it should be, because the
financial well-being of our Nation and the impact on the daily
lives of our citizens is, to me, one of the most important
issues here in Washington. Certainly those who are going to
testify before us today understand that. Again, I appreciate
their great work.
I do apologize. Because of trying to be in several places
at once, I will be here for the opening statements and then try
to return for the Q and A and the second panel.
Thank you, Mr. Chairman.
Mr. Towns. Thank you very much.
Congressman Murphy.
Mr. Murphy. Thank you, Mr. Chairman.
Often the repeated phrase that Government should work more
like a business doesn't exactly prove an apt analogy, but when
it comes to issues of financial management, when it comes to
making sure that we have good audited financial statements, it
certainly is an apt analogy, and I am very thankful to the
chairman again for being able to be a member of this
subcommittee, a new member of this subcommittee.
I thank the witnesses for being here to shed some light on
a very important issue to the new constituents in my District
who care deeply about how their taxes are spent by this
Government, and taxpayers across the country.
Thank you, Mr. Chairman.
Mr. Towns. Thank you very much.
At this time I yield to the ranking member of the
subcommittee for his opening statement, Mr. Bilbray of
California.
Mr. Bilbray. Mr. Chairman, I apologize for my tardiness.
I appreciate the witnesses here today. Mr. Chairman, I just
appreciate the ability to participate in this hearing. As
somebody who spent 18 years in local government, from being a
mayor to a chairman of a county of 3 million, I am obviously
very interested in that huge leap between the theory of how we
want to spend our money and the reality of what really does
happen with those funds.
With no other ado, Mr. Chairman, I yield back and thank you
again for the participation.
Mr. Towns. Thank you.
I yield to Mr. Welch.
Mr. Welch. I want to thank you for holding this hearing. I
look forward to serving with you on this subcommittee. My
colleague, Mr. Murphy, said better than I can say everything I
would have said, so I am going to ask to have his remarks re-
recorded in my name. [Laughter.]
Mr. Towns. You are going to do very well on this
subcommittee.
Thank you very much.
Actually, the first panel, of course, is already at the
table. It is our longstanding policy, as you know, to swear the
witnesses in.
[Witnesses sworn.]
Mr. Towns. Let the record reflect they have spoken in the
affirmative.
Our first panel features two leaders in advancing Federal
financial management and promoting Government accountability.
David Walker is the Comptroller General of the United States
and leads the Government Accountability Office, the
investigative and auditing agency for the U.S. Congress. Mr.
Walker is a certified public accountant and has extensive
executive level experience in both Government and private
industry financial management.
Linda Combs is the Controller in the Office of Management
and Budget in the Executive Office of the President. As
Controller, Dr. Combs oversees Government-wide financial
management policies and requirements. She also has extensive
experience in Federal financial management and has served as a
leader in several Federal agencies.
Your entire statement is in the record, and I will ask that
each witness summarize your testimony in the time provided,
and, of course, that is 5 minutes.
Please proceed, Mr. Walker.
STATEMENTS OF DAVID M. WALKER, COMPTROLLER GENERAL OF THE
UNITED STATES, GOVERNMENT ACCOUNTABILITY OFFICE; AND LINDA
COMBS, CONTROLLER, OFFICE OF MANAGEMENT AND BUDGET, EXECUTIVE
OFFICE OF THE PRESIDENT
STATEMENT OF DAVID M. WALKER
Mr. Walker. Chairman Towns, members of the subcommittee, it
is a pleasure to be here today to report on the U.S.
Government's consolidated financial statements for the years
2006 and 2005.
Since enactment of key financial reforms in the 1990's, the
Federal Government has made substantial progress in improving
financial management activities and practices; however, the
Federal Government still has a long way to go in order to
address several principal challenges to fully realizing strong
Federal financial management.
As you mentioned, Mr. Chairman, for the 10th consecutive
year, certain material weaknesses in financial reporting and
other limitations in the scope of our work resulted in
conditions that prevented the GAO from being able to provide
the Congress and the American people with an opinion as to
whether the consolidated financial statements of their
Government was fairly stated in conformity with generally
accepted accounting principles.
Furthermore, we also reported that the Federal Government
did not maintain effective internal control over financial
reporting and compliance with certain significant laws and
regulations.
For the third consecutive year the GAO included an emphasis
paragraph in our audit report noting that our current fiscal
path is unsustainable and that tough choices by the President
and the Congress are necessary in order to restore our Nation's
long-term fiscal sustainability.
Currently, our Nation's financial condition is worse than
advertised. From a broad financial management perspective, the
Federal Government's deteriorating long-range financial
condition and fiscal imbalance are matters of increasing
concern. The fiscal year 2006 financial report disclosed that,
despite a reported increase in revenues for fiscal year 2006 of
about $255 billion, the Federal Government's cost exceeded its
revenues by $450 billion, the net operating cost.
Furthermore, the total of reported liabilities,
contingencies, and unfunded commitments for things like Social
Security and Medicare rose from about $20 trillion in 2000 to
about $50 trillion in 2006. That is a 147 percent increase in 6
short years.
To put things in perspective, $50 trillion amounts to
$440,000 per American household, and median household income in
America is less than $50,000.
Table two on page 6 of my testimony I would commend to you,
because that takes these huge numbers and puts it in terms that
I think you and others can fully appreciate.
At some point we are going to have to start making some
tough choices in order to put us in a more prudent and
sustainable path. That will include, among other things,
increasing transparency and enhancing the relevancy of key
financial, performance, and budget reporting; reinstituting and
strengthening budget controls; strengthening oversight of
programs and activities; and re-engineering, reprioritizing the
entire base of the Federal Government.
The Federal Government restated certain of its fiscal year
2005 consolidated financial statements as part of this year
financial reports to correct certain errors. Since fiscal year
2004, we, at GAO, have reported our concerns about restatements
to Federal agencies' previously issued financial statements.
Frequent restatements to correct errors can serve to undermine
public trust and confidence in both the entity and the
responsible parties. As has been the case for 9 previous fiscal
years, the Federal Government did not maintain an effective
system on total controls.
But on the positive side of the ledger, for fiscal year
2006, 24 of 24 CFO Act agencies reported within 45 days, and 19
of 24 CFO Act agencies were able to obtain a clean opinion on
their consolidated financial statements, up considerably from
where we were a few short years ago.
The three primary impediments to an opinion on the
financial statements are: the Department of Defense,
intergovernmental activity, and preparing the consolidated
financial statements.
In summary, the Federal Government's financial management
is much improved since the CFO Act and FMMIA were enacted in
the 1990's, but we still have a ways to go, and the tail on the
dog is the Department of Defense.
Thank you, Mr. Chairman. I would be happy to answer any
questions you might have.
[The prepared statement of Mr. Walker follows:]
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Mr. Towns. Thank you very much, Mr. Walker.
Dr. Combs.
STATEMENT OF LINDA COMBS
Ms. Combs. Thank you, Congressman Towns, Congressman
Bilbray and other distinguished members of the subcommittee. I
thank you for providing us an opportunity to be with you today
to discuss with you OMB's vision for strengthening Federal
financial management in the coming years.
Improving financial management is one of this
administration's top management priorities. With the launch of
the President's management agenda in 2001, the President issued
a call to action for Federal managers to achieve a series of
critical financial management goals that, if attained, would
help American citizens gauge whether the people's money is
being properly accounted for and wisely spent, increase
transparency into the fiscal health of the Federal Government,
and provide reliable financial information to be used by
Federal leaders so they can mange their day-to-day operations
of their Government and ours more efficiently.
I am pleased to report that the Federal financial community
is positioned to meet those challenges. We have, indeed,
achieved significant forward progress on all the key indicators
of the President's management agenda, and specifically, as you
and Mr. Walker have just pointed out, 19 major agencies that
represent 75 percent of all Federal outlays achieved a clean
audit opinion last year. The number of auditor reported
material weaknesses has reduced approximately 15 percent from
just the past year. And, for the second consecutive year, as
has already been pointed out, every major Federal agency issued
their audited financial statement within 45 days of the
previous year. Just to put that in a tiny bit of perspective
for us, it was taking as long as 5 months to complete financial
reports in 2001. Improper payments has declined to $36.3
billion from $45.1 billion in 2004, so in those 2 short years
we have taken improper payment improvements down by $9 billion.
We have disposed of more than $4.2 billion in excess real
property since 2004.
It is now incumbent upon the Federal financial community to
build on this foundation of progress so that we are prepared to
address the fiscal challenges that lie ahead. Federal managers
must continue to mobilize resources, rededicate efforts, and
strengthen our accounting practices. We have to implement
stronger internal controls, issue financial reports more
timely, eliminate instances of error and waste, and use
financial data on a day-to-day basis to manage cost. Also, we
must approach these management improvement activities with an
eye toward balancing the cost of our efforts against the
benefits that they ultimately derive for the taxpayer.
