<DOC>
[106th Congress House Hearings]
[From the U.S. Government Printing Office via GPO Access]
[DOCID: f:61686.wais]
OVERSIGHT OF FINANCIAL MANAGEMENT PRACTICES AT THE DEPARTMENT OF
JUSTICE AND THE FEDERAL AVIATION ADMINISTRATION
=======================================================================
HEARING
before the
SUBCOMMITTEE ON GOVERNMENT MANAGEMENT,
INFORMATION, AND TECHNOLOGY
of the
COMMITTEE ON
GOVERNMENT REFORM
HOUSE OF REPRESENTATIVES
ONE HUNDRED SIXTH CONGRESS
FIRST SESSION
__________
MARCH 18, 1999
__________
Serial No. 106-68
__________
Printed for the use of the Committee on Government Reform
Available via the World Wide Web: http://www.house.gov/reform
______
U.S. GOVERNMENT PRINTING OFFICE
61-686 WASHINGTON : 2000
COMMITTEE ON GOVERNMENT REFORM
DAN BURTON, Indiana, Chairman
BENJAMIN A. GILMAN, New York HENRY A. WAXMAN, California
CONSTANCE A. MORELLA, Maryland TOM LANTOS, California
CHRISTOPHER SHAYS, Connecticut ROBERT E. WISE, Jr., West Virginia
ILEANA ROS-LEHTINEN, Florida MAJOR R. OWENS, New York
JOHN M. McHUGH, New York EDOLPHUS TOWNS, New York
STEPHEN HORN, California PAUL E. KANJORSKI, Pennsylvania
JOHN L. MICA, Florida PATSY T. MINK, Hawaii
THOMAS M. DAVIS, Virginia CAROLYN B. MALONEY, New York
DAVID M. McINTOSH, Indiana ELEANOR HOLMES NORTON, Washington,
MARK E. SOUDER, Indiana DC
JOE SCARBOROUGH, Florida CHAKA FATTAH, Pennsylvania
STEVEN C. LaTOURETTE, Ohio ELIJAH E. CUMMINGS, Maryland
MARSHALL ``MARK'' SANFORD, South DENNIS J. KUCINICH, Ohio
Carolina ROD R. BLAGOJEVICH, Illinois
BOB BARR, Georgia DANNY K. DAVIS, Illinois
DAN MILLER, Florida JOHN F. TIERNEY, Massachusetts
ASA HUTCHINSON, Arkansas JIM TURNER, Texas
LEE TERRY, Nebraska THOMAS H. ALLEN, Maine
JUDY BIGGERT, Illinois HAROLD E. FORD, Jr., Tennessee
GREG WALDEN, Oregon JANICE D. SCHAKOWSKY, Illinois
DOUG OSE, California ------
PAUL RYAN, Wisconsin BERNARD SANDERS, Vermont
JOHN T. DOOLITTLE, California (Independent)
HELEN CHENOWETH, Idaho
Kevin Binger, Staff Director
Daniel R. Moll, Deputy Staff Director
David A. Kass, Deputy Counsel and Parliamentarian
Carla J. Martin, Chief Clerk
Phil Schiliro, Minority Staff Director
------
Subcommittee on Government Management, Information, and Technology
STEPHEN HORN, California, Chairman
JUDY BIGGERT, Illinois JIM TURNER, Texas
THOMAS M. DAVIS, Virginia PAUL E. KANJORSKI, Pennsylvania
GREG WALDEN, Oregon MAJOR R. OWENS, New York
DOUG OSE, California PATSY T. MINK, Hawaii
PAUL RYAN, Wisconsin CAROLYN B. MALONEY, New York
Ex Officio
DAN BURTON, Indiana HENRY A. WAXMAN, California
J. Russell George, Staff Director and Chief Counsel
Bonnie Heald, Director of Communications/Professional Staff Member
Mason Alinger, Clerk
Faith Weiss, Minority Counsel
C O N T E N T S
----------
Page
Hearing held on March 18, 1999................................... 1
Statement of:
Bromwich, Michael, Inspector General, Department of Justice,
accompanied by Marilyn Kessinger, Director, Financial
Statement Audit Office; and Stephen Colgate, Assistant
Attorney General for Administration, Department of Justice. 3
Calbom, Linda, Director, RCED Accounting and Financial
Management, General Accounting Office; John Meche, Deputy
Assistant Inspector General, Financial, Economic, and
Information Technology, Department of Transportation; David
Kleinberg, Deputy Chief Financial Officer, Department of
Transportation; and Carl Schellenberg, Chief Financial
Officer, Federal Aviation Administration................... 117
Letters, statements, etc., submitted for the record by:
Bromwich, Michael, Inspector General, Department of Justice,
prepared statement of...................................... 7
Calbom, Linda, Director, RCED Accounting and Financial
Management, General Accounting Office, prepared statement
of......................................................... 119
Colgate, Stephen, Assistant Attorney General for
Administration, Department of Justice:
Information concerning buget 2000........................ 115
Information concerning referrals......................... 43
Prepared statement of.................................... 20
Response to followup questions........................... 38
Kleinberg, David, Deputy Chief Financial Officer, Department
of Transportation, prepared statement of................... 169
Meche, John, Deputy Assistant Inspector General, Financial,
Economic, and Information Technology, Department of
Transportation:
Information concerning environmental liabilities......... 195
Prepared statement of.................................... 138
Schellenberg, Carl, Chief Financial Officer, Federal Aviation
Administration:
Information concerning environmental liabilities......... 193
Information concerning inventory items................... 189
Prepared statement of.................................... 176
OVERSIGHT OF FINANCIAL MANAGEMENT PRACTICES AT THE DEPARTMENT OF
JUSTICE AND THE FEDERAL AVIATION ADMINISTRATION
----------
THURSDAY, MARCH 18, 1999
House of Representatives,
Subcommittee on Government Management, Information,
and Technology,
Committee on Government Reform,
Washington, DC.
The subcommittee met, pursuant to notice, at 1:59 p.m., in
room 2154, Rayburn House Office Building, Hon. Stephen Horn
(chairman of the subcommittee) presiding.
Present: Representatives Horn, Biggert, Ose, Turner, and
Maloney.
Staff present: J. Russell George, staff director and chief
counsel; Bonnie Heald, director of communications/professional
staff member; Mason Alinger, clerk; Kacey Baker, intern; Faith
Weiss, minority counsel; and Ellen Rayner, minority chief
clerk.
Mr. Horn. A quorum being present, the Subcommittee on
Government Management, Information, and Technology, will come
to order. Today's hearing is the second in a series of hearings
to examine the results of financial statement audits at
selected Federal agencies.
In the late 1980's, Congress recognized that one of the
root causes of waste in the Federal Government was that
financial management leadership, policies, systems, and
practices were in a state of disarray. Financial systems and
practices were obsolete and ineffective. They failed to provide
complete, consistent, reliable, and timely information to
congressional decisionmakers or to agency management. In
response, Congress passed a series of laws designed to improve
financial management practices and to ensure that tax dollars
are spent for the purposes that Congress intends.
The Chief Financial Officers Act, enacted in 1990,
represented the most comprehensive financial reform legislation
of the last four decades. It established a leadership structure
for Federal financial management, including the appointment of
Chief Financial Officers in the 24 largest Federal departments
and independent agencies. In 1994, the Chief Financial Officers
Act was amended to require agency-wide audited financial
statements covering all agency accounts and associated
activities. In addition, the CFO Act, as amended, enables the
Office of Management and Budget to require the submission of
financial statements by component entities within the agencies.
The Federal Aviation Administration within the Department of
Transportation is one of those agencies.
Today, we will hear testimony focusing on financial
management within the Federal Aviation Administration and
within the Department of Justice. After many attempts, neither
of these agencies has successfully prepared reliable financial
statements. This year, financial audits of these two agencies
reveal numerous weaknesses in financial control and in some
cases a failure to comply with Federal laws and regulations.
In its fifth attempt to receive a clean opinion on its
financial statements, the FAA has failed. Earlier this month,
the Department of Transportation's Inspector General reported
that FAA cannot keep track of its more than $11 billion worth
of property and equipment. The agency failed to produce support
documentation for tax revenues that are collected by the
Internal Revenue Service and deposited in the Airport and
Airways Trust Fund, and it failed to report accurately on the
costs of its programs. This includes the extensive
modernization of the Nation's air traffic control system which
will ultimately cost more than $42 billion.
The General Accounting Office, which is the fiscal and
program auditing arm of the Congress, recently added the FAA's
poor financial management to its list of problem areas that
place Federal agencies at high risk of being vulnerable to
waste, fraud, and abuse of the taxpayers' money. The GAO
reported that these weaknesses could result in the agency being
unable to locate mission-critical equipment, such as radar
units and other air traffic control equipment, which could
exacerbate an emergency.
The GAO also reported that the FAA lack of cost accounting
information limits its managers' ability to make effective
decisions on the agency's resource needs. It also inhibits
managers from maintaining adequate control over major projects,
such as the $42 billion air traffic control and modernization
system.
As for the Department of Justice, it also failed to receive
a clean opinion on its 1998 financial statement. After three
attempts, the Department of Justice's Inspector General has
again found that significant weaknesses persist in all of the
Department's component agencies, including the Immigration and
Naturalization Service, the U.S. Marshal's Service, the Drug
Enforcement Administration, and the Asset Forfeiture Fund, to
mention but a few.
The Inspector General's audit found that the Department of
Justice's computer systems were vulnerable to improper access
and that the Department was unable to account properly for
seized and forfeited assets. Furthermore, the Department failed
to comply with four laws governing financial management within
the Federal Government. In an especially troubling situation,
one regional office of the Immigration and Naturalization
Service illegally earmarked money for unspecified purposes at
the end of fiscal year 1998.
Several of the Department's agencies could not reconcile
their accounting records within the Department of the Treasury,
the Government's bank. The Immigration and Naturalization
Service, which I have mentioned, was out of balance by $76
million. The Drug Enforcement Agency was off by $38 million,
and the Department's Working Capital Fund missed by $44
million. This issue is not simply an exercise in bean counting.
Accurate financial statements are the keystones to effective
financial management in the Federal Government.
The information reported in the financial statements of the
Federal Aviation Administration and the Department of Justice
plainly do not provide reliable sources of information for
decisionmaking by Congress or by the agency itself. In
addition, these significant weaknesses in financial control
undermine the agency's ability to manage their own operations
leaving them vulnerable to fraud, waste, and the abuse of the
taxpayers' money.
We will explore these issues in greater detail today. We
want to know what the Federal Aviation Administration and the
Department of Justice are doing to resolve these deficiencies.
We welcome our witnesses, and we look forward to their
testimony.
On panel one, the Honorable Michael Bromwich, the Inspector
General of the Department of Justice, is accompanied by Ms.
Marilyn Kessinger, Director of Financial Statement Audits,
Office of the Inspector General, Department of Justice, and Mr.
Stephen Colgate, Assistant Attorney General for Administration
of the Department of Justice.
If you would rise as we swear in all witnesses, and raise
your right hands.
[Witnesses sworn.]
Mr. Horn. We will note for the record that all three have
affirmed the oath, and we will begin with the very
distinguished Inspector General as the beginning testimony. Mr.