As we set out to achieve new and better levels of financial
performance and do so in a cost-effective manner, it is
critical that the Federal community orient itself around a
common set of priorities and a clear and consistent road map
for improvement. Therefore, pursuant to the CFO Act of 1990, my
office, the Office of Federal Financial Management within OMB,
issues an annual plan to Congress that highlights our key
financial management goals, how we measure them, our expected
performance over the next 5 years, and the steps we will take
to ensure their success.
To achieve these important objectives described in our
report, the Federal financial community has undertaken a series
of reforms intended to strengthen key areas of financial
management. These activities include improving and/or
strengthening areas such as internal controls, financial
systems, payment accuracy, real property management, grants
management, financial reporting of the Government, as a whole.
Our recently issued annual report describes in great detail
our planned actions in these areas and how we are going to
measure our progress over time. The Federal financial community
undertakes a myriad of day-to-day activities, as well, so that
we can comply with the CFO Act of 1990.
We believe in transparency and we believe that the CFO
Council, along with the President's Council on Integrity and
Efficiency, which is comprised of our IGs throughout
Government, is currently joining forces to improve both the
cost effectiveness of how we go about producing our audited
financial statements and how we present this information so
that it is understandable and so that excessive costs are not
taken to drain on agency resources.
Every tax dollar is far too precious for us not to make
well-informed decisions. This administration looks forward to
continuing our partnership with Congress, with GAO to address
these specific problems that we have. We have a long way to go.
We need to be stronger. We need to be smarter. And we need to,
indeed, have more sustainable accountability.
We will build on our successes.
Thank you for your continuing support and effort. I look
forward to answering your questions.
[The prepared statement of Ms. Combs follows:]
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Mr. Towns. Thank you very much.
Let me thank both of you for your testimony.
Let me begin, Mr. Walker, with you. You know, DOD always
appears to be the problem. Is there any reasonable possibility
of DOD getting a clean audit in the next few years?
Mr. Walker. I would sure like, Chairman Towns, for the
Department of Defense to be able to achieve a clean audit
opinion before I leave office, which is October 25, 2013, but I
wouldn't bet a lot of money on it. I believe that their current
approach to trying to improve their financial management
systems and controls and their plan to try to achieve, you
know, an audit opinion is vastly superior to their prior one,
but I think most likely we are going to be at a point where
there are several major entities within the Department of
Defense will be in a position to have a clean audit opinion
before the end of my term, and possibly several line items
across the agency. We are going to try to make sure that more
than that gets done, but I am not that optimistic as of this
point.
Mr. Towns. What about the new DOD plan for better financial
management? Will that help?
Mr. Walker. The so-called FIAR plan, F-I-A-R----
Mr. Towns. Yes.
Mr. Walker [continuing]. I believe it is clearly superior
to their past plan. As you may recall, their past plan called
for them to have a clean audit opinion for the entire
Department of Defense by fiscal year 2007. It was totally
unrealistic. Their new plan takes the entities that they hope
to be able to achieve an opinion on and the line items that
cross the different silos within the Department of Defense and
talks about making progress on an installment basis toward
ultimately achieving an opinion on the overall Department.
Clearly superior but, frankly, they are really just getting
started within the last year or so.
Mr. Towns. Do you want to comment on that?
Ms. Combs. I would totally agree with what Mr. Walker has
had to say about that. I would just add that I think also the
effort that is underway, in terms of their A-123, their
administrative order 123, internal controls effort, will
probably help to accelerate some of the difficulties that they
have had in the past. They are working very, very hard to try
to correct deficiencies.
Mr. Towns. All right.
Mr. Walker, you paint a very sobering portrait of the long-
term fiscal outlook for the Federal Government. I want to ask
you about private sector liabilities and whether they are
accounted for.
As you know, when the Federal Government had to spend
hundreds of millions of dollars to bail out failing savings and
loans in the 1980's, it created a real financial shock. Today
the Federal Government acts as a guarantor for a lot of private
debt by law for things like student loans, pension benefits,
publicly chartered companies like Fannie Mae. Are these
potential liabilities accounted for in the Government's balance
sheet? And how do we know if the Federal Government is properly
managing the risk for these private sector liabilities? How do
we know?
Mr. Walker. Well, first, as you note, Chairman Towns, on
one hand you have traditional liabilities, which would be for
things like debt held by the public, which would be for
unfunded pension and health care to military and civilians that
are Government employees. You have certain commitments and
contingencies. For example, to the extent that the Government,
you know, might guarantee certain debt, to the extent that the
Government might step up if certain entities fail, then those
are various contingencies. And then we have certain unfunded
commitments, the difference between what we have promised with
Social Security and Medicare and the dedicated payroll tax
revenues and premiums that we have available to meet those
promises.
The answer is: if it is a firm commitment of the U.S.
Government, if we have identified the likely event, if it is
probable that it will occur, and if we can estimate within a
reasonable degree of certainty the amounts of money involved,
then under that circumstance it would be booked as a liability.
Unless and until all three of those conditions exist, it would
not be.
Let me give you an example. The Pension Benefit Guarantee
Corporation is a U.S. Government corporation. Technically, the
United States is not liable for its obligations. Technically
the PBGC can borrow, I believe, up to $100 million. Its assets,
however, are far less than its liabilities. It is in the hole
about $20 billion. There is not a liability on the Government's
financial statements for the PBGC, but we do disclose that
contingency. We do note that it is under-funded by about $20
billion and what the nature and extent of the Government's
obligations might be with regard to that.
Mr. Towns. Right. Thank you very much.
I yield to the ranking member, Congressman Bilbray.
Mr. Bilbray. Thank you.
Mr. Walker, I want to just tell you I am very impressed
with your commitment to fiscal sanity. I know there is not a
lot of fans for you around this Hill, but I want you to know
that you have one here. I appreciate your straight talk on the
issues.
Department of Homeland Security has been put together by
those of us in Congress trying to organize something, a whole
lot of loose pieces that were thrown together under the crisis
of 9/11, and is now struggling to try to be an organized
strategy. Is there any light at the end of the tunnel that this
agency is actually going to be able to function as hoped for,
from the fiscal point of view?
Mr. Walker. Yes. Absolutely. I think, frankly, DHS will
probably get there before DOD will get there. The fundamental
difference is the Department of Homeland Security represented
22 different departments and agencies that had different
cultures, different systems, different structures, and,
frankly, until September 11, 2001, most of them weren't even
focused on homeland security. Their missions were fundamentally
changed.
In contrast, take the Department of Defense, which was
created in 1947. This is the 60th anniversary of the creation
of the Department of Defense. They were all in the defense
business. There weren't as many entities involved. Yet, here 60
years later they are still in last place in financial
management.
So yes, we can be successful. We will be successful.
Mr. Bilbray. I appreciate that. And, for the record, I
opposed the Department of Defense. I think we ought to be up
front and call it the Department of War, exactly what it is. I
think that the political correctness changing terminologies, we
spend more time talking about terminology rather than getting
the job done.
Department of War, Department of Defense, has there ever
been a time in our history where they have been not the problem
child with this kind of stuff? I am a history major. I go back
and remember having issues such as Stewart raiding Union wagons
and sending a telegram back saying you guys ought to all be
thrown in prison because the mules aren't worth pulling the
wagons because you guys are cutting deals on the purchase of
equipment for the Army.
Has there been any time that we can really show that the
Army, the Navy, or--we won't mention the Marine Corps. We don't
want to get in trouble here--but that the Department of War,
Department of Defense has been a good player in this, or has it
all historically been the problem that most of us perceive it
to be?
Mr. Walker. I am also a student of history and I also have
responsibilities for auditor generals around the world, and so
it is not just the United States but it is also looking at
other countries. Defense Departments, War Departments, whatever
you want to call it--by the way, we used to call it War in the
past--have always been challenged from a financial and fiscal
standpoint, and frankly in part because, in general, they are
not held as accountable as other departments and agencies are.
I will tell you that one of the things that I have done in
recent years is I have looked to some of the other countries to
find out what their experiences have been and they typically
are about the last one to get their financial act together, the
Department of Defense or War or whatever you want to call it in
other countries, but most of them have.
For example, the United Kingdom has been able to achieve a
clean opinion on its financial statements for several years in
a row. That was not the case until recent years. So they
typically are a lag indicator and they have been a problem for
a long time.
Mr. Bilbray. Yes. Just an editorial note: they also at
almost exactly at that time abandoned their carrier and their
task force and their ability to project their military force
overseas extensively, but that does have an overall impact.
You know, Ms. Combs, OMB is talking about that they found
over $45 billion in 2004 in improper payments. What do you
think we can do to reduce those improper payments?
Ms. Combs. Well, we are currently involved in a number of
ways of reducing those improper payments already. One of the
things that we used the President's management agenda score
card for and we used the process of the score card is to hold
agencies accountable for reductions in these key strategic
areas that we know are going to make the biggest difference in
how successful their entire financial operations are.
One of the things that we are very, very pleased with is
the improper payments initiative. I think the improper payments
initiative starts out by looking at risk-susceptible programs,
and in this way we are able to take the highest-risk programs
in each of the departments and agencies and target those. So we
used some strategic ways of looking at who has the highest
levels of improper payments and what are some things we can do
within each one of those programs within each department.