Bromwich.
STATEMENTS OF MICHAEL BROMWICH, INSPECTOR GENERAL, DEPARTMENT
OF JUSTICE, ACCOMPANIED BY MARILYN KESSINGER, DIRECTOR,
FINANCIAL STATEMENT AUDIT OFFICE; AND STEPHEN COLGATE,
ASSISTANT ATTORNEY GENERAL FOR ADMINISTRATION, DEPARTMENT OF
JUSTICE
Mr. Bromwich. Thank you very much. Mr. Chairman and members
of the subcommittee, I appreciate the opportunity to appear
before this subcommittee to discuss the Department of Justice's
consolidated financial statement audit for fiscal year 1998.
Accompanying me today, as you noted, Mr. Chairman, is Marilyn
Kessinger who is the Director of our Financial Statement Audit
Office, and she is responsible, along with her staff, for
coordinating the audits of the consolidated financial
statement.
This report represents the third year that the Office of
the Inspector General has audited the Department's consolidated
financial statement. Due to the Department's decentralized
nature, separate audits of nine Department reporting components
are first completed and then combined into the consolidated
audit report.
We noted improvements at the component level during fiscal
year 1998, most notably, a 50 percent decrease in the number of
material weaknesses compared to the preceding year; 26 in
fiscal year 1997 versus 13 in fiscal year 1998. Other
reportable conditions also decreased from 26 in fiscal year
1997 to 18 in fiscal year 1998. No substantial new internal
control weaknesses were identified this past fiscal year, and
we noted progress in many of the areas that received
unfavorable findings during the prior 2 years.
However, this positive news must be tempered by the fact
that for the third year in a row the Department received a
disclaimer of opinion, in effect, no opinion on its
consolidated financial statement, because of an inability to
complete the audit due to serious deficiencies noted in the
underlying audits.
Four of the nine components--the Assets Forfeiture Funds/
Seized Asset Deposit Fund, the Immigration and Naturalization
Service, the Office, Boards, and Divisions, and the U.S.
Marshal's Service--received disclaimers of opinions on their
individual audits in fiscal year 1998.
On the other hand, four components--the FBI, the DEA, the
Office of Justice Programs, and the Working Capital Fund--
received unqualified or clean opinions on their balance sheets
in fiscal year 1998.
The Federal Prison System received a qualified opinion in
fiscal year 1998, which means that its financial statements
were presented in accordance with applicable accounting
standards except for a line item or account.
My written statement and our financial statement audit
provides a detailed description of how the Department and each
of the components fared in fiscal year 1998. Rather than review
this information, Mr. Chairman, I would move that my full
written statement be introduced into the record, and I would
like to summarize.
Mr. Horn. Let me say, automatically--and I should have said
at the beginning--every time a witness first opens their mouth
from the first sentence, it is automatically put in the record,
and then your remarks or summary, however you want to proceed,
follow after to complete that.
Mr. Bromwich. Terrific; thank you, Mr. Chairman. Rather
than review that information, I thought it would be more
helpful for me to focus my remarks on the challenges facing the
Department for it to improve its financial management and
obtain a clean consolidated audit opinion.
First, top Department management must continue to emphasize
the importance of these issues and provide necessary support to
the component financial staffs. Managers must emphasize long-
term correction of problems to improve the Department's
financial management, not just short-term fixes that will earn
a better audit opinion.
Some components have used contractors extensively to
supplement their financial management staff and more quickly
implement short-term fixes. This heavy use of contractor
support raises two concerns: first, components may become too
reliant on contractor assistance and not make the appropriate
systemic changes, and, second, the components financial
management staffs will not learn from this process if
contractors are shouldering the bulk of the responsibility.
This leads to another observation: we see a shortage of
adequately trained financial management staff at the
Department. While this shortage precipitates the extensive use
of contractors, it also has caused many Department components
to struggle to meet the deadlines required to ensure a March
1st release of the consolidated audit report. In addition, many
Department components could fail in the future if anything
happened to their handful of key financial managers.
Successful implementation of new financial systems is
critical to the Department's future of financial management
success. The U.S. Marshal's Service encountered numerous
difficulties implementing its new system, and this had a
significant adverse impact on its audit results in fiscal year
1998.
Finally, Mr. Chairman, your invitation letter to this
afternoon's hearing requested that I address financial
management practices of three of the Department of Justice's
components--DEA, INS, and the Marshal's Service--and I would
like to end my oral presentation by referring to the
experiences that we had in those three components.
First, with respect to the DEA--the DEA received an
unqualified opinion on its balance sheet and a disclaimer on
its remaining financial statements. The DEA made significant
progress in fiscal year 1998 addressing previously identified
weaknesses. For fiscal year 1998, it had four reportable
conditions, one of which was considered a material weakness.
Implementation of a new core accounting system along with the
commitment by senior management was critical in resolving many
of DEA's outstanding issues. A particular challenge in fiscal
year 1999 for the DEA is the replacement of key finance
personnel.
The Immigration Service. For the third straight year, INS
received a disclaimer of opinion on its fiscal year 1998
financial statement. INS had nine reportable conditions of
which five were considered material weaknesses. Although
improvements were made in many areas--for example, INS reduced
its material weaknesses from eight to five--weaknesses continue
to exist in the overall control environment that prevents INS
from producing auditable financial statements.
During fiscal year 1998, INS management began or continued
several initiatives to reduce longstanding financial management
issues, including a restructuring of its regional accounting
operations and resolution of problems in its property
subsidiary system. Successful implementation of the new core
accounting system scheduled for October 1, 1999, together with
development of adequate staffing levels, are critical to
improving financial management at INS.
The Marshal's Service. Like INS, the Marshal's Service
received its third straight disclaimer of opinion on its fiscal
year 1998 financial statements. It had three reportable
conditions of which two were considered material weaknesses.
The U.S. Marshal's Service was unable to process routine
transactions in accordance with standards and provide documents
on a timely basis in order to complete the audit.
There were also significant internal control weaknesses
over its new financial management system, called STARS, which
was implemented in fiscal year 1998. The weaknesses identified
in STARS represent the most significant challenge to the
Marshal's Service in resolving its outstanding issues.
Mr. Chairman, as I look back on the Department's
experiences with consolidated financial audits, results from
the first audit in fiscal year 1996 clearly were not
encouraging. Regrettably, the results for fiscal year 1997 were
even more disappointing as the reality of the new financial
reporting requirements sank in, and the Department enforced the
March 1st deadline established by the act. There was also very
little time for corrective action to take place between
completion of the fiscal year 1996 audit and initiation of the
fiscal year 1997 audit.
The Department has made noteworthy progress in fiscal year
1998. However, it faces major challenges with the
implementation of new financial systems, increasing financial
reporting requirements, and a shrinking of the pool of
qualified financial managers.
The success of the consolidated effort is dependent upon
the success of individual component audits. Several components
have longstanding financial problems that are now just
beginning to be addressed after years of neglect. Some of these
problems are not easy to correct. The Department needs to
concentrate its efforts on the four components that received
disclaimers of opinion in fiscal year 1998 while at the same
time maintaining the successful results obtained in other
components.
Mr. Chairman, I would be happy to answer any questions you
might have.
[The prepared statement of Mr. Bromwich follows:]
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Mr. Horn. I thank you. If we might, I would like to finish
with the three of you and then have the questions.
Mr. Ose has joined us, and we are delighted to have you
here. We are through the first witness, the Inspector General,
and we are now starting on--does Ms. Kessinger have anything to
add to what Mr. Bromwich said?
All right, Mr. Colgate is the Assistant Attorney General
for Administration; go ahead.
Mr. Colgate. Thank you. Mr. Chairman, I would like to first
start off by saying that I endorse the observations that have
been made by the Inspector General. I don't think that there is
by and large a disagreement between the IG and myself on this,
and I think that is important to start off by saying that.
I am pleased to have the opportunity to appear before you
today to discuss the status of financial management at the
Department of Justice. As the Assistant Attorney General for
Administration, I am fully committed to ensuring our financial
operations, systems, and internal controls meet and exceed
Federal standards. I also recognize the tremendous value in
having our financial operations independently reviewed through
the audited financial statement process. Excellence in
financial management is an established goal in the Department's
annual performance plan. The Attorney General and I are
committed to obtaining an unqualified Department-wide opinion
on our financial statements, and we are making every effort to
do that this year, although it is a very sizable task.
At the outset, I recognize we face major financial
management challenges. We need to make significant improvements
in our business practices, systems, and oversight if we are to
meet Government-wide standards, improve accountability, and
produce better performance information. As our audit results
attest, we have made progress. However, we have not yet
attained the degree of precision in our operations that the
Federal financial management improvement legislation of the
nineties requires.
This afternoon, I would like to discuss our improvement
efforts in two primary areas: first, our audit correction
action plan in high risk areas, and, second, our systems
efforts. While several of the Department's components obtained
clean opinions on some or all of the 1998 statements, the
auditors could not render an opinion on the consolidated
Justice statement for the third year in a row. Clear progress
this year was evidenced from the fact that our material
weaknesses were reduced from 26 to 13, but we have more work to
do.
After 3 years of audits, the Department components with
isolated exceptions have been able to effectively resolve our
pure accounting weaknesses. The steps taken by the Bureau of
Prisons and the FBI to resolve their obligation and property
problems are good examples of the success that we have had.
Conversely, weaknesses in the business practices and controls
are taking much longer to address.
We are making concerted efforts to address our high risk
areas. The Drug Enforcement Administration has made major
changes in its financial controls to minimize the potential for
reoccurrence of the two employee embezzlements. The DEA has had
PriceWaterhouseCoopers verify its new controls, demonstrating
DEA's commitment to addressing past weaknesses.
Improvements are also underway at the Immigration Service,
although more time is needed to fully address their remaining
weaknesses. INS has reorganized into regional finance centers
with specialized functions to improve service and has made
progress in reconciling its fund's balances.
The Marshal's Service has encountered shortfalls in their
budget this year, which are largely a factor of their virtually
uncontrollable workload. My senior staff are analyzing the
Marshal's Service's budget situation as well as evaluating its
efforts to address the accounting and systems weaknesses cited
in the audit.
The Assets Forfeiture Fund now has a consolidated national
tracking system in place, and the auditors recognize that
substantial control improvements were made this past year.
The second area I would like to discuss is the status of
our financial systems projects. Although new accounting systems
alone will not solve all the weaknesses cited in the audit,
improved systems which comply with Federal accounting and
security requirements are essential to our success. Installing
new systems requires massive and complex multi-year projects.
Six of the nine entities or funds which received separate
financial audits were impacted by significant system projects
during the 1998 audit. Further, all nine will be impacted by
major projects or reviews before the 1999 audits are completed.
During the past year, we have completed the move of 100
Bureau of Prisons financial management offices onto the
Department's upgraded system. DEA, INS, the Marshals, and the
Office of Justice programs continue to refine commercial, off-
the-shelf system solutions that have been installed. The
majority of components are now operating Y2K compliant
commercial packages or have renovated their financial systems.
I have recently initiated a comprehensive review of the systems
efforts at DEA and the Marshals Service. I anticipate the
reviews will reaffirm the progress made in the new systems,
address the audit issues, and offer recommendations for most
effectively completing the remaining portion of both projects.
In closing, I am encouraged that we have made substantial
progress with the audits and that we are seeing some
significant progress in our systems efforts. Where we have
ongoing problems in underlying business practices and program
controls, we have the active involvement of senior management
in addressing these problems. Most importantly, I am personally
committed, as is the Attorney General, to seeing our finance--
our fundamental business practice problems solved through the
carefully planned reengineering of our operations.
Mr. Chairman, this concludes my prepared statement. I would
be more than glad to answer any questions that you or other
members of the committee may have. Thank you.
[The prepared statement of Mr. Colgate follows:]
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Mr. Horn. We thank you for that statement. I note, Mr.
Colgate, that you have had some experience in various agencies
as a senior civil servant of Budget Officer of Finance, so
forth. Who is the Chief Financial Officer for Justice?
Mr. Colgate. The Department of Justice has not appointed a
Chief Financial Officer since the act was enacted because of
this dichotomy of having the Assistant Attorney General for
Administration being a career civil servant. So, that position
has not been filled. I have essentially been performing the
functions of the act.
Mr. Horn. Who is the Chief Information Officer in the
Department of Justice?
Mr. Colgate. I serve as the Chief Information Officer at
the Department of Justice.
Mr. Horn. Don't you think that part of the problem here is
that we have nobody that can work a 7-day week and 18 hours a
day to get this job cleaned up, in either case? You are holding
three positions.
Mr. Colgate. I don't think that it is so much of the fact
that I am holding the three positions. I think that really the
underlying issue is that we are trying to make some major
changes in our financial systems at the Department of Justice
at the same time trying to engrain within the culture at the
Department the importance of an audited financial statement.
I think that I have been very well supported by the staff
who works in this area and that we can address these issues. I
don't necessarily believe that it is the appointment so much
but the order of magnitude of the changes that we have to
undertake.
Mr. Horn. Well, don't you think--given the situation in
Justice where they are not able to show us a balance sheet, the
accountants--don't you think that we ought to have a full-time
CFO to concentrate on those problems and a full-time CIO to
concentrate on those problems. When you have this kind of a
situation, it seems to me you need to take some obvious common
sense measures. When Congress passed those laws on a bipartisan
basis, they did not think that Assistant Secretaries for
Administration or Assistant Attorney Generals would take over
those things themselves.
Now, I have had this running war with the Treasury
Department which is also screwed up, and the Assistant
Secretary for Management has held all the positions, and the
result is they can't give the full-time attention that Congress
knew 5 years ago in the 103d Democratic Congress when I came in
here--they knew, ``Hey, we have to spend time on this. We have
to have the expert that knows something about finance,
something about computing.'' Now, we didn't think it was all
combined in one superhuman, I guess I would say. So, what do
you think about that?
Mr. Colgate. My personal view is that at the Department of
Justice, I think the senior management has liked the notion of
one-stop shopping. When there is an administrative issue,
whether it be financial management or technology issue, instead
of going to various different players, that they can hold one
person accountable who can coordinate and investigate and get
back to them on what corrective action needs to be taken.
I think that we can adequately perform the functions of the
underlying statute, whether it be the Clinger-Cohen statute
related to technology or the Chief Financial Officers Act, and
I think that is why we have this situation, as you point out,
in the Department of Treasury as well as Justice, the senior
political leadership want to be able to reach out and hold one
person accountable, and that is the tension that is here.
Mr. Horn. And to whom do you report?
Mr. Colgate. I report to the Deputy Attorney General, but I
can assure you that when it comes to management and
administrative issues, the Attorney General involves herself
personally on these issues.
Mr. Horn. Does the Attorney General know about the
situation on these financial statements?
Mr. Colgate. Yes, she does. As a matter of fact, she has
called in all of the heads of the components and has made it
really clear to them that she wants this situation straightened
out, and she plans to hold additional meetings now that we have
the results of the 1998 audit and there has been improvement.
We are pleased to see that the Office of Justice programs has
moved to a balance sheet clean opinion as well as the Drug
Enforcement Administration, but that is not satisfactory--and
she holds them personally accountable and meets with them on a
periodic basis to address these concerns.
Quite honestly, Mr. Chairman, I am quite glad that we now
have a cabinet officer who very much understands from her
experience working in Florida of being an individual who was
audited when she was State's attorney; who had to go through
the laborious task of doing an inventory; who understands and
appreciates the importance of audited financial statements. She
truly believes that when an organization moves to get a clean,
audited financial statement, that you essentially address
important internal control situations that but for having this
audited financial statement, would just languish.
Mr. Horn. Does she know that she has an option and could
appoint a Chief Financial Officer and a Chief Information
Officer?
Mr. Colgate. Yes, she does.
Mr. Horn. And she rejected that approach or what?
Mr. Colgate. I will give you my observation--I wouldn't
want to speak for the Attorney General, but I will give you my
observation--I think she likes the notion of what I will
jokingly refer to as one-stop shopping.
Mr. Horn. Why would having three people divide that work,
get more done, and not have to be a bunch of bureaucrats about
it, it seems to me they could work as a team, and you could
still get one-stop shopping, because you have to be overworked
in this job; same as Mr. Munoz in Treasury when he was there. I
know, I have been in an administration; I know the hours people
put in, and you have a very distinguished record. I mean, you
have the Distinguished Service Award for your administrative
programs; you got the Meritorious Executive Distinguished
Executive Presidential Rank Award. So, there is no question,
you have a lot of ability, but you can have the greatest amount
of ability, and if you don't have the time in which to get
something done, it eventually becomes the big avalanche. It
isn't just a little snowball; it is a big avalanche, and it
seems to me you should all rethink and she should rethink and
the Deputy Attorney General should rethink, ``How do we get on
top of this?'' And it should be thought of on an emergency
basis, and people should put the horses in there that they need
to carry the load.
So, let me move on, but I have very strong feelings on it
why certain agencies have problems. You just can't be
everywhere everyday on all these issues, and it simply
backfires on you, and I think this has backfired. So, we need
to give this a little attention, and we need to get somebody as
the Chief Information Officer and a Chief Financial Officer,
and I think the one-stop service is nonsense, if you can't do
it when you have three high-powered people. And if you can't,
then there is a problem in building a team.
So, let me go now to the computer security weaknesses and
for the fiscal years 1997, 1998, the pervasive computer
security weaknesses have been reported at the Department data
centers as well as at the FBI's data center. Now, these
weaknesses affect the integrity and reliability of the
Department's financial information and other program
information maintained on those sites. In addition, there are
risks of unauthorized access to these systems. Let me ask the
Inspector General, what type of computer security testing has
been done during this audit?
Mr. Bromwich. For a detailed response, I would like to turn
to Ms. Kessinger to describe that.
Ms. Kessinger. We hire contractor firms to do the work for
us, and we use PriceWaterhouseCoopers to do a general controls
review at the Rockville and Dallas data center, and we use KPMG
to do a controls review of the data center in the District of
Columbia for the FBI, and they do the FISCAM, which is the
audit program the GAO prescribes and that is where we get our
results from. They also did some applications testing during
the last year on various accounting systems throughout the
Department. There were improvements this year in the security
controls in the Department's data centers, in particular, and
we were able to rely upon them and make that conclusion for the
first time this year.
Mr. Horn. Do you want to add anything, Inspector General?
Mr. Bromwich. No, Mr. Chairman.
Mr. Horn. Is the testing that is done actually--does it try
to gain unauthorized access to the Department's system when you
are testing it yourself?
Ms. Kessinger. Yes, we do penetration testing at both of
the data centers.
Mr. Horn. Do you ever think of going out to a high school
and getting one of those little nerds that stays up all night
to crack into departmental securities? [Laughter.]
Ms. Kessinger. Ironically, you know, that is--we do testing
from several different perspectives; from an outsider
perspective with little or no knowledge of the Department or
with some access to a building, for instance, a contractor that
is in the FBI building. And with little or no knowledge of the
Department, there was some access gained. I don't know that I
think the high school student could have done it, but----
Mr. Bromwich. We use big nerds rather than little nerds,
Mr. Chairman.
Mr. Horn. You would be amazed the talents that lie out
there beyond the Appalachians.
Could you please elaborate on what the risk is in your
judgment now? How secure is secure?
Ms. Kessinger. I would say that we don't have a humongous
risk. I would say we have a risk. We have especially a risk
with our own employees and our contractors. There are a lot of
contractors in this Department and with people walking around
our buildings and that kind of thing, I think it is very, very,
very difficult to ever lessen those risks, and we can never do
enough in the training, prevention, those kinds of issues, and
there has to be almost constant pressure from the top down on
those issues, and we need to increase that pressure.
Mr. Horn. Now, do we know how many penetrations have
occurred from outside the system and how many have been
internal where somebody just wants to sort of snoop around;
sees somebody's file?
Ms. Kessinger. You mean someone other than our auditors?
Mr. Horn. That is correct. Do we have any data on that?
Mr. Colgate. I could provide to the committee, for the
record and I like the notion of what Ms. Kessinger said of the
pressure--this is something that the Attorney General is very
focused on. We just recently completed our first series of
penetration testing within the Department of Justice, and we
were very concerned about the results of that penetration
testing. It looked at it from outside access as well as the
notion of social engineering with our own employees to gain
access of these systems. The AG was not satisfied with the
results of it, and we have essentially received corrective
action plans of every one of the systems that we have tested in
the first round--I believe we received them all--and we put the
components on notice that we will, this fall, after giving them
time to correct the deficiencies that we have identified, we
will again conduct a series of tests to ensure that the
corrective actions that they have identified have actually been
implemented.
As well, Mr. Chairman, we plan to conduct a second round of
penetration testing of additional systems within the Department
of Justice. We have made the fundamental commitment that
computer security is basic business of the Department of
Justice, and we will dedicate the necessary resources to ensure
that we correct any deficiencies that we can define. We have
been, in my personal opinion, too lax in this area, but I think
that we have gotten some folks' attention through these recent
rounds of penetration testing.
I am pleased that when it comes to the audited financial
statement that in 1998 we moved from a material weakness as it
relates to our financial systems to a reportable condition.
That doesn't mean we let up until we get this absolutely
corrected.
Mr. Bromwich. Mr. Chairman, if I could just add, beyond the
computer security testing that we do in the context of the
financial statements, my office has a separate computer
security office that does this kind of work in the Department,
so we are working very hard on these issues across a number of
components, and I must say that the management of the
Department has been quite responsive to the audits that we have
done and is trying to move quickly to address the deficiencies
that we have noted.
Mr. Horn. Could you give me a ranking of what are the
easiest components of the Department of Justice in terms of
penetration?
Mr. Bromwich. We haven't done them all, so I can't give you
a comprehensive one. We have done work in the Rockville data
centers and the Dallas data centers; we found some problems
there, and those are being addressed, and we are continuing to
do work in other components of the Department, but we haven't
yet done it throughout the Department so that I could give you
a ranking of the sort that you are requesting.
Mr. Horn. Now, is there a way that you would know and the
Assistant Attorney General would know when these systems of the
different components--because some of them aren't probably
comparable; I would suspect you might even have a little
inoperability problem--but would you know if there has been
penetration, and to whom is that report given if they can tell
immediately that the system has been broken into?