We meet with those folks frequently. We have a lot of
engagement with our departments and agencies from the financial
management side of OMB. One of the things that we have found
that helps in eliminating improper payments is extra
verifications. I know Mr. Walker and I have talked about this.
We were able to talk about it earlier today, how pleased we are
with some of the various programs. HUD, for example, this year
just got off the high-risk list for two of their programs that
had been on the high-risk list since 1994. A lot of what goes
on in getting agencies off that high-risk list and reducing
improper payments is being sure that payments are going to the
right individuals and that payments to individuals where they
don't belong are removed. We find extra verification to be one
of the key elements that we use in reducing improper payments.
Mr. Bilbray. Thank you, Mr. Chairman. I know my time has
expired. I would like a followup question whenever it is
possible.
Mr. Towns. Thank you very much.
I now yield to the gentleman from Connecticut, Mr. Murphy.
Mr. Murphy. Thank you, Mr. Chairman.
I wanted to go back to the DOD for a moment. It is hard not
to, given the amount of time this subcommittee and full
committee has spent overseeing a lot of the funds spent through
DOD and I think have raised awareness in the public over the
money being spent through the DOD and State Department.
Mr. Walker, help me maybe zero in on the issue a little
bit. Are the issues within DOD system-wide, or are we talking
about specific departments, agencies, pieces of DOD that raise
greater issues than others?
Mr. Walker. Some entities are better than others in DOD,
but it is a department-wide problem. Just to put a little meat
on the bones, the Department has about 2,000 legacy non-
integrated information systems that have financial and other
management information in them that were created independently
by the different services, by the different DOD offices that
exist. They don't talk to each other. In many cases you have to
enter a 16-digit code for each transaction. It has to be
entered into multiple systems. That is just an example of the
problem.
One of the things that we are recommending is that, since
DOD has 15 of 26 high-risk areas on GAO's high-risk list of
which financial management is but one, we are recommending that
the Department create a new chief management official, a level
two official with a proven track record of success with a term
appointment to focus full-time on these longstanding and
systemic management problems.
Mr. Murphy. The FAIR plan, does that address some of these
questions of lack of interoperability?
Mr. Walker. That plan, along with their business systems
information plan, which is--you know, they have a business
transformation unit that is focusing more on the information
technology and the enterprise architecture. That, in
conjunction with that plan, is trying to take a look at these
systems.
Mr. Murphy. Mr. Chairman, just one last question.
Mr. Walker, I just want to point to one interesting piece
within your written testimony where you made a comment and said
that ``The managers within DOD lack access to the full range of
information--'' this is directly from your statement--``to the
full range of information needed to effectively manage day-to-
day operations.'' Just talk a little bit about what is behind
that concern.
Mr. Walker. Well, what is important to keep in mind is the
objective here is not just to get a clean opinion on your
financial statements, because all that says is that the numbers
are fairly presented in all material respects.
Mr. Murphy. Right.
Mr. Walker. You could have all kinds of economy,
efficiency, effectiveness problems and still get a clean
opinion on your financial statements. Ultimately what has to
happen is that you need systems and controls that will provide
timely, accurate, and useful financial and management
information to be able to make informed decisions day to day.
They don't even have systems and controls that will allow them
to be able to get an audit opinion once a year, much less
systems and controls that will allow them to have information.
For example, inventory. They don't know how much inventory
they have, nor necessarily what condition it is in or where it
is, which can cause them to continue to buy things where they
already have plenty of it.
They also can have a circumstance which we have reported on
where they are selling excess inventory for cents on the dollar
when they are buying it for a dollar.
Mr. Murphy. And obviously an inventory system, you know, if
you are in the business world, is one of the first things you
are going to invest in. On that example, what are the barriers
in DOD to having a basic system of inventory cataloging?
Mr. Walker. A lot of it has to do with outdated systems,
information systems, all independent systems--everybody has got
their own system--and ineffective controls. So that is
illustrative of the problem that they have in many areas.
Mr. Murphy. Good.
Thank you, Mr. Chairman.
Mr. Towns. Thank you very much.
Let me just come back to you, Mr. Walker, and actually, you
too, Dr. Combs. Each of you in your testimony mentioned
possible changes to the way the Government measures and audits
its assets and liabilities. We often hear questions about
whether we measure the right things and whether the auditing
method we use now matches the risk involved. Are we spending
too much money auditing low-risk items and not paying enough
attention to higher-risk items?
Mr. Walker. Well, let me, if I can, Mr. Chairman, address
two elements. One deals with financial reporting and the other
deals with auditing. I think my statement talks about both.
On financial reporting, I think we have to recognize that
we are not a private sector business. We are a sovereign
Nation. Therefore, we need to make sure that our financial
reporting recognizes that reality and that we are providing
financial information that is useful and relevant for the type
of entity that we are.
In some cases I think we need to think about whether or not
a traditional balance sheet makes sense for the Federal
Government. On the other hand, we need more fiscal
sustainability in intergenerational equity reporting, which is
not something you would see in the private sector, because if
we don't end up mending our ways we are going to mortgage the
future of our kids and grandkids something terrible. We need to
recognize that and we need to show that.
We also need more performance reporting. We don't have a
stock price. The U.S. Government doesn't have a stock price. We
don't have certain market proxies that can say how well we are
doing. So we need key national indicators and indicators that
can help us see how we are doing for a variety of reasons.
Now on the audit, audits by definition are supposed to be
focused on materiality. Materiality is both quantitative and
qualitative. You are supposed to focus your energy and efforts
based upon risk and based upon relevant materiality. So some of
that is already considered in how you are going about the
audit.
I do, however, think it is relevant, including for the
Department of Defense, to decide how many entities should they
seek to obtain an audit opinion on, because the more entities
you seek to obtain an audit opinion on, the more money it is
going to cost you, and therefore I think they need to step back
and say how many different entities should end up receiving an
audit opinion so that we can go about this in a way that will
achieve better transparency and accountability, but in a cost-
effective manner.
Ms. Combs. You know, I think one of the reasons we selected
the 45 day reporting time table was so that some day when we
have a consolidated audit for the Federal Government we could
do that within, let's say, 60 days, and that would be
consistent with what the private sector offers.
I think in order to think toward the future along those
lines, I know Mr. Walker and I agree that we have to be very,
very careful on how we use these reporting models, and we have
to recognize that the Federal Government has some unique needs,
and when we start consolidating agency and financial reporting
by agency into a consolidated report, we need to be looking now
at the current reporting model and to see if it really does
provide for reliable, transparent, user friendly kind of
financial statement.
Mr. Walker and I were talking right before the hearing how
we would very much like for the general public to know more and
to use more of the financial information that we provide.
Our office has fairly recently started what we call a
smarter accountability work group. We are working with chief
financial officers, along with members of the President's
Council on Integrity and Efficiency, the IGs, and this work
group is currently being charged with producing a white paper
on strategic directions that we might look at to look at how we
are actually doing our reporting. We look forward to sharing
that with a greater financial community and seeing if there are
some things that we can do that are, indeed, smarter and lead
to stronger and sustainable accountability for the Federal
Government.
Mr. Towns. Thank you very much.
Just before I yield to the ranking member, the Sarbanes-
Oxley Act required better internal controls and financial
reporting for public companies. Have the requirements of
Sarbanes-Oxley had any spill-over effect in the area of
Government accounting?
Mr. Walker. First, as you know, Mr. Chairman, Sarbanes-
Oxley applies to public companies. It doesn't apply to closely
held companies, it doesn't apply to not-for-profit entities,
and it certainly doesn't apply to the Federal Government, which
is a lot more than a not-for-profit. We are losing money big
time. So it doesn't apply.
One of the things that the JFMIP--the Joint Financial
Management Improvement Program Principles--have looked at--and
I am chairman of that group. It is the Secretary of the
Treasury, Director of OMB, Director of OPM, and myself as
Comptroller General of the United States--we have looked at
whether and to what extent some of the concepts of Sarbanes-
Oxley might make sense to apply to the Federal Government.
In some cases the answer is yes, in some cases the answer
is clearly no. In some cases, quite frankly, the Federal
Government was already ahead of the private sector. For
example, GAO has expressed opinions on the internal control
systems and financial management on the entities that we audit
well before Sarbanes-Oxley was passed. The independence
requirements for auditors, we had already modernized our
independence requirements before Sarbanes-Oxley was passed.
But there are still issues that we need to look at at the
principal level to determine whether or not they make sense for
the Federal Government.
Mr. Towns. OK. Thank you.
I yield to the ranking member, Congressman Bilbray.
Mr. Bilbray. Thank you.
I am sure neither one of you are old enough to have been
around back when the savings and loan assets were liquidated by
the Trust, the Land Trust, but I will tell you one thing that
really became obvious to somebody watching the people make
money off of the liquidation of the savings and loan assets was
that the American taxpayer didn't get their fair share out of
that. I saw people that were friends of mine making millions
and millions of dollars because the Federal Government
basically liquidated assets at 10 cents on the dollar, and
anybody that had enough money to be able to put together those
packages walked away with huge assets.