Mr. Colgate. We could provide--we do have a mechanism in
which when we are broken into, and we were broken into in a
very visible way. It was not too long ago that the Department's
Website was broken into by a hacker and pornographic and
obscene material was placed in lieu of the Department's
Webpage. We do have an incident response system so that when
these do become known to us, that we institute it, and I will
tell you, Mr. Chairman, we bring in the Federal Bureau of
Investigation, and we have brought in other assets to let
people know that we are not going to take this lying down. We
had a recent, what they determined, denial of service, I would
say, within the last 3 months, again, where someone tried to
flood our Webpage. We are very sensitive to this. It is the
major focus in the Department's budget really from a nationwide
perspective in beefing up our capability to deal with what we
call cyberattacks and cyberterrorism. We are taking it very,
very seriously, and we want folks to know that if you try this,
we will investigate.
Mr. Bromwich. As a routine matter, these would not be
reported to us unless it was clear that it was a Department
employee who was involved, and then that would be within our
investigative jurisdiction.
Mr. Horn. Have you had any Department employees that have
been involved?
Mr. Bromwich. In terms of penetration?
Mr. Horn. Right.
Mr. Bromwich. Not that I am aware of, no.
Mr. Horn. OK, in terms of being curious about the file.
I am going to ask one more question on this, and yield all
the time she wants to Vice Chairman Biggert. I understand that
the Immigration and Naturalization Service has been penetrated.
What is that situation all about? Is that just eager beaver
immigration lawyers or what?
Mr. Bromwich. I am not aware of it.
Ms. Kessinger. Our PriceWaterhouseCoopers auditors when
they did some testing were able to get into the Immigration
network through some----
Mr. Horn. So, it was just through the
PriceWaterhouseCoopers camp?
Ms. Kessinger. Yes, it was just through the testing, yes.
Mr. Horn. So, that is no outside; it is a test you
conducted inside?
Ms. Kessinger. Right, and those results were passed on to
the Department, and they are working on them.
Mr. Horn. OK. I now yield to the vice chairman, Mrs.
Biggert of Illinois.
Mrs. Biggert. Thank you, Mr. Chairman. It is my
understanding after hearing your testimony that several DEA
employees have been involved in two different cases of
embezzling DEA funds, and one case involved a single DEA
employee who allegedly embezzled more than $6 million during a
6-year period. The employee allegedly submitted hundreds of
false payment vouchers seeking reimbursement for services never
performed by a sham corporation he established, and the second
case involved collusion among three DEA employees who used DEA
funds to purchase various electronic and other equipment valued
at approximately $2.7 million that was diverted for their own
use.
And it has been reported that during that period in which
the embezzlements occurred, financial management weaknesses and
DEA-controlled environment included ineffective segregation of
duties, failure to require appropriate approvals, inadequate
supporting documentation, inaccurate accounting and control
over property and equipment. These financial management
weaknesses significantly impaired the organization's ability to
prevent or properly detect improper actions by employees, and,
Mr. Colgate, what has the DEA done to correct these control
problems and to prevent further embezzlements from occurring?
Mr. Colgate. Your summary was an accurate one of the
situation that occurred. We did have a fundamental--in my
personal opinion--a fundamental breakdown in the notion of
segregation of duties and internal controls that allowed the
situation where one employee was able to obligate the funding
and essentially control the disbursement of the funding which
resulted in this loss.
I am pleased to say that DEA has taken corrective action in
addressing these internal control weaknesses. It is my
understanding that they brought in an independent accounting
firm to look at the revised internal control processes and have
implemented those processes.
We have moved DEA, and DEA, I think, in part--Mike, and you
have to correct me if I am wrong--one of the reasons why in
previous years that they received a disclaimed opinion was
because of these very internal control deficiencies that you
have outlined. For fiscal year 1998, at least as it relates to
the balance sheets, DEA has received a clean opinion.
So, I will say that I am pleased that DEA has taken this
very seriously; has reviewed their internal control procedures;
has brought in an outside firm to validate those procedures,
and I think that we have taken the necessary corrective
actions, but I think your summary of the situation was an
accurate summary at the time.
Mrs. Biggert. Well, maybe to ask, then, of Mr. Bromwich,
what did the auditors do to satisfy themselves that these
control weaknesses had been addressed?
Mr. Bromwich. Well, I agree with Mr. Colgate that your
summary in looking at the inadequate segregation duties was, in
fact, a major cause that led to the $6 million fraud; that and
the fact that it related to covert law enforcement activities
which unfortunately is frequently an excuse for violating
fundamental rules of financial management. I share Mr.
Colgate's view that, in fact, the DEA did attack this problem
aggressively; did attack specifically the segregation of duties
issues, and did tighten up its financial controls in a way that
certainly minimizes the possibility that this kind of fraud
will occur again.
Mrs. Biggert. Well, it is my understanding that the
auditors reported this year that the weaknesses that allowed
the embezzlements to occur still exist, and, specifically, that
of 153 paid invoices, they tested that 21 of those lacked
evidence that DEA ever received the goods or services, and 10
were missing approval for payment. So, I am wondering why--in
the light of these recent embezzlements--why the invoice is
being paid without documentation of receipt and acceptance?
Ms. Kessinger. During our testing, it is normal for us to
find these kinds of issues and testing of invoices and
disbursement. We would normally either look for additional
documentation that would support that it was an appropriate
payment or that something occurred. We were also covering the
period fiscal year 1998, which started back in October 1, 1997,
and it is probably a lot of these things that were implemented
may not have been implemented at the beginning of the fiscal
year and were implemented during the year. The auditors were
able to do enough testing to get comfortable really that the
numbers were substantially correct.
Mrs. Biggert. So, will you continue then to monitor these
weaknesses to ensure that this doesn't happen----
Mr. Bromwich. Yes, absolutely.
Mr. Colgate. It is my understanding that it is part of the
routine review that would occur every year, so that they test
it to ensure that there are proper receiving reports, proper
invoices that support the payments, because we don't want to
ever get ourselves in that situation again.
Mrs. Biggert. Well, it seems like you might want to do some
special checks on this rather than wait for a whole year to
ensure that this hasn't occurred.
Ms. Kessinger. We will be doing interim testing during the
summer, and then we do the substantive testing in the fall, so
we are pretty much in there almost on a year-round basis at
this point.
Mrs. Biggert. OK. Thank you, I yield back my time. Thank
you.
Mr. Horn. I thank the gentlewoman. Those are good
questions, and you are welcome to do a lot more. I am only
going to pick on a few things here, and then we will move
along, so if you see--OK, well, I understand that. This is sort
of a busy day for everybody.
On the Immigration and Naturalization Service, I guess
since there was a problem on their financial aspects, I guess I
would say, in 1998, as I understand it, the auditor of INS
identified nine significant weaknesses. The auditor then
reported ``that INS has not established effective controls to
ensure that transactions were accurately and completely
reported.'' They went on to say they ``could not satisfy
themselves as to the extent to which INS financial statements
are affected by this matter.'' In addition, the auditor
reported that INS could not agree that its accounts with the
Treasury were off $76 million. They couldn't come up with an
accurate listing of who they owed--to whom they owed money.
They couldn't account for the revenue collected from applicants
in advance of processing, just to mention a few things. So, I
guess I would ask, Mr. Colgate, what actions are you taking to
ensure these weaknesses will be corrected in a timely manner?
Mr. Colgate. I have no dispute with the findings of the
auditor. Our biggest concern initially was this whole notion
that there wasn't sufficient reconciliation--I believe you use
the term $77 million--between the INS' balances and those
reflected by the Department of Treasury.
Mr. Horn. That was $76 million.
Mr. Colgate. Yes. We are concerned about that, and INS has
established a very aggressive corrective action plan. They have
brought in an outside firm to help them reconcile the balances
where there have been discrepancies. I would say if you asked
me a couple of years ago where my greatest concern was within
the Department of Justice, I would have to say within the
Immigration Service. I would say based on the results of our
1998 audit and the commitment by the Commissioner and the
organizational changes of moving to regional financing centers,
my personal view is that INS would receive the most improved
player award for 1998. I am hopeful that given the level of
commitment that INS has demonstrated in 1998, if we can
continue that level of commitment in 1999, that we can move to
the situation where INS would have a qualified opinion and be
able to overcome these deficiencies that have been listed.
The second observation I would offer is that it is very
important that we complete moving INS from an antiquated system
to the cross-servicing arrangement that it has entered into
with the Department of Commerce to move to a new financial
management system. With the change in the system and the
continued commitment of the Service to get its financial house
in order, I think that we can overcome this.
Mr. Horn. Is there suspicion of embezzlement with this $76
million?
Mr. Colgate. It is not so much the suspicion of
embezzlement, but I would say that we always have to be
suspicious until we get our total financial house in order. So,
I don't want to totally disclaim it. I think it is more of a
situation of making sure that we accurately reflect the
obligations that we incur; that we accurately reflect the
receipts that we receive, because when you look at the INS, I
believe it is almost a third of its operational expenses are
paid for by offsetting collections, so it is very important for
us to have sound financial management in an agency that
receives almost a third of its funding through receipts.
Mr. Horn. Have we analyzed who is at what financial station
that is inputting in these different accounts and examines
whether there is a possibility there for embezzlement or fraud?
Mr. Colgate. I will have to provide that for the record; I
don't know the detailed answer. I would point out, though, that
my staff has informed me that INS, since the closing of the
1998 audit, has been able to completely reconcile, at this
point in time, that balance that is in dispute between Treasury
and INS, so I think that is a good indication. I will give you
those detailed answers that you request.
Mr. Horn. OK, without objection, it will be in the record
at this point.
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Mr. Horn. You are saying it is detailed within the $76
million. Is that what we are talking about? In other words, it
is the whole $76 million, you are saying you are getting
reconciliation now?
Mr. Colgate. It has been pointed out to me--and if I have
made a mistake, I will make sure I clarify for the record--but
I have been told that the $76 million that was not
reconciliated has been, at this point in time, completely
reconciled to the Department of Treasury.
Mr. Horn. OK. I will tell you one thing I learned as a
chief executive was make sure that person that never takes a
vacation takes a vacation, and have someone else sit at their
desk and see what kind of weird transactions come through. So,
you might want to think about that, rotating people around or
something.
Mr. Colgate. That is a very good point. I think that was a
classic example that was in the DEA situation that we were
questioned about earlier. Essentially, my recollection was that
your new employee who worked at another agency had moved into
the accounting operations and was in a similar situation as you
described and looked at those invoices and said this doesn't
make a lot of sense. I think your observation is a good one.
Mr. Horn. Well, that is what management should be aware of.
It doesn't mean all our employees get that way, but sometimes
people are under a lot of pressure we don't know about.
Sometimes people do weird things when they are under either
that kind of either financial pressure on a mortgage or they
have a child on drugs and they need treatment or whatever, and
all I am saying is there are ways that good auditors know, and
I found over 18 years as a CEO, I always kept the auditor
afterwards where I could eyeball him and he could eyeball me,
and I said, ``OK, tell me what you found on I don't know how
many other campuses in the State of California, and let me
know, and what do you do to do it.'' And, obviously, making
sure that sort of two people have to know about what the
financial input and the financial output. It is just watching
some things that we think, ``Gee, you know, such a dedicated
person,'' and, yes, dedicated, right, to bring their bank
accounts up. So, you need to look at that.
In terms of the Community-Oriented Policing Services,
otherwise known as COPS, I noticed the Inspector General's
Audit Division performs numerous audits each year to determine
whether the recipients of the Community-Oriented Policing
Services grants are misusing the funds. The audits during the
previous year identified over $35 million of questioned costs
and over $60 million of funds that could be put to better use.
In addition, the auditor of the Offices, Board, and Divisions'
fiscal year 1998 financial statement identified a weakness in
the COPS Program involving inadequate documentation in the
grant files. Now, what can you tell us, Inspector General,
about that, or Mr. Colgate?
Mr. Bromwich. Mr. Chairman, we are doing, as you know, a
substantial amount of work in the COPS Program. We are right
now compiling a summary of all of the work that we have done to
date that synthesizes into categories the various problems that
we have identified.
In addition to that, we are doing a major internal audit of
the administration and management of the COPS Program that is
close to being releasable in draft form within the Department,
and I anticipate that that will be released publicly fairly
soon.
So, we are visibly engaged in overseeing this particular
program.
Mr. Horn. And is that looking at the other end of the grant
in the locality and whether they are following----
Mr. Bromwich. Yes.
Mr. Horn. Is that sort of a random sample or are you
looking at that----
Mr. Bromwich. Not a completely random sample, Mr. Chairman.
It began as our following up on specific referrals that were
made to us by COPS management. They said, ``We think we have
problems with X, Y, and Z grant recipients for these reasons.''
And so we began by looking at those. Since that time, as we
have done more of them, we have been selecting for ourselves,
approximately 50 percent of the COPS audits that we are doing.
So, it is a mix of referrals and self-selected grant audits.
Mr. Horn. Well, I thank you for that information.
Let me just ask Mr. Colgate a couple of closing questions
here, because I know you have, I believe, another hearing to go
to, Inspector General. So, I would just like to know what
percent of your time on the average, let us say over a month,
do you spend in your role as Chief Financial Officer? What
percent of your time, generally, do you spend in your role as
Chief Information Officer? What would you say off the top of
your head?
Mr. Colgate. I would spend, I would say, at least two-
thirds of my time related to Chief Financial Officer type of
activities. I would say that when it comes to CIO activities,
there has been far more delegation to whoever was the Deputy
Assistant Attorney General in IRM. I am not going to kid you,
my background, as you noted, I mean--I have been Director of
Finance staffs and budget officers in three different agencies,
and my interest and my love is financial management. So, I
would say the majority of my time is spent on financial
management issues.
Mr. Horn. OK, and then how much on the Chief Information
Officer's role?
Mr. Colgate. I would say probably--to be quite candid with
you, I would say probably--if I was to measure it any one day,
I would say 65 percent of my time is spent on CFO or financial
management type of activities. I would say that 15 percent of
my time is spent on administrative type of issues, whether it
be personnel or whatever, and then the smallest portion of my
time would be related to CIO type of activities.
Mr. Horn. OK. My last question to you, Mr. Colgate, is the
debt collection situation. According to the Department of
Justice's fiscal year 2000 summary performance plan, the
Department has completed a comprehensive debt management review
focusing on the Department's and components' efforts to
implement the, if you will, the Horn-Maloney effort in 1996,
otherwise known as the Debt Collection Improvement Act which we
just happened to get in the Omnibus bill that year, and I guess
I would ask you what were the results of this review including
the efforts to collect debts referred to from other agencies?
Do you have any thoughts on that?
Mr. Colgate. I don't have--I will provide in detail the
results of that review. I know that we are in the process right
now of putting out our Privacy Act notices that we can begin
this summer referring debts, the DOJ debts to be serviced by
the Department of Treasury, but we have to get this Privacy Act
notice out before we can begin that referral process. But,
specifically, on the status by appropriation, I would be more
than glad to give you that detail by account.
Mr. Horn. If you would, without objection, it will be
inserted at this point, and I guess I would ask what
improvements are being made as a result of this review, because
I am interested in your role in relationship with other
departments of the Federal Government where we are also trying
to get active, aggressive debt collection?
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Mr. Colgate. We are in the process, Mr. Chairman, of
implementing a new system so that we can significantly improve
the management of the Government's debt and the ability to not
only improve its management but its referral out to either
private counsel or Assistant U.S. Attorneys to collect. I have
been very pleased at the levels of debt referals, in
particular, in the Department of Education, we have received a
significant increase in the number of student loan cases that
have been turned over from the Department of Education to the
Department of Justice for collection. That is really good news
for the taxpayer, because to the extent that we can
aggressively go after those using private counsel, in many
instances, you can essentially return those loan balances to
provide additional loans to new college students.
I will be more than glad to give you a list over the last 3
years of increases in our civil debt collection, and we can
give it to you by client agency is my recollection. In summary,
we are making some system improvements. I am pleased to see
client agencies like Education increase their referrals to us.
I think we have made important strides here, but there is more
work to do.
Mr. Horn. Well, I am glad to hear that and any guidance you
can give us on that, we will be holding extensive hearings on
the debt collection in other agencies, and I am glad to hear
that you see a real change with some of the Departments. We
will be going over with the ranking Democrat as well as some on
the majority that have not been able to get here because of
markups and other things, some of the other questions that we
might not have in the record, and we would be most grateful if
both the Inspector General and the Assistant Attorney General
would give us a reply, and we will put the question and the
answers, at this point, in the record, without objection.
[The information referred to follows:]
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Mr. Horn. So, that is all I think we are going to do today
on the Department of Justice. So, you are free to leave, but in
answering the questions, you are still under the oath that you
took to tell the truth and nothing but the truth. So, thank you
very much for coming.
Mr. Bromwich. Thank you, Mr. Chairman. I want to again
express my appreciation for your being flexible in terms of the
order of panels this afternoon.
Mr. Horn. Glad to try to be flexible.
OK, we are now ready on panel two, and that is the Federal
Aviation Administration.
[Pause.]
Mr. Horn. All right, if the four witnesses and anybody who
is their assistant who might be talking, I would just have you
all stand and be sworn in at once.
[Witnesses sworn.]
Mr. Horn. All right, 1, 2, 3, 4, 5, 6, 7, 8, 9, 10, 11,
12--you almost equal the Pentagon--[laughter]--have affirmed to
the oath, and they are free to talk into the record.
So, let us start just down the order on the agenda and the
lineup we have in the first part of the panel. Ms. Linda Calbom
is the Director, Resources Community and Economic Development
Accounting and Financial Management from the General Accounting
Office. Thank you for coming and being lead witness.
STATEMENTS OF LINDA CALBOM, DIRECTOR, RCED ACCOUNTING AND
FINANCIAL MANAGEMENT, GENERAL ACCOUNTING OFFICE; JOHN MECHE,
DEPUTY ASSISTANT INSPECTOR GENERAL, FINANCIAL, ECONOMIC, AND
INFORMATION TECHNOLOGY, DEPARTMENT OF TRANSPORTATION; DAVID
KLEINBERG, DEPUTY CHIEF FINANCIAL OFFICER, DEPARTMENT OF
TRANSPORTATION; AND CARL SCHELLENBERG, CHIEF FINANCIAL OFFICER,
FEDERAL AVIATION ADMINISTRATION
Ms. Calbom. Thank you, Mr. Chairman. I am pleased to be
here today to discuss financial management issues at the
Federal Aviation Administration. As you know, in January 1999,
GAO designated FAA financial management as a high-risk area
because of serious and longstanding accounting and financial
reporting weaknesses. These weaknesses render FAA vulnerable to
waste, fraud, and abuse; undermine its ability to manage its
operations, and limit the reliability of financial information
provided to the Congress and taxpaying public.
Since 1994, the Department of Transportation's IG has
undertaken audits of FAA's financial statements and has
consistently been unable to determine whether the financial
information is reliable. This pattern of negative financial
results continues today with the IG's recent financial audit
report, a disclaimer of opinion on FAA's fiscal year 1998
financial statements, and I know Mr. Meche will talk a little
bit more about that.
Four fundamental problems must be resolved before FAA can
achieve the most basic level of financial accountability.
First, the agency must resolve the serious problems related to
accounting for property, plant, and equipment, and institute
systems, procedures, and controls to ensure that accountability
is maintained on an ongoing basis. Since 1994, the IG has
consistently reported that these assets are being
inappropriately expensed or otherwise unaccounted for, and
current estimates are that the asset balance may be understated
by as much as $5 billion to $10 billion.
During the audit of the fiscal year 1998 financial
statements, the IG specifically identified $1 billion of
equipment that was not recorded on the books as well as
numerous other errors and weaknesses in FAA's process for
keeping track of property and equipment.
The second issue FAA must address is to complete its
improvements to its inventory accounting system, particularly
related to spare parts at thousands of field locations around
the country. FAA does not currently have a reliable system in
place to track and control these field spare parts on a
continuous basis.
The agency's lack of accountability for property and
equipment and inventory impairs its ability to efficiently and
effectively manage operations that use these assets and expose
the agency to waste, fraud, and abuse. For example, lack of
physical controls over inventory and equipment could result in
the costly, unnecessary acquisition of assets already on-hand,
shortages of critical parts, delays in ordering needed assets
or undetected theft or loss.
The third basic problem FAA must address is to implement a
cost accounting system capable of reliably accumulating full
project cost information. The lack of cost accounting
information impairs FAA's ability to make effective decisions
about resource needs; to adequately monitor and control major
projects such as the $42 billion air traffic control
modernization project that you mentioned, Mr. Chairman, and to
identify and avoid waste. The lack of cost accounting
information also limits the ability of FAA management and other
decisionmakers to develop a system of user fees based on the
cost of services provided. And, finally, it limits the agency's
ability to meaningfully evaluate performance measures in terms
of efficiency and cost effectiveness.
And the fourth issue FAA must address is its other
financial reporting weaknesses that preclude it from preparing
meaningful financial statements. Audited financial statements,
as you were mentioning as well, are designed to provide a
public report of how taxpayer money provided to a given agency
was spent and when linked to performance measures what the
taxpayer got for their money. However, as evidenced by the
numerous problems in preparing the basic financial statements
that were reported by the IG, FAA lacks this fundamental level
of accountability.
FAA's senior management has indicated that they recognize
the urgency of addressing their financial management
deficiencies, and they are working diligently toward correcting
them. However, they are still far from financial
accountability. Until the agency is able to correct its basic
accounting deficiencies and produce a complete set of auditable
financial statements, it will continue to be negligent in its
duty to the taxpaying public to be a responsible steward for
the billions of dollars it is provided annually to carry out
its mission.
That concludes my statement, Mr. Chairman.
[The prepared statement of Ms. Calbom follows:]
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Mr. Horn. Thank you very much. We will now move on to John
L. Meche, the Deputy Assistant Inspector General for Financial,
Economic, and Information Technology for the Department of
Transportation. Welcome.