Why do I bring this up? I think that one of the biggest
concerns I have is I may not see those who are actually being
hurt, but I see money going or assets going to people who
really shouldn't be getting those assets from the Federal
Government. We don't talk too much about that. The guys,
millionaires made big millions off of savings and loan debacle.
Right now do we have any idea how much assets are going to
illegal immigrants within this country right now?
Mr. Walker. I don't have a number that I can give you, Mr.
Bilbray. I will give you three examples of areas of concern
that we have at GAO along the lines of what you are talking
about.
No. 1, I already mentioned where the Defense Department
sells things for cents on the dollar when it is buying it for a
dollar on a relative basis. Another example is we have huge
excess facilities in the Federal Government. It is on our high-
risk list. We are going to need to rationalize that and we are
going to need to sell off a lot of that. We need to make sure
we learn from the lessons of the past and get a good deal for
the taxpayers. The third example is the Federal Government
owns, for the benefit of American citizens, a lot of mineral
rights and a lot of lands. And in many cases we are not getting
fair value for those mineral rights.
Mr. Bilbray. Again, I echo that, too.
Mr. Chairman, something to remember. I come from a Navy
town, but for lands that the U.S. Government has bought, we not
only have a right, we have a responsibility to put that back on
the fair market and get a fair return for it and not just make
an in-kind gift to whatever political subdivision is lined up
to take it.
You know, in San Diego we had some unique situations where
the city had actually donated land for training facilities on
the condition it be used for it, so that you should transfer
back. But that is so rare that it is astonishing that you have
huge tracts of land that are worth billions and billions of
dollars. Monterey would be a good example. Don't tell Sam Farr
I said this, but huge assets being thrown away over there.
My concern, Ms. Combs, you were talking about
identifications. You know, I am looking at some of my
colleagues talking about giving amnesty to 12 million illegals,
and I don't mean to hit on this, but it is estimated that will
be about 60 million people that will be a $50 billion hit on
our Treasury every year.
Your mention about documentation and issues like that, was
that referring only to contractors, or is that general for
recipients across the board?
Ms. Combs. No, sir. I was also referring to recipients.
Most Federal benefit programs, as I understand it, are required
by statute to verify the immigration status of non-citizens
through SAVE, the Save Program, under the U.S. Citizenship and
Immigration Services. I understand this to be a Web-based
system that allows agencies to electronically verify
immigration status against USCIS data bases to help ensure that
only eligible non-citizens receive Federal, State, or local
benefits.
Now, I will say we also know that there are some benefit
programs administered by State agencies, for example, that do
permit individuals to self-declare their citizenship status.
Mr. Bilbray. Ms. Combs, let me interrupt. We have
contracts. We are giving grants to a group like Acorn that is
actively recruiting people illegally in the country to get home
loans based on the fact that they are under-served, under their
grant. So a lot of these things I don't think that we are being
really open about the fact that not only this is going on--and
I appreciate the fact that you are saying let's recognize it--
we are, be it for political or some other reason, we are
actively giving grants to groups that are openly, publicly
telling the news media, yes, we are providing loans to these
people. They are here. We don't care if they are illegal. We
are going to provide these services to them.
Go ahead, Mr. Walker.
Mr. Walker. If I can, let me mention a couple of things.
One, on the immigration challenge, two dimensions. From a
practical standpoint, I don't think you are really going to get
control of the immigration problem until we start enforcing our
labor laws. The fact is that the average daily wage in Mexico
for an unskilled worker is $4.50.
Mr. Bilbray. Mr. Walker, I totally agree. That is why we
have Silvestre Reyes' bill out there to make it simple so we
can crack down on employers.
Mr. Walker. Right. I mean, you know, if you don't do that
you are not going to choke it off. But let me mention a couple
other things.
No. 1, Social Security and Medicare, I get questions a lot
saying, gee, can't we solve Social Security and Medicare's
problems by just opening up immigration, allowing more
immigration? The answer is no, you can't come close to doing
that.
There is the key: when you are talking about immigration,
you are talking about economic growth, and if you are talking
about the fiscal impact on the Federal Government, just for
that purpose, the key is what are the average skills and
knowledge of the individuals involved. If the average skills
and knowledge are above average for our country, it will be a
net plus over time. If they are below average, it will be a net
minus over time. That is what we need to understand, because in
our economy we have to compete based on skills, knowledge,
innovation, productivity, quality. We can't compete on wages.
Mr. Bilbray. So in other words, if it was such a great deal
for the economy and for the budget, you would be coming here
and recommending that we, to create more poor people to help
the economy, we would cut all our funding to these anti-poverty
programs so we can generate our own domestic supply, rather
than have to import.
Mr. Walker. I will have to think about that, Mr. Bilbray.
Mr. Bilbray. The point being is that entry level laborers
do not pay the expense of the minimum standard that we allow
everyone to live by in this country.
Mr. Walker. And if you also look at the nature of Social
Security and Medicare, by definition they provide more and take
less from people who are less well off.
Mr. Bilbray. Mr. Chairman, I only bring this up because
California is at a crisis now to where even Governor
Schwarzenegger, an immigrant, who wants to provide health care
to illegal immigrant kids has said we have to cutoff welfare to
the children of the people, U.S. citizens, at 5 years, cutoff
welfare, because we can't afford to continue to pay people to
stay here illegally just because their children were born here.
I mean, this is Schwarzenegger saying the budget is forcing us
to have to do things that we never thought we would ever live
to do.
Mr. Walker. Can I piggyback real quick, Mr. Chairman, on
that? I apologize.
You know, we have a lot of policies that are based on the
past, and one of the policies that I think we need to
reconsider is we have a policy that says that if you are born
in the United States you are automatically a citizen. Now, when
was that created? A long time ago when it was a long journey
where one risked life and limb in order to come to the United
States, and when we were seeking actively to try to populate
this great continent. Yet, we still haven't looked to try to
modernize that, and I think that is something that has to be on
the table.
There is a difference between a pathway to citizenship and
a pathway to legal status.
Mr. Bilbray. I appreciate it, Mr. Walker. Just to let you
know, it was late 1940's that we allowed people who were not
permanent resident aliens to get that automatic citizenship.
Guest workers didn't qualify in those days.
Mr. Towns. I am going to have to stop the citizenship
debate and move to my colleague from Vermont.
Mr. Welch. Thank you, Mr. Chairman.
Mr. Walker, I want to ask about some accounting issues
across Federal departments and also between different agencies
within the same department. GAO, as you know, identified this
as a material weakness, and on our second panel we are going to
hear how that problem has been for DHS.
From your perspective, what is the main problem that
doesn't allow agencies to do what seems to be a straightforward
thing; namely, match up their accounts? Is that a use of
different accounting definitions, technology, poor
communication? What's the deal?
Mr. Walker. It is a combination of factors. Any time you
deal with, you know, an inter-entity transaction, it means that
both sides have to have their act together with regard to
systems and controls.
Mr. Welch. So do you and OMB have any recommendations for
standardizing the transactions so that agencies can clear each
other's accounts better?
Mr. Walker. Well, you know, one of the things that I think
we need to be thinking about is something that Brazil has
already implemented, and that is Brazil had very similar
problems to what we had, and they ended up going to a
standardized financial management system with standard
definitions and specifications with regard to information
systems on financial management. I mean, my gut feeling is that
if Brazil can do it, we can do it, although that is clearly a
multi-year effort.
Mr. Welch. Thank you.
Mr. Towns. Thank you very much. No further questions. The
first panel is actually being discharged at this time. Thank
you very much for your testimony. We really appreciate your
coming and sharing with us. We look forward to continuing to
work with you.
Mr. Walker. Thank you.
Ms. Combs. Thank you, Mr. Chairman.
Mr. Walker. If I can say for the record, Mr. Chairman,
believe it or not, Mr. Bilbray, I have not had one complaint
about stating the facts and speaking the truth on financial and
fiscal issues and many, many compliments on both sides of the
aisle. Thank you.
Mr. Towns. No doubt about it. You tell it like it is, and I
like that. We eventually will get the message. Sometimes,
though, some people catch on a lot faster than others.
Sometimes it takes some of us 2\1/2\ hours to watch 60 Minutes.
But that doesn't mean we can't watch it; it just takes us
longer.
Mr. Bilbray. Actually, Mr. Walker, after the testimony
today, we may give you an honorary membership in the
Immigration Caucus. OK?
Mr. Towns. I would like to welcome our second panel. As
with the first panel, it is our committee policy that witnesses
are sworn in, so please rise and raise your right hands.
[Witnesses sworn.]
Mr. Towns. Let the record reflect that they all answered in
the affirmative.
Let me briefly introduce each witness.
James Campbell is Acting Chief Financial Officer for the
Department of Energy. He is a Certified Public Accountant and
has over 30 years of financial management experience in both
the private sector and the Federal Government, with the last 28
years in the Department of Energy in various financial
management capacities.
William Maharay is Deputy Inspector General for the Office
of Audit Services at the Department of Energy. He has more than
25 years with the Department, and he oversees the financial
statement audit at the Department of Energy.