Mr. Meche. Thank you. Good afternoon, Mr. Chairman. Thank
you for inviting the Inspector General's Office to testify on
FAA's financial management. In the interest of time, I will
summarize my prepared statement. I will cover three topics:
FAA's current financial status, actions to develop a cost
accounting system, and challenges ahead for FAA.
Seven years ago, we began auditing the FAA financial
statements. To be frank, the books and records at that time
were in very poor shape. Since then, FAA has done lots of work;
and made many improvements. Unfortunately, some issues
identified years ago still haunt FAA. About 3 months ago, we
briefed FAA on the results of our audit for fiscal year 1998.
We informed FAA that it would not get a clean opinion this
year, and that fiscal year 1999 was already in jeopardy. At
that time, FAA decided it had to tackle these tough issues.
FAA's toughest challenge is the property and equipment accounts
which totaled about $12 billion. Much of this is old stuff, and
the records do not exist or cannot be easily found. FAA has put
together a task force involving headquarters and its regional
employees. We and GAO are working with FAA to find acceptable
solutions, and, Mr. Chairman, it is working.
For example, FAA's voice switching control systems,
installed in 23 locations, were on the books at $234 million.
By using budget information and national contracts, the FAA was
able to document its true cost as $1.1 billion. The difference
becomes really important if FAA is to recoup its full cost from
user fees.
Turning to cost accounting, FAA had set out to develop a
system by October 1, 1998, but the project has not gone
smoothly. FAA recently acknowledged it could not implement the
cost accounting system by its milestone of March 31, 1999 and
has revised the schedule. As of today, FAA plans to have a
fully operational cost accounting system by the end of fiscal
year 2001. The FAA needs cost accounting for management
purposes, but it is vital to establishing user fees if and when
they are authorized.
The FAA must address one other issue. The cost accounting
system gets its source data from the Department's accounting
system. During the past 7 years, including this year, we
identified significant financial control deficiencies within
the existing system. Without a clean audit opinion on its
financial statements, the FAA cost accounting system, even if
flawlessly designed, will not produce defensible cost-based
data. The Department plans to replace the accounting system by
June 2001.
The FAA and the rest of the Federal Government is moving to
measuring performance as required by the Government Performance
and Results Act. This will require financial systems that can
link cost information to performance data, and provide
information on cost effectiveness of FAA's major programs.
Unfortunately, FAA's current financial systems do not produce
the data it will need.
In conclusion, FAA is making an extraordinary effort to fix
the books by the end of fiscal year 1999. But, Mr. Chairman,
that is not good enough. Unless FAA fixes the financial systems
for the long term, FAA's books are likely to revert to their
current inaccurate position.
FAA is facing difficult financial conditions. To control
and monitor its costs, FAA needs basic financial tools,
including a reliable cost accounting system and good financial
data. It will take leadership, dedication, commitment, and very
hard work to solve these financial issues. FAA now has the team
in place and has the support of the Department's Chief
Financial Officer. We in the IG's Office stand ready to assist
the FAA Administrator and her Chief Financial Officer in any
way we can to make this a success for FAA, DOT, and the Federal
Government.
Mr. Chairman, that concludes my oral comments. I will be
pleased to answer any questions.
[The prepared statement of Mr. Meche follows:]
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Mr. Horn. We will defer the questions till we have
everybody's statement before us.
Now, I don't know who is to talk first, but in the line,
Mr. Kleinberg is the Deputy Chief Financial Officer, but Mr.
Schellenberg is the Chief Financial Officer. So, who is first?
Mr. Kleinberg. I will speak first. I am from the Department
of Transportation; Mr. Schellenberg is from----
Mr. Horn. Mr. Kleinberg is going into the Valley of Death,
I guess, and you are on the horse right behind him. [Laughter.]
Mr. Kleinberg. Mr. Chairman and members of the
subcommittee, thank you for the opportunity to speak before the
subcommittee and to testify on FAA's improvements in financial
management and the Department's actions to encourage and
support FAA's efforts.
We are pleased with the improvements that FAA has been
making in financial management over the past years and
especially their recent stepped up efforts. The audited
financial statement process has been of great benefit in
improving financial management throughout the Department. It
has brought greater discipline and focused the financial
management activities.
The material weaknesses identified by the DOT Inspector
General have directed DOT organizations to areas that can
benefit from financial management improvements. FAA has been
preparing financial statements for audit for the past few
years. Material weaknesses have been identified in the areas of
property, plant, equipment, and inventory. Corrective action
plans for these areas have been developed. Some actions have
been completed; others remain in the process of being executed.
These corrective action plans have extended over multiple years
and have involved numerous FAA offices. FAA has mobilized both
financial and program officials from headquarters, regional,
and field offices to assure the needed financial improvements
are implemented.
These financial management improvements must be
accomplished while at the same time not compromising vital
programmatic activities. Although the task has involved adding
new responsibilities and priorities to many FAA offices, FAA
has been making excellent progress in eliminating material
weaknesses through the execution of these corrective action
plans. The FAA Administrator, the DOT Chief Financial Officer,
the DOT Inspector General frequently review FAA's progress in
achieving these corrective actions. They support FAA's
endeavors and believe that they are on a reasonable course to
achieve a clean opinion.
The Secretary, the FAA Administrator, and the Chief
Financial Officer are committed to meeting the President's goal
of a clean audit opinion for the Department for fiscal year
1999. To accomplish this goal, FAA must also receive a clean
audit opinion in their fiscal year 1999 statement. In line with
this important goal, FAA's corrective action plans are
scheduled to be completed in fiscal year 1999. FAA's
organizations are currently ahead of schedule in completing
their required goals and milestones. This should allow ample
time for the General Accounting Office and the DOT Inspector
General to review FAA activities and to render a clean audit
opinion for fiscal year 1999.
We believe the FAA's actions demonstrate their full
commitment to improving financial management. They are taking
the necessary steps to demonstrate to the General Accounting
Office and the DOT Inspector General that their financial
statement is deserving of a clean audit opinion. A clean audit
opinion for FAA will assure the Congress and the American
public that FAA resources are being managed wisely and in the
public's best interest.
I will be pleased to respond to your questions after the
cycle is over.
[The prepared statement of Mr. Kleinberg follows:]
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Mr. Horn. Thank you very much. Mr. Schellenberg, the Chief
Financial Officer of the Federal Aviation Administration.
Mr. Schellenberg. Thank you very much, Mr. Chairman. It is
a pleasure to be here to explain what the FAA is attempting to
do to resolve both of these major issues. I want you to know
one of our agency's top priorities is to enhance FAA's
financial credibility and integrity as quickly and effectively
as possible.
Recently, the General Accounting Office put FAA on its
high-risk list for financial management for two key reasons:
the agency's failure to receive a clean audit opinion on its
financial statements, and the lack of a fully implemented cost
accounting system. We are fully committed to taking those
actions necessary to give the DOT Inspector General the basis
on which they can provide us a clean audit opinion.
Getting such an audit opinion is important to us not only
as a part of the goal to achieve a governmentwide unqualified
audit but also to assure the public that the assets entrusted
to the FAA are properly managed and accounted for. To ensure
success in this effort, we are working cooperatively with the
Office of Inspector General and the General Accounting Office
to identify and rectify those financial discrepancies that are
holding the agency back from receiving a clean audit opinion.
Together, we have identified three critical areas that the
FAA must address that had previously been overlooked for years.
First, reduce the FAA's work in process account which has been
overstated as completed facilities and facilities and equipment
were not transferred to the appropriate fixed-asset accounts at
appropriate times. Second, the need to adequately document the
agency's assets at sites throughout the country, and, third,
the need to adjust accounts for personal property, such as
radars and switching systems, to properly reflect their full
costs.
Let me emphasize at this point that the deficiencies that
we have described in those three circumstances relate to the
appropriate accounting process not the agency's ability to
locate those assets. In other words, it is not a loss of
assets, it is a question of an appropriate accounting
treatment.
As the agency's Chief Financial Officer, I am leading the
FAA's monumental effort to tackle these problem areas. Together
with the Office of Inspector General, we have set goals and
targets for FAA employees at headquarters and each of the
regions to complete this work. Led by each regional
administrator, dedicated teams have been formed throughout the
regions to undertake this work according to established goals
and processes.
For example, early in fiscal year 1998, the agency convened
a field spare parts inventory conference to coordinate the
physical inventory with the regional liaisons at over 800
sites. This analysis resulted in the FAA changing the
methodology it uses to price the agency's inventory to more
accurately reflect the cost of that inventory. Since then, both
GAO and OIG have sampled the inventory and found no material
discrepancies for the line items sampled. Another full wall-to-
wall inventory is planned for later this year.
In order to correct other financial statement deficiencies,
we will work with the Department and the IG to develop and
implement changes to our existing accounting systems; to
capture the new standard general ledger accounts, and change or
convert existing records to meet new reporting standards. We
have also accelerated our efforts with regard to developing a
process improvement plan. This plan when completed will
identify all changes in requirements needed to ensure that the
FAA has in place the correct automated systems, procedures, and
resources necessary to ensure the continued integrity of our
financial systems for the future. I share Mr. Meche's concern
that we institute processes so that we don't have to play
catchup again in the future, and that not only do we get a
clean audit opinion, we keep a clean audit opinion.
The deadlines we have set for ourselves will enable the
task to be completed with ample time remaining for the Office
of Inspector General to issue a clean audit opinion in fiscal
year 1999. We are pleased to be able to report that as of mid-
March, each region and center and their respective lines of
business is ahead of the goals for accomplishing these tasks,
and we anticipate having this work fully completed on time.
The second reason why FAA was put on the GAO high-risk list
was the lack of a fully implemented cost accounting system. It
should be noted, however, that the FAA is one of the first
Federal agencies to take steps to establish a full cost
accounting system based on generally accepted government
accounting principles. We have not just embarked on a
traditional cost accounting system but one that incorporates
non-financial with financial transactions in order to allocate
and determine the full cost of FAA's services. So, it is a
combination of performance measurement as well as the financial
data so that we can have, in fact, the kind of information Mr.
Meche referenced earlier. Knowing these costs will allow us to
track our performance and make informed management decisions
both which will help the agency better control its costs.
FAA commenced this effort 2\1/2\ years ago and will deliver
the first phase of the cost accounting system to support the
air traffic service organization by the fourth quarter of 1999.
Thereafter, other lines of business will be added in phases so
that the cost accounting system will be fully implemented
throughout the agency by the end of fiscal year 2001.
In our discussions with private companies that have
implemented similar cost accounting systems. We determined our
5-year completion target falls well within the range of best
business practices. Although the FAA has been held at fault for
not having delivered a complete cost accounting system. We
believe that the FAA should also be given the credit for having
taken these pioneering steps.
Let me summarize by saying that the FAA is undertaking
serious, comprehensive steps to regain our financial
credibility and integrity. We are cooperating fully with the
Office of Inspector General and the General Accounting Office
on an ongoing basis to achieve these goals and to avoid any
future problems. We have every confidence we will meet these
goals of achieving a clean audit opinion and implementing the
first phases of our cost accounting system in fiscal year 1999.
And if I may be permitted a personal comment when the
Administrator appointed me to this position during the middle
of the summer, it was made crystal clear to me by her and later
by the Chief Financial Officer of the Department that these two
functions, that delivering a clean financial statement and a
cost accounting system were the two major priorities that I
needed to proceed with. Let me assure you I am directly focused
on doing exactly those things. When I found that we were not
proceeding in both of those areas with the speed and with the
diligence that was necessary, we stepped in; we reorganized; we
took steps; we instituted new processes; we made
accountability; we made overtures to the OIG and the GAO to
work constructively to resolve issues in advance. I think we
are on track at this point, and I look forward to the fact that
we will be able to achieve that statement of cleanliness this
fiscal year. Thank you.
[The prepared statement of Mr. Schellenberg follows:]
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Mr. Horn. Well, we wish you well on that point. Just so I
get the relationship of reporting correct in my mind, Mr.
Schellenberg, you report to whom in the Federal Aviation
Administration?
Mr. Schellenberg. I report to the Administrator, Mrs.
Garvey.
Mr. Horn. OK, and to whom does the Chief Information
Officer report?
Mr. Schellenberg. The Chief Information Officer who is a
new gentleman that has just joined us also reports to Mrs.
Garvey.
Mr. Horn. OK, and so you have full responsibility for being
the Chief Financial Officer.
Mr. Schellenberg. That is correct.
Mr. Horn. All right. Who is the Assistant Administrator for
Management or whatever that position is called?
Mr. Schellenberg. Well, we no longer have an Assistant
Administrator for Management, sir. What happened is that we
have Assistant Administrator for Financial Services, and I am
that person. We have an Assistant Administrator for Human
Resource Management, and that is Ms. Glenda Tate. And we have
an Assistant Administrator and Chief Financial Officer, and
that is Mr. Daniel Meehan. I have some slight administrative
duties.
Mr. Horn. Wait a minute right there. You are the Assistant
Administrator for Financial Services.
Mr. Schellenberg. And Chief Financial Officer.
Mr. Horn. And you are also Chief Financial Officer, but you
just named that other person Chief Financial Officer.
Mr. Schellenberg. Oh, I am sorry. The other person I named
was the Chief Information Officer; I probably misspoke.
Mr. Horn. OK, yes.
Mr. Schellenberg. And that is Mr. Daniel Meehan.
Mr. Horn. OK, so your role as Assistant Administrator for
Financial Services, did that precede your coming to the agency?
I mean, has that position been around for a long time?
Mr. Schellenberg. No, no, that was just created. I have
been in the agency for a long time, but I was appointed to that
position, and it was created for the first time last summer.
Mr. Horn. OK, so you are not really doing anything other
than the Chief Financial Officer operation.
Mr. Schellenberg. That is correct.
Mr. Horn. OK, that is what I wanted to get straight,
because I wondered if you were reporting to an Assistant
Administrator for Financial Services, because the role should
report to Mrs. Garvey, the Administrator. Good, OK.
Now, we welcome Mr. Turner, and we are just finished the
testimony, and we are into questions now, and if you would like
to say anything at this point, you are certainly welcome.
Mr. Turner. You go right ahead.
Mr. Horn. OK. Well, let me ask the General Accounting
Office, Mrs. Calbom, is it true that the items mentioned are
missing or there was a mention that these items were not
missing? What is the finding of the General Accounting Office?
Ms. Calbom. You are talking about the property and
equipment items?
Mr. Horn. Right.
Ms. Calbom. I think what has been happening is over the
years as equipment is purchased it is being charged through to
the expense accounts, so it just flows through operations, and
it is not then being tracked on an ongoing basis. And what the
IG is finding is they are trying to go back--actually. The
agency, with the IG looking right behind them as they go, is
trying to go back and reconstruct the records, so they can
figure out which assets should have been put on the books and
kept on the books, so they can track those assets on an ongoing
basis. So, I think that is mostly what they are finding. They
are also finding situations, I know there was at least one
situation that is in the IG's audit report, where there was a
structure on the books for $1 million, and the structure had
been demolished 10 years ago. So, it is a lot of sloppy
bookkeeping is what it is.
Mr. Horn. And that is to be done by the Federal Aviation
Administration or is to be done by the Department of
Transportation?
Ms. Calbom. The cleaning up?
Mr. Horn. Well, the keeping of what data when and where.
Ms. Calbom. Oh, it is FAA's job to be doing that.
Mr. Horn. OK, so each service agency, whatever they are
called, within the Department of Transportation has their
responsibility.
Ms. Calbom. Yes, it is fairly autonomous, and FAA, as you
know, then prepares its own consolidated financial statements
which are subjected to an independent audit.
Mr. Horn. Interesting. OK, let us take a look at some of
the property, plant, and equipment just to review it. You say
FAA spent $26 billion on its Capital Improvement Program. Now,
those are the ones related to the Airport Improvement Fund, I
assume; the special trust fund that is set aside? Or is that
general fund money beyond the trust fund? Like a third runway
at Los Angeles International; a lot of that would come out of
the trust fund.
Ms. Calbom. Correct me if I am wrong, but I believe a lot
of that relates to the Air Traffic Control Modernization
Program.
Mr. Horn. OK. So, that is in terms of facilities for the
FAA to do its job itself, OK.
Ms. Calbom. Correct.
Mr. Horn. All right. And then we noted that they reported
less than $12 billion in gross property, plant, and equipment
asset costs. Is that correct?
Ms. Calbom. Yes, I believe it was right around $12 billion
that is on the books, and when we say gross, we mean before
depreciation is considered.
Mr. Horn. Well, then comes the obvious question: If you
have spent approximately $26 billion on capital year
improvement during fiscal years 1982 through 1998 and the
financial statements reported less than $12 billion in gross
property, plant, and equipment asset costs, the question is
where is the remaining $14 billion?
Ms. Calbom. Right.
Mr. Horn. So, where is it?
Ms. Calbom. That is the question that is being pursued
right now by FAA officials as well as--as I was saying, the IG
has been looking at what they are coming up with, and they are
trying to go back and reconstruct the records and determine
which of those funds that were spent really should have been
assets that are capitalized on the books. There is certainly
some of the property that was properly expensed, and certainly
there is some of it that relates to projects that were
abandoned or written off.
Mr. Horn. Has anybody checked those projects to see if they
were ever built?
Ms. Calbom. Well, I think as far as the funds that they are
identifying that relate to assets that should be capitalized--
and Mr. Meche can probably answer this better--but I believe
that they are going out and taking a look at those assets and
ensuring that, in fact, they are there.
As far as the funds that relate to the scrapped projects,
so to speak, that is money that was spent that isn't providing
any long-term benefit.
Mr. Horn. Well, we ought to be check to see if the
structure is there. I am not being humorous about it, but the
Subcommittee on Appropriations, independent offices, HUD, so
forth, went checking in New Orleans to see where the buildings
were that the Department of Housing and Urban Development had
been granting money to them over time, and they found a lot of
buildings that never even were erected, but somebody got the
money. So, we ought to check that.
Mr. Meche. Mr. Chairman.
Mr. Horn. Yes.
Mr. Meche. We know where most of that money has gone. We
are, in fact, in the process of rebuilding the records. There
was about $5 billion--and that is a very rough estimate right
now, because we are looking to the future--there is about $5
billion of that difference that was, in fact, expensed off the
records, and we are rebuilding those records right now with FAA
to be able to get that amount. There is another at least $2
billion, maybe $3 billion that we know. For example, the money
for the AAS system that was spent, but it never came into
production. So we know right now where a lot of that money is.
Mr. Horn. Well, you have me down to presumably $5 billion
or if you muddled a couple of things there, I am not quite sure
what the net balance is, but I asked where is the remaining $14
billion, and I think you said, ``Well, we certainly have about
$5 billion we think we know.'' And, obviously, then, what has
happened to the $9 billion?
Mr. Meche. That is correct, sir, and we are reconciling
that number down, and what we are finding so far is the kinds
of situations that I described. It is where FAA has not put the
system in place because it just never got off the ground, but
yet the money was spent. So, that is part of the money that you
are looking at, as well as expensing it and not capitalizing it
on the records. That is what the situation is with the $5
billion we know about right now.
Mr. Schellenberg. Mr. Chairman, maybe I can help a little
bit also.
Mr. Horn. Please.
Mr. Schellenberg. What we are really talking about is the
appropriate status on the records, not the location of the
assets. For example, it could be a question of where the FAA
had charged an asset to an inappropriate account. In such a
case, we are going back and correctly capitalizing the asset
while placing it where it properly belongs in our financial
statements records.
Mr. Horn. Well, let us take that item and example. Who
signs off on that particular asset item so that there is some
senior management responsibility? Would that be you signing off
on it or your predecessor?
Mr. Schellenberg. The actual decision to expense a
particular item?
Mr. Horn. Yes, right.
Mr. Schellenberg. It would be handled by the offices,
particularly on a regional basis, that were in charge of doing
the accounting for that particular project. As a practical
matter, I can't find any proper justification for expensing
what should have been capitalized; it should have been
capitalized.
Mr. Horn. Do those papers still exist with somebody's
signature on it? Did somebody assume responsibility, and did
they not then just input it properly or improperly at the
headquarters level?
Mr. Schellenberg. It was a combination of two pieces:
expensing it improperly and leaving it for too long in a work
in process kind of account. What we are doing in the one case
is the catch-up work to take things out of work in process that
have been completed long ago and putting those now in
appropriate asset accounts. Next we go back and recalculate and
redetermine the appropriate figure to put on the capital
account and the appropriate figures to actually expense. When
we have finished this work in the June timeframe, we will have
an accurate statement of what is legitimate work in process,
what is legitimate expense, and what is legitimately assigned
to those capital asset accounts. We are putting those figures
where they should have been all along.
Mr. Horn. Sure. Do we have any sort of feeling as to how
many thousands items there are here? Are we talking hundreds of
items or what?
Mr. Schellenberg. We are talking thousands of items. We are
working on the most significant items. We are ensuring that
current assets are appropriately accounted for. We are working
collectively and quite cooperatively with the Inspector General
and the GAO to ensure that we identify and characterize the
most material parts of inventory, so that everything is
appropriately accounted for. So, it is literally thousands of
job orders that have to be appropriately characterized.
Mr. Horn. Now, in your judgment as Chief Financial Officer,
do you think that the FAA has the appropriate system and
equipment to do this job?
Mr. Schellenberg. I think we have in place the appropriate
equipment and systems to do the catch-up. I do not yet think we
have in place the appropriate systems to keep current. We have
some groups that will develop those systems so that if you ask
me that question in 2 months, I feel confident I will be able
to tell you at that point, we have the systems that will let us
stay current. So, we are working on one; one I think is in
place.
Mr. Horn. Now, in terms of just the equipment--let us not
talk about property for a minute or big structures--do you have
a system now that you feel will keep track of the billions of
dollars in equipment that FAA purchases?
Mr. Schellenberg. Yes.
Mr. Horn. So, you think you are OK on that one?
Mr. Schellenberg. I think we will be OK.
Mr. Horn. Have you evaluated the FAA's plans to correct
their records for items that have not been recorded in the
past, and, if so, do you think this effort will be successful?
Mr. Schellenberg. Yes, we have taken a look at that, and I
think it will be successful.
Mr. Horn. OK. Let us see, I think we have enough on that.
If we haven't, we will send you a few questions after the
hearing.