David L. Norquist is Chief Financial Officer at the
Department of Homeland Security. Mr. Norquist was leader in the
financial management at the Department of Defense and served as
a professional staff member here on Capitol Hill with the House
Appropriations Committee.
Mr. James Taylor is Deputy Inspector General at the
Department of Homeland Security. He, too, has extensive
experience as a Federal financial manager, and in his current
position oversees financial auditing at DHS.
Your entire statement, gentlemen, will be in the record. I
would like to ask you to try to summarize within the period of
5 minutes to allow time for our questions from the panel.
Why don't we start with you, Mr. Campbell, and come right
down the line.
STATEMENTS OF JAMES T. CAMPBELL, ACTING CHIEF FINANCIAL
OFFICER, U.S. DEPARTMENT OF ENERGY; WILLIAM MAHARAY, DEPUTY
INSPECTOR GENERAL OF AUDIT SERVICES, U.S. DEPARTMENT OF ENERGY;
DAVID NORQUIST, CHIEF FINANCIAL OFFICER, U.S. DEPARTMENT OF
HOMELAND SECURITY; AND JAMES L. TAYLOR, DEPUTY INSPECTOR
GENERAL, U.S. DEPARTMENT OF HOMELAND SECURITY
STATEMENT OF JAMES T. CAMPBELL
Mr. Campbell. Thank you, Mr. Chairman and members of the
subcommittee. I appreciate the opportunity to address you today
to describe the progress we are making at the Department of
Energy in overcoming the financial management challenges that
have caused us to lose our unqualified audit opinion on the
fiscal year 2005 and 2006 financial statements.
We are working hard to restore our financial management
credibility, and we expect this progress to be reflected in the
audit of the fiscal year 2007 consolidated financial
statements.
I understand the subcommittee is interested in the events
and conditions surrounding our fiscal year 2006 audit opinion,
but I would not be forthright if I did not disclose the
conditions that occurred in fiscal year 2005 that led to that
2006 audit opinion.
For the record, the Department received unqualified audit
opinions on its financial statements for 6 consecutive years,
from fiscal years 1999 through 2004. However, in fiscal year
2005 the Department implemented two initiatives to achieve
long-term benefits that profoundly altered the accounting
operating environment.
First, at the beginning of the fiscal year the Department
consolidated and centralized its financial services operations
to gain efficiencies that were identified through a competitive
sourcing study that was run by the in-house team.
Second, 6 months later we changed most of the Department's
accounting processes and deployed a non-customized, federally
certified commercial off-the-shelf financial system. In
hindsight, the Department might have been better served by
implementing these business transformations sequentially.
Concurrent implementation presented short-term management
challenges which prevented the Department from producing
timely, auditable financial statements and, consequently, our
auditors reported a material weakness in internal control
related to financial control and reporting and issued a
disclaimer of opinion on the fiscal year 2005 financial
statements.
This disclaimer led to the development and implementation
of a 2-year plan for regaining our unqualified audit opinion. A
2-year recovery was required since the disclaimer on the ending
fiscal year 2005 balances automatically became a disclaimer on
the fiscal year 2006 opening balances. Once the Department
receives an unqualified opinion on its balance sheet, it will
then have an audit-acceptable opening balance on which to base
the opinion on the rest of the financial statements. The
earliest this can be achieved is on the fiscal year 2007
statements.
The Department's senior leadership took the audit outcome
very seriously. The Secretary and the Deputy Secretary made it
perfectly clear that the financial problems we experienced were
not solely owned by the Office of the Chief Financial Officer
but rather by every element of the Department, and called on
the entire senior leadership team to engage in solving this
serious management challenge.
In October 2005 the chief financial officer established a
multi-disciplinary team of financial professionals from both
headquarters and our field institutions to identify the root
cause of these management challenges and to recommend a path
for it. In December of that year, the team presented its
results to the Deputy Secretary, and he accepted the
recommendations without modification. In short, 30 issues were
identified in 3 broad categories: people, processes, and
technology. It was originally assumed that the root cause was
the new accounting system, but the analysis revealed most
problems were related to people and processes.
The overriding recommendations centered on the need for
clarifying financial management roles and responsibilities,
redefining business processes to reflect the Department's new
accounting environment, and gaining a greater understanding of
the new system's functionality and reporting capabilities.
From February to June 2006, the Office of Inspector General
initiated a series of reviews to determine whether the
Department's plan and completed corrective actions adequately
addressed critical control weaknesses in the financial
management and reporting process. While the reviews were
substantially less in scope than the financial statement audit,
they provided a clear indication for the Department's senior
leadership of the progress on our remediation.
Fiscal year 2006 was the first full year present with our
new core financial system, and the many issues and challenges
contained in our remediation plan commanded considerable
attention and staff resources throughout the year. While the
financial statement audit ORs were only engaged to issue an
opinion on our 2006 balance sheet because of the aforementioned
opening balance issues, the audit did cover the entire scope of
our financial operations.
The audit opinion on the balance sheet was upgraded from a
disclaimer opinion to a qualified opinion, which is a major
step closer to us achieving the goal of an unqualified opinion
in 2007. The qualification was due to concerns relating to the
Department's accounting and reporting for obligations and
undelivered orders.
As we progressed into 2006, the senior leadership continued
to provide strong direction and support for addressing these
issues preventing us from reaching our goals. A task force was
established, a plan was developed and executed to correct the
problems with obligations and undelivered orders. The planned
actions included: correcting abnormal balances, clarifying
procedures, and performing a comprehensive reconciliation of
about 1,200 contracts comprising over 95 percent of our
September 30, 2006, undelivered orders balance.
This phase of the remediation is now complete. The auditors
are currently retesting the ending fiscal year 2006 balances,
and we are optimistic, based on the work we have performed,
that this audit will confirm the propriety of our undelivered
orders balance, clear the qualification on the ending fiscal
year 2006 balances, setting the stage for regaining an
unqualified audit opinion on all financial statements this
fiscal year.
In summary, implementing a core financial system,
establishing and operating under a new chart of accounts, and
reorganizing financial services operations are never easy
undertakings. Doing them in the same fiscal year created a
major management challenge for the Department. Decisions to
implement these initiatives were made with the best of
intentions, and, while we did not fully anticipate all the
challenges that we encountered, the Department's response to
these challenges has been aggressive, effective, and has
positioned us for improved financial management.
Successful completion of these actions would not have been
possible without a strong partnership with the Office of
Inspector General and without the outstanding dedication and
professionalism of the entire CFO community.
We look forward to regaining our unqualified audit opinion
this fiscal year and restoring financial management credibility
with our customers and our stakeholders.
This concludes my opening statement, and I would be pleased
to respond to any questions you or the subcommittee may have,
sir.
[The prepared statement of Mr. Campbell follows:]
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Mr. Towns. Thank you very much, Mr. Campbell.
STATEMENT OF WILLIAM MAHARAY
Mr. Maharay. Mr. Chairman and members of the subcommittee,
I am pleased to be here at your request to testify on issues
associated with the 2005 and 2006 audits of the Department of
Energy's financial statements. Over the years, the Office of
Inspector General has conducted and overseen a number of
reviews of the accounting and financial operations of the
Department, addressing issues such as accounting information
systems, financial statement reporting, and remediation
efforts.
Prior to 2005, as Mr. Campbell has indicated, the agency
received unqualified audit opinions on its financial
statements. This changed when the Department embarked on a mid-
year implementation of a new accounting system known as STARS.
The Department undertook the system development effort during a
time when it was also reorganizing its financial services
organization. The reorganization resulted in the consolidation
of financial recording and reporting processes previously
performed at many separate locations. The centralization caused
a significant loss of skilled personnel and changed the manner
in which the Department's accounting system interfaced with its
major contractors and ancillary systems.
Because of concerns with completing these major initiatives
simultaneously, my office performed two pre-implementation
reviews of STARS. The first of these reviews identified a
number of personnel and internal control issues that increased
the likelihood the Department would not be prepared to launch a
fully capable system as scheduled in October 2004. Based upon
our review and other factors, the Department decided to delay
implementation until mid-year April 2005.
The second pre-implementation review completed by my office
in January 2005 cautioned, ``the planned mid-year
implementation of STARS poses special challenges that could
impact successful deployment of the system.'' In particular, we
noted: one, two separate accounting systems would have to be
used to produce the consolidated financial systems; two,
accelerated reporting schedule would provide only a limited
time to correct implementation problems; and, three, the burden
of auditing two separate systems would severely stress both
accounting and auditing resources.
The Department decided to move forward with the mid-year
implementation in April 2005. Soon thereafter, our audit work
revealed a significant number of issues in the new system and
accounting operations. In particular, the audit identified
issues with data conversion and with developing new accounting
processes and reports. These problems detracted from the
ability of the accounting staff to complete routine accounting
reconciliations and impacted the ability of Department
officials to monitor and control their budgets.
Despite significant effort by senior leadership, financial
managers, and staff, the Department was unable to correct many
of these problems by year-end. Consequently, the independent
public accounting firm employed by the Office of the Inspector
General issued a disclaimer of opinion on the Department's 2005
financial statements and reported a material weakness in
financial management and reporting controls.
A previously identified reportable condition on
unclassified information and security systems continued from
prior years.
Given the extent and significance of the problems
identified, we initiated a series of reviews in January 2006,
to determine whether the Department's planned corrective action
would address critical financial management weaknesses. Our
review found problems with timing and completeness to plan
corrective actions, recording of obligations, and completing
key reconciliations.
The Office of Chief Financial Officer agreed with our
suggestion of realigning resources and refocused its efforts on
financial management issues.
When conducting our 2006 audit of the agency's balance
sheet, we found the Department had made significant progress in
addressing deficiencies that surfaced in the prior year.
However, actions needed on a number of issues associated with
obligations and undelivered orders had not been completed,
leading to a material weakness in internal controls and a
qualified opinion on the 2006 audit.
Additionally, problems with unclassified system security
continued, and a new reportable condition related to
performance measure was identified.
Since the issuance of our 2006 financial statement audit,
we have coordinated with the Department and have begun another
focused review on actions to remediate problems associated with
obligation on undelivered orders. Should this effort be
successful and no new material weaknesses emerge, the
Department would be in a position to obtain an unqualified
opinion on the 2007 audit.
In summary, we believe that strong financial management is
essential to the Department. Based upon our experience, the
Department's senior leadership, to include both the Secretary
and the Deputy Secretary, is committed to maintaining strong
controls and has been fully invested in resolving weaknesses.
We will continue to assist in that effort, as we have in the
past, by devoting a significant portion of our resources to
providing independent assessments of the accounting and
financial management operation of the Department.
Thank you, Mr. Chairman and members of the subcommittee.
That concludes my statement.
[The prepared statement of Mr. Maharay follows:]
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Mr. Towns. Thank you very much.
Mr. Norquist.
STATEMENT OF DAVID NORQUIST
Mr. Norquist. Thank you, Chairman Towns, Ranking Member
Bilbray, and members of the subcommittee for this opportunity
to testify before you today on the results of the fiscal year
2006 financial audit of the Department of Homeland Security.
I also want to thank you for House Resolution 134. Your
statement of support and recognition for the DHS work force is
greatly appreciated.
Regarding the audit, DHS received a disclaimer of opinion
on its fiscal year 2005 and 2006 financial statement. Secretary
Chertoff and I are committed to correcting this and to
achieving the intended outcome of the Department of Homeland
Security Financial Accountability Act. To this end, the
Department has put into place corrective action plans to
improve our financial management process and to address
material weakness conditions such as those involving inter-
agency and inter-departmental balances.
Looking back, substantial progress was achieved in our 2006
financial statement audit. Two components, U.S. Customs and
Border Protection and the Federal Law Enforcement Training
Center, received favorable audit outcomes. CBP obtained an
unqualified opinion on its financial statement, and FLETC
obtained an unqualified opinion on its first ever balance sheet
audit.
Significant progress has also been made in reducing
conditions that comprise the Department's material weakness
structure. For example, most significantly, U.S. Immigration
and Customs Enforcement eliminated five of its seven component
level material weakness conditions.
In 2005, our auditors had identified inter-agency and
inter-departmental accounting as a material weakness condition.
The Department made progress on this front in 2006, eliminating
inter-agency balances as an auditor-identified weakness.
We are proud of this progress, but much remains to be done.
When I testified before this committee in September, I outlined
a series of initiatives I intended to implement over the next
year. I am pleased to report to you today that these efforts
are well underway. I will focus on one that is of particular
relevance to the audit.
We discussed creating a Department-wide corrective action
plan to address the material weaknesses. That is done. Mr.
Chairman, I brought you a copy of it, as well. This is the
Internal Control Over Financial Reporting Playbook that
outlines our strategy and process to resolve material
weaknesses and build management assurances. Many of our
material weaknesses were inherited and they are longstanding
challenges. These challenges will not be solved in a single
step, but the ICOFR Playbook details the path forward through
near and long-term fixes.
But we are not stopping at simply fixing what the auditor
finds. Our Playbook has two tracks. The first track includes
corrective actions for weaknesses identified by the auditors,
such as fund balance with Treasury or inter-governmental
balances. But the Playbook also includes a second track, where
we examine and test processes where no weakness was
identified--this is often called the A-123 process--because our
management needs to make affirmative assurances that the
controls are effective, not simply noting that the auditors
couldn't find anything.
I appreciate the support we have received from our Office
of the Inspector General as we developed the Playbook. Through
performance audits, they have provided timely feedback on our
corrective action plans, and I look forward to their continued
independent advice and essential cooperation.
DHS has made progress since our last hearing, and we are on
track to make more progress this year, as well.
I appreciate the support we have received from the
Congress, and particularly this subcommittee. Thank you for
your leadership and your continued support for the Department
of Homeland Security.
[The prepared statement of Mr. Norquist follows:]
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Mr. Towns. Thank you very much, Mr. Norquist.
Mr. Taylor.
STATEMENT OF JAMES TAYLOR
Mr. Taylor. Thank you, Chairman Towns, Mr. Bilbray, I am
Jim Taylor. I am the Deputy IG at Homeland Security, and I
appreciate the opportunity to discuss today the status of
financial management at DHS and efforts to implement the
Department of Homeland Security Financial Accountability Act.
The Office of the Inspector General partners with the
Secretary of Homeland Security and his executive staff to
ensure that the Department accomplishes its mission in the most
effective, efficient, and economic manner possible. Our goal is
to provide independent, objective information and identify
issues and opportunities for improvements in financial
management and other areas.
Strong financial management and accountability are
essential to the achievement of DHS' mission. The
Accountability Act recognizes this and has very specific
requirements with respect to internal controls over financial
reporting, by requiring the Secretary to include in DHS'
performance and accountability report an assertion of internal
control over financial reporting.
DHS met this requirement in both 2005 and 2006, with the
Secretary asserting that the Department was unable to provide
reasonable assurance that internal control over financial
reporting was effective.
The act further requires the Secretary to include an audit
opinion on the Department's internal controls over financial
reporting in DHS' accountability report beginning in fiscal
year 2006. The Department met this requirement, as well, with
the Inspector General issuing a disclaimer opinion on the audit
of the Department's internal control of financial reporting.
To promote internal control improvements, the Office of the
Inspector General has gone beyond simply issuing these
opinions. Working closely with the CFO Office, we have
conducted a series of performance audits that focus on the
Department's corrective action plans to address internal
control weaknesses. Our objective was to measure the
Department's progress in preparing well-developed corrective
action plans to support internal control improvements.
We provided recommendations to the CFO to strengthen these
plans as they were being developed. We will continue with this
effort in 2007.
For 2006, the financial management within the Department
continued to falter, however. The department was, again, able
to receive an opinion on its financial statements, and 10
material weaknesses were recorded for the 3rd straight year.
KPMG, under contract with the Office of the Inspector General,
issued a disclaimer of opinion. The reasons for this disclaimer
included management at the Coast Guard and TSA were unable to
represent that their balance sheets, as of September 30, 2006,
were fairly stated in conformity with U.S. generally accepted
accounting principles. The office of the CFO, ICE, and FEMA
were unable to support the accuracy of certain accounts, and
the DHS' Office of Financial Management was unable to reconcile
inter-governmental transactions and balances with other Federal
trading partners totaling approximately $3.5 billion in 2006
and $1.5 billion in 2005.
The Department's 10 material weaknesses ranged from
financial management oversight and reporting at the Department
level to controls surrounding the recording of individual
account balances within DHS bureaus.
Our four performance audits reports issued between July
2006, and February 2007, assessed the effectiveness of DHS'
corrective action plans to address internal controls
weaknesses. These audits focused on the corrective action plans
at Department level, as well as at the Coast Guard and ICE,
given their importance to the overall success of the
Department.
We identified weaknesses related to financial management
oversight and financial reporting relating primarily to
resource capabilities within the Office of the CFO at Coast
Guard, whose activities impact virtually every one of DHS'
material weaknesses. Our primary recommendations are for the
Coast Guard to improve its corrective action plans by
performing a thorough root cause analysis of weaknesses and
develop a detailed list of tasks and milestones based upon this
analysis.
A positive development in 2006 was at the Immigration and
Customs Enforcement. ICE began its corrective action planning
process early and was able to close out 37 of 49 weaknesses
identified during the 2005 financial statement audit, including
material weaknesses relating to fund balance at Treasury. It is
also evident that senior leadership at ICE are actively engaged
in developing overall financial management strategy, corrective
action plans, and developing systems to monitor overall
internal control improvements.
Additionally, ICE senior leadership has set a positive tone
for financial management improvements and actively monitors
progress. However, the Federal Protection Service and ICE have
encountered problems during the financial management transition
that they are still working to resolve. In addition to
inadequate funding, poor administrative support for FPS has
been a transition to DHS.
In October 2006, it was reported the FPS was not paying
invoices for its contract guard services nationwide in a timely
manner resulted in a violation of the Prompt Payment Act,
largely due to systems problems. Of the 25,557 invoices paid
between October 1, 2004, and November 2005, 88 percent were not
paid within 30 days, as required by the Prompt Payment Act.
This resulted in over $1.2 million in interest penalties. This
is largely due to problems of transition from the GSA financial
management system to the ICE Federal financial management
system.
In conclusion, Mr. Chairman, we feel that there has
recently been significant progress at DHS under the CFO's
leadership, particularly in developing strategies and the
Playbook with specific milestones to improve financial
management throughout the Department. The CFO has initiated
efforts to address staffing and skills limitations and
identified a process to maintain senior management focus on
achieving the milestones identified. However, the Department
has not realized the fruits of these efforts to date, and it
remains largely at the same place in terms of financial
management as it was when it was first created, with financial
systems and processes so in need of corrective actions that we
cannot rely on the information they produce. It will take years
of focused effort and committed resources to successfully
address these issues.
We intend to continue taking a corrective and engaged
approach in collaboration with the CFO to monitor the financial
management improvement efforts, and we look forward to working
with the Department and the Secretary, as well as with
Congress.
Mr. Chairman, this concludes my prepared remarks. I would
be happy to answer any questions you or the subcommittee may
have. Thank you.
[The prepared statement of Mr. Taylor follows:]
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Mr. Towns. Thank you very much, Mr. Taylor.
Let me begin. I pose this question to both DOE and DHS.
After DOE received a disclaimer of opinion in its 2005
financial statements, the Secretary and Deputy Secretary noted
that the agency's financial problems were not solely related to
the inefficiencies at the CFO level, but rather it resulted
from the Department-wide inefficiencies. Would you both agree
with that assessment? In other words, would you agree that a
system-wide effort is necessary to direct the financial
management?
Mr. Campbell. Sir, I think, as I recall, the Secretary said
that it was the responsibility of the entire leadership team to
participate in the resolution of this significant management
challenge that was presented as a result of audited financial
statements, and we have been doing that religiously for the
last year and a half. This is a subject at the Secretary's
leadership meetings every other week in terms of briefing the
senior leadership team on our progress.
Part of the reason why this is a broader responsibility
than just the CFOs is the resources across the Department of
Energy report through the Assistant Secretarial organizations,
and therefore there is a line responsibility from the Assistant
Secretaries to those field offices and those resources, and, if
you will, a dotted line from the CFO to the field CFOs.
I think that the reason we have been as successful in
making the progress we have is because everyone has
participated in their various roles in our remediation efforts.
Mr. Maharay. I don't disagree with a thing Mr. Campbell
said, but let me give some background information. When we
issued our disclaimer, we indicated that the reporting system
the Department used to consolidate information was not
sufficient to allow us to state the accounts were properly
stated; however, historically the Department has had a strong
financial management system, particularly using contractors
reporting into the Department's system. Throughout our audit
work those accounting system contractor systems reporting into
the Department's general ledger system, we have found basically
no problems with those.
So it is basically a top level reporting problem that needs
to be solved, and I believe the Department is presently doing
that.
Mr. Norquist. Mr. Chairman, I completely agree that this is
not solely at the CFO level. In fact, if you attempt to only
address it at that level you won't be successful.
Our experience has been, for example, that ICE, which was
very successful last year, Assistant Secretary Julie Myers, the
head of the entire organization, took a very active leadership
role, supported her CFO, but recognized that to eliminate the
weaknesses she needed the participation of all of the different
parts.
Likewise, as we put together our corrective action plans,
we reached out to have all the components put together. I mean,
there are assets in here. It is not simply reporting financial
transactions handled by a CFO. There is the value of assets,
there is operations, supplies, things that are managed and run
by other parts of the Department. It is, after all, the
Department's financial statement, not simply the CFO's. So only
by reaching out and including that broader organization and
getting that strong senior leadership support can you be
successful in this area, so I think you are exactly right on
this.
Mr. Taylor. Mr. Chairman, I have been on both sides of
this. I spent most of my career on the CFO side at different
departments and agencies. The places where you are most
successful, the leadership is at the top. The CFO cannot
succeed in making the changes required to get clean audit
opinions, to implement financial systems, without the direct
support and very vocal support of senior management, so I
totally agree.
Mr. Towns. Mr. Norquist, you mentioned the corrective
action plan. What does that really entail?
Mr. Norquist. The corrective action plan, to begin with an
effective corrective action plan you go back to identify what
is the root cause. One of the signs of an ineffective
corrective action plan is they simply take the specific
incident the auditor found and said we are going to fix that.
So what we did to build it was we had workshops and we said
what is the underlying reason. You know, it is like if you find
that someone comes in and says there are bees in your attic and
you just kill the 10 bees, you are not going to be surprised
that they are back. You have to find the nest. You have to go
after the root cause of the problem.
So you go through that, and then you say what do we need to
fix. Are there policies that are missing? Do people need to be
hired and trained? Does the system not record the data at the
right level? In order to be effective, the corrective action
plan has to clearly lay out who is going to do what by when,
and so you have milestones, you have accountable officials, and
then behind it you have a senior leader who expects to know on
a regular basis where you stand on that corrective action plan
so they can help by holding people accountable.
I think those are the key components. What we have is we
have laid out our corrective action plan to address the
material weaknesses identified by the auditors, laid out the
milestones we intend to follow, as well as the actions we are
going to take where they are beyond where the material
weaknesses are to be able to satisfy that requirement for
management assurance that the controls are effective.
Mr. Towns. Thank you very much.
I yield to Mr. Bilbray.
Mr. Bilbray. Thank you, Mr. Chairman.
Mr. Chairman, I think the one thing we can work together on
this issue, and it is huge, but we can agree that this is a
problem that has been around a long time. It seems like no
matter what the party affiliation of the executive branch, it
is a problem that we confront.
Gentlemen, in all fairness, you know, as a former mayor I
look at this and pretty well figure people would be going to
jail in California with the kind of reports I have seen come
down, but then, again, as a mayor I didn't have 500 prima
donnas running around Capital Hill worried more about votes
than balancing the budget, and we weren't exchanging the
executive branch every few years just to keep the system
moving.
In all fairness, I think that the challenge really runs a
lot deeper than any of us really understand. The Founding
Fathers developed a separate and conflicting process, and now
we start understanding more why they didn't want us to have a
whole lot of money to shift around. I think it has become
obvious.
How long have you guys been with your departments?
Mr. Campbell. I have been with the Department of Energy for
29 years, sir.
Mr. Maharay. For 28 years, sir.
Mr. Norquist. I was confirmed in June of last year.
Mr. Taylor. I have been Deputy IG at DHS for a year and a
half. I spent 20 years at FEMA earlier in my career.
Mr. Bilbray. OK. Well, you are on the borderline. You and
Norquist get over. The rest of you are going to line up on the
gallows.
Mr. Norquist. In that case, I just got there, sir.
[Laughter.]
Mr. Bilbray. The issue really comes down to a little word
that you use, and that is accountability. Raising degree of
concern, raising the urgency, holding people accountable, that
really does matter. I guess it really starts with us here on
this subcommittee to get to the committee and take it to
Congress. It matters. It damn well matters.
I think that we all agree that we don't want to go around
the world setting the rest of the world free and then enslaving
our children to a debt. We don't want to ask our children to
have to decide between feeding their children or throwing us
out into the cold when we are senior citizens.
How do we make the system more accountable, though, under
the Civil Service structure that we have? What is the ability
at your level or below you, let alone above you, to make people
more accountable? Let's just say how do we initiate a
sensitivity program to the fact that the budget really does
matter and expenditure accountability really is an important
thing?
Mr. Norquist. I think there are a number of ways----
Mr. Bilbray. The guy who doesn't have job security yet.
Mr. Norquist. A couple of ways. The first is in performance
standards. One of the effective things to do is put specific
accomplishments in people's performance standards so when their
job is up for review, when they are looking at what sort of
bonus or whether rewards or compensations, it is specifically
addressed. Did they, in fact, accomplish the goals that were
laid out for them? I think that is absolutely essential.
The other one is people have to be trained to understand
what they are accountable for. In DHS, for example, one of the
initiatives we started was a training program for every new
hire there in financial management, so whether you are hired by
ICE or CVP or the Coast Guard, we had a class this week--it was
the first one--where we are going to take all those new hires
in DC and we are training them this week, and one of the things
we are covering is fiscal law and internal controls. Everyone
out there who calls themselves a member of the financial
community should recognize a potential Anti-Deficiency Act
violation, should recognize a breakdown in controls, internal
controls, and should understand it is up to them to stand up
and flag it.
Often the types of weaknesses you are after is because
somebody who came in who was properly trained looks at a
process and says this doesn't seem to match with what I was
trained to do and raises the alarm. That is what we need to
make sure. And by training the right folks that we have to look
for that, we can increase our ability to enforce the rules and
to make sure people are accountable for how they spend
taxpayers' money.
Mr. Bilbray. Does that accountability have the ability to
go down through the system? I know the Commandant, we can nail
the Commandant of the Coast Guard, but when it comes down to
it, how far down can he then make accountability and is
everyone down the line basically vulnerable to repercussions?
Or is there a threshold we would reach at mid-management that
the defense system, basically the Civil Service system, is
protecting not just good, hard-working people, but also those
that should be held accountable?
Mr. Taylor. There is absolutely some of that, but there is
the ability, if you have defined the requirements, to hold
people accountable at much lower levels, rather than saying the
accountability is only at the Commandant level or at the
Secretarial level or the CFO level, that you have components
and you have managers who need to accept responsibility for
their piece of the activity.
I think it goes beyond that, though, sir. I think that
management has to recognize that financial management, itself,
and managing the fiduciary, taking care of your fiduciary
responsibilities is not a CFO function. It is a management
function. Every manager who runs every program should be
directly responsible and accountable. That is when things start
changing.
Mr. Bilbray. I appreciate that. You guys know where the
term decimation came from?
Mr. Norquist. No, sir.
Mr. Maharay. No, sir.
Mr. Bilbray. Anybody a history major?
Mr. Norquist. Kill off 1 in 10? Is that it?
Mr. Bilbray. That is it.
Mr. Norquist. If they lose a battle?
Mr. Bilbray. Actually, if they turn it around or if they
didn't show bravery, if they did not do their job, 1 in 10 was
chosen by lot and then the other 9 beat him to death. I am not
proposing that for bureaucracy, but, looking at this debt, it
may be one of those things. Rome had to do it to save
themselves from the invasion by Hannibal.
We may be wanting to save our grandchildren from the debt.
I will just tell you that we really need to have a degree of
urgency brought right down to the rank and file troops to
understand they have a vested interest in this.
In city government and county government you tend to start
laying people off when you reach these kind of reports. We
haven't done that at the Federal Government, and maybe that is
one of those things we need to talk about is actually a fiscal
decimation, 1 in 10 down the line.
Thank you very much. On that bright subject, I will yield
back.
Mr. Towns. Let me talk about information security then.
Last year we saw in the Department of Veteran Affairs where a
laptop computer and hard drive containing sensitive data was
stolen from an employee's home. Security is also a financial
management issue, because you need to guarantee that your
systems are protected against tampering and limit access to
financial records. You know, from a financial management
perspective, what steps have been taken to advance security,
data security?
Mr. Maharay. Let me talk from the Department of Energy's
standpoint about what the Office of the Inspector General has
reported on. We have identified information security as a
continuing, reportable condition or weakness at the Department
of Energy. We have found problems in terms of passwords being
easily guessed, we found problems in terms of patchwork, in
terms of security patchworks not being installed, we have found
problems in terms of contingent planning and access.
The Department is moving forward, from what we can see, in
terms of strengthening its process, but it is a long way. As it
implements enhanced controls, people get smarter and smarter on
how to thwart those controls, so this is a continuing challenge
for the Department of Energy.
Mr. Campbell. I would agree with that.
Mr. Norquist. I don't have the percentages, but I will
provide them for the record, but our CIO Committee has done a
strong job in improving the certification of our systems. We
also have regular meetings where I and the CIO for the
Department will get together with the components' CFO and CIO
and discuss the audit findings, what their corrective actions
are. The Under Secretary for Management attends and helps
emphasize the importance of resolving this.
One of the points that Mr. Walker raised and I think is
correct, as well, here is that we have to be aware of the
differences between ourselves and the private sector. Well, the
auditors may latch on to the ability of whether or not you have
a weakness to somebody affecting your financial statement, no
one is going to doctor our financial statements so they can
sell our stock short on the market.
That is not why they are going to try and break in. So we
shouldn't just fix a weakness with that label on it, because,
while that is a symptom of the problem, that is not the
underlying root cause and that is not the weakness we are
trying to prevent. We are trying to prevent fraud, we are
trying to prevent waste, prevent abuse. There are other systems
they would want to get to.
So the solution has to address the overall control and the
different systems they can get to, not simply the ones the
auditor found, so we are making that a priority as we go
through these, to make sure we are getting to the root cause
and addressing the potential implications of any weakness in
addressing those.
I will provide you the percentage for the record, but our
CIO has made a strong emphasis on this area and in
strengthening system security.
[The information referred to follows:]
[GRAPHIC] [TIFF OMITTED] 37001.080
Mr. Towns. Any additional steps?
Mr. Maharay. Additional steps? There is a process in terms
of the IT security called C and A, creditation and
accountability. This is a systematic process by which you go
and you evaluate your IT systems, and we have found
deficiencies in the way the Department of Energy has
implemented, and I suspect that all agencies need to go through
the systematic process to enhance its IT security.
Mr. Towns. Any other comments?
Mr. Taylor. Yes, Mr. Chairman. At DHS our Inspector General
considers information security so seriously that we have an
office under the Assistant IG just for IT audits, so we have 35
people. Their only function is to do IT reviews within the
Department.
Information technology is a material weakness throughout
the Department, not just for financial management, but across
the board. We do think that certification and accreditation
process at DHS has taken strides forward and we think they are
making progress, but to date we think there is a lot of
vulnerability within the Department that we need to address.
Mr. Campbell. I would just add that the certification and
accreditation process that we have employed in our CFO systems
has been strong. We have put in a tremendous amount of work to
make sure that those systems are secure, and we have reported
to our CIO that we have completed all of that effort as it
relates to the CFO systems.
Mr. Towns. What steps can be taken by the Department to
reduce the amount of interest that the Government pays on
delinquent payments?
Mr. Campbell. Let me try first. Actually, our experience
there has been pretty good. We are pretty close to what OMB's
metric is, which is 98 percent of payments on time. With every
metric we have to be careful to make sure that, in achieving
the metric, we haven't spent more money to get payments made on
time than the benefit of getting payments made on time. That
said, I think the answer is more effective systems, more
effective approval of invoices by the contracting officers. It
is an area where we struggled initially when we implemented our
new system, and we have made monumental improvement from that
point forward. So I think it is a combination of good systems
and a good system of approvals and good coordination back and
forth between the contracting organizations and the financial
management organizations and program organizations.
Mr. Towns. Any other comments?
Mr. Norquist. One of the things that is happening during
that time window is the contracting officer technical
representative is validating, before you make the payment, that
the Government did, in fact, get the services that it ordered
in order to make sure that we are only paying the contractor
what they are entitled to.
So part of making sure you are not late on the payment is
having a well-defined process that moves efficiently so that
you don't want to end up telling the contracting officer to
hurry it up, because their job is to protect the taxpayer. That
is an important internal control. You want to give them enough
time to do it, but have an efficient enough process that once
they are done you can still make the payment on time. So it is
a balance you are trying to strike, and the only way to
effectively do that is try and automate or make a more
standardized process.
You will see, when an organization goes through change,
they will frequently have a problem in this area because they
won't want to make a payment necessarily improperly if they can
avoid it, and they take more of an interest payment penalty.
When they have the process down, you should see that decline,
you should see the timeliness of the payments improve and the
penalties decline, as well.
Mr. Bilbray. But don't we have a problem with Homeland
Security of not being reimbursed by our own people?
Mr. Norquist. There was some challenge. I believe this
related to----
Mr. Bilbray. Security.
Mr. Norquist [continuing]. The Federal Protective Service,
which works on a reimbursable basis.
Mr. Bilbray. Yes.
Mr. Norquist. So it depends on payments from others. If
they don't have the documentation that the other organization
has ordered and paid for the service, they can't easily go
ahead and make payment. I don't know that they were late on
making payments to DHS. I am not familiar with----
Mr. Bilbray. I heard they were late and that was causing
them to be then having to pay interest, and it was all
basically within our internal operations, though I know you
guys are all separate. But the problem was that Homeland
Security wasn't getting paid by the other guys for services
provided, and then have to basically hang out, pay interest
based on the fact that somebody else wasn't reimbursing them
for the services provided.
Mr. Norquist. I am not familiar with that, Mr. Chairman.
What I do know is that when they changed the business process,
trying to make sure you have all the documentation to validate,
yes, we reserved the service, yes, this is in accordance with
the contract, and yes, the customer has the money, they moved
slower than we would like them to. They have improved that.
They have taken steps, for example, centralized the receipt
of contractor invoices so all the bills coming in for payment
come in to one control place, which makes it much more
efficient in paying them, and to handle things electronically
rather than moving stacks of paper. So I know ICE is working to
make progress and to centralize those things, but the
transition was a challenge.
I think one of the things you will find from the testimony
is organizations going through changes, reorganizations, new
financial systems, run into a challenge, and it is the matter
of addressing and implementing corrective actions to fix those
that right the ship. But those are always a point of risk, and
so you have to be attentive when you have an organization
either being transferred or going through a change, to look for
these types of problems.
Mr. Bilbray. I appreciate your effort to save trees.
Mr. Towns. Thank you very much.
Let me thank all the witnesses for coming today and sharing
with us. We appreciate that.
At this point this subcommittee is adjourned.
[Whereupon, at 4:35 p.m., the subcommittee was adjourned.]
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