Let us talk a little bit about air traffic control
modernization. I served on the Aviation Subcommittee when I
first came here and had a few views as I went out and looked at
that thing, and it turns out I was right, and the FAA was right
to cut if off at $4 billion. I would just like to know why they
didn't cut it off at about $4 million, $40 million or $400
million? The IRS went to $4 billion also. I don't know if they
were cloned so that FAA and IRS--you got different letters, but
it didn't sound like a clone, but they end up with the same $4
billion, and I guess nobody gets their attention until a few
billion are spent in Government.
Now, the General Accounting Office testimony indicates that
the $42 billion Modernization Program is expected to continue
through fiscal year 2004. This is a significant program, and I
believe its expected costs will be an additional $16 billion
over the next 6 years for such things as radar navigation,
communications equipment, as well as computer software. When we
buy this additional equipment, I am concerned whether or not
you will be able to account for it properly. What do you think?
Mr. Schellenberg. I am concerned about that too. That is
exactly why I convened this group to get together to design the
kind of system that will let us keep current and make sure that
as those items are acquired, they are appropriately
characterized in the accounts and that we are current with the
process.
Mr. Horn. Well, I guess I will ask the obvious, because it
seems to me there must be some corporations in America that
have related things to deal with in terms of categories and
that maybe you could get it off the shelf or have you looked at
that? Or has the Chief Information Officer looked at that? Or
is the person too new to look at it?
Mr. Schellenberg. Well, I don't. I will defer to Mr.
Kleinberg on that issue, if I may, please.
Mr. Kleinberg. We have looked at it in the sense that we
have adopted an Oracle financial package that we are putting in
the Department that will be in place in 2001. That handles,
obviously----
Mr. Horn. And you have already tested this Oracle system to
see if it does for you what you want it to do?
Mr. Kleinberg. We tested it in the first stage; the second
stage of a more refined testing starts next month and will be
completed by the middle of June at which time we get into what
we call the final build stage. By Oracle's own management view,
they think we are chasing them rather than them chasing us at
this stage, and we hope that continues. So, we think that that
is the type of package that is supplying chain management
although if all the other types of software at the private
sector do use similar type things, it will be available to us
and subtle enough to handle all of these problems.
Mr. Horn. So, you are not the alpha site, you are the beta
site.
Mr. Kleinberg. No, actually, we are beyond the beta site in
the sense that this is proven by about 5,000 corporations
already.
Mr. Horn. Good. Well, we will extend the alphabet a little
bit. [Laughter.]
No, I am glad that you let somebody wear themselves out in
making sure it works.
Mr. Kleinberg. Exactly.
Mr. Horn. It makes sense.
OK, inventory. I understand from the testimony here that a
lot of progress has made in the ability to keep track of
inventory located in your warehouse, as I understand it, in
Oklahoma City. However, there still seems to be problems
keeping track of parts located in the field. This seems
especially critical since those parts are scattered around
30,000 locations throughout the country. You might have some
overseas also; I know you keep some people overseas. FAA, I
would have the question is, what are you doing to ensure that
you have a system in place that can keep track of these parts
on an ongoing basis? I guess, Mr. Schellenberg, that all was
headed in your direction.
Mr. Schellenberg. I rather expected it was. We have been
doing a number of things on our field spares. We have conducted
physical inventories to ensure the present location of all
those items. We did one last year; we will do another one this
year. We are also in the process of developing the perpetual
inventory system to keep better track of those field spare
items. Again, the question associated with those field spares
is often the fact that you need a critical part in another
facility and sometimes the issue has been that it has been more
pressing for our folks to restore that facility--get it there,
get the equipment running--than it has been to do the
paperwork. What we need to do in the new system is to make it
simple enough, quick enough, and easy enough that inventory
tracking steps happen quickly, easily, and currently, so that
we have an accurate and complete status that is up to date at
the moment.
Mr. Horn. Yes, having heard the question and the answer, I
would like to know from the Inspector General and from the
General Accounting Office, do you think they are on the right
track or are there real problems here?
Mr. Meche. Mr. Chairman, I think they are on the right
track. We recommended to FAA about 5 years ago that they
establish a perpetual record system for these field spares. It
wasn't until about 6 months when Mr. Schellenberg came on board
that we brought this to his attention. We showed him what the
results were and convinced him that it was time for FAA to
establish perpetual records, and he has, moved out on that. As
soon as the FAA gets those spares into inventory--there is
going to be a physical inventory--we will test it, and assuming
that there is no problem with the accountability, we will be OK
with it.
Mr. Horn. Ms. Calbom, for GAO, what is your reaction?
Ms. Calbom. I guess we still have some concerns about the
field spares inventory at this point. As stated in my
testimony, when we took a look at some of the test counts that
the IG did in the field--we, ourselves, did not do test counts
in the field; we did them at the big warehouse but not in the
field--we were just concerned that at all the sites the IG
staff went to there were a number of problems that were
discovered, and we really felt like probably the count process
may not have been a good process. It is real hard tell if they
truly had a good handle on what was out there.
I am happy to hear that they are going to do another
complete count for the fiscal year 1999 audit, and then the IG
will go in and take a look at those, and we will be following
up on that as well. And I do agree with Mr. Meche that they are
beginning to implement a perpetual inventory system which is
something where they can keep track of the ins and outs, and
so, at any given point in time, they know what they have at
different locations, and I think that is really essential for
this type of operation, because, like you say, it is scattered
all over the country. And when you have spare parts like this,
I mean, some of them are really critical, it is important if
you have modifications or other things like that, it is very
important from an operational standpoint, to know where those
are so that they can be updated if need be.
Mr. Horn. Well, let us put it this way, thousands of
American firms that assemble things or manufacture have adopted
the so-called Japanese inventory system where your parts are
fed into when you need them in some way, obviously by computing
the stocks down to a certain level. Is there any possibility
that the kind of parts FAA needs and has in that huge warehouse
in Oklahoma City where that can be directly sent to people in
the field by the person that is making them? And I don't know
if you have looked at that or that would save you warehouse
space or what, but it is something you might think about.
Mr. Schellenberg. We have done much of that, Mr. Chairman.
Let me also point out that at most of these field facilities it
is not a question of manufacturing something that you have
anticipated demand for, it is often a question of a part
failure that needs to be replaced very quickly in order to
preserve their safety. So that we try to anticipate; we try to
stock these facilities with the required number, but there will
often come times when it doesn't happen exactly the way you
planned. What we want to do is to have economic quantities, but
we also need to have the ability to respond very rapidly. So,
we are doing what you are suggesting; it is a difficult balance
to take at times.
Mr. Horn. Give me an idea of what the FAA needs in parts.
Is this for radar or what?
Mr. Schellenberg. This could be the major tube for a radar.
It could be major components of air ground----
Mr. Horn. Tube for radar? You mean, we are not still using
vacuum tubes, right? LAX was until recently, I think.
Mr. Schellenberg. The tube is the major thing that
generates the radar signal, the clystron, on many of our
things. It could be air ground communications equipment; it
could be something that is a part of a navigational aid. So,
when these things cease working, we need to get them back up
and operating as soon as possible. So, it is a question of
anticipating what parts are going to fail, and that is not
always an easy process.
Mr. Horn. Well, I am glad you are taking a look at it. Do
you know in your current inventory different parts are there in
that Oklahoma City warehouse?
Mr. Schellenberg. I don't have the number at my fingertips;
we will be happy to provide it.
[The information referred to follows:]
The total inventory of items at the Logistics Center in
Oklahoma City is 84,143 items.
Mr. Horn. The Air Force, I found, over the years, has so
many spare parts it is unbelievable, and a lot of them are
planes they no longer order, so when you have a master sergeant
that knows what they are doing there, why, they can usually
clean up that inventory.
Mr. Schellenberg. We are doing an interesting thing, Mr.
Chairman, that you might be interested in. We are now operating
our logistic center as a franchise fund. The individual
facilities that now need to have parts are being charged for
those parts, so that they now have financial accountability.
This has increased their awareness of economic quantities to
have on hand, so it is working a very positive effect.
Mr. Horn. And routine maintenance to be preventive
maintenance to help extend life.
Mr. Schellenberg. Yes.
Mr. Horn. Well, that makes sense, and I congratulate you on
that.
Financial reporting. It has been mentioned that there are
significant errors in the 1998 financial statement, including
problems with statements of budgetary resources and net costs.
In addition, FAA's financial statements, themselves, say that
``some of the budgetary balances from the general ledger were
not accurate or were incomplete in the accounting system.'' I
guess I would ask the Inspector General, what do you mean in
your report when you say that $7.2 billion unobligated balance
in the statement of budgetary resources could not be
substantiated?
Mr. Meche. Mr. Chairman, this is the first year that we
have had to audit these new statements. What we have found in
this particular example you are talking about is that this is a
cumulative figure that has built up over years. For auditors to
come in for the first time--I mean, for auditors to validate
that number, they have to be able to track it back to every
single dollar that it is involved, and when you are dealing
with transactions that have been occurring over 15 to 20 years,
it is just not possible to do. That is what we ran into with
these new statements.
Mr. Horn. What you are saying is there is no way we can
ever check this?
Mr. Meche. I believe that is probably correct. We have
tried to do some of that work this year, and we have been able
to get to some of the dollars, but certainly not anywhere near
the total amount, because it just keeps going further and
further back in time.
Mr. Horn. What is the General Accounting Office's view and
what is the FAA's view on this?
Ms. Calbom. Well, as you know, Mr. Chairman, the purpose of
adding these new statements is really so you can get, No. 1, a
complete picture of what is going on. I mean, you have your
statement of budgetary resources that kind of tracks things on
a budgetary basis; you have your statement of net cost which
then says, OK, how is the money spent specifically. If we can
do detailed audits on our statement of net cost and then tie
that into the statement of budgetary resources and our budget
accounts, ultimately, then we can get some comfort on the
validity of the numbers that are reported in the budget
accounts.
Unfortunately, what has happened with FAA--and there are
other agencies where this has occurred as well--they have not
maintained good documentation--because they never had to
before; no one ever checked--of the budgetary accounts. This is
the first year we have subjected some of those to audits, and
it is a similar situation, as you have heard time and time
again in the various testimonies on the other agencies, when we
first started subjecting them to the audit of just the balance
sheet and the operating statement, nobody had the records. They
are starting to get the records now; put them together. Same
thing on this statement of budgetary resources; they are
finally realizing, ``OK, we have to keep records of this as
well.'' Until we are able to do that, we are not going to have
the full package; the last part of the package being the
performance reporting, that we can provide that full set of
accountability that really needs to be provided.
Mr. Meche. And, Mr. Chairman, one other point on that: when
FAA tried to prepare that statement this year, they had to go
totally outside their accounting system. The accounting system
does not have that information--that is the point that you
pulled out of our report. One of the issues for the future that
we talked about is having a financial system that incorporated
all of the requirements so the system itself, automatically,
internally, checks and balances itself to where you keep these
things under control as you go along.
Mr. Horn. Well, this leads, obviously, to a few questions
on cost accounting and if we think it is reasonable at this
point. The fiscal year 2000 budget that was submitted to us in
Congress includes $7.5 billion in user fees to be collected
during the 5-years beginning October 1, 1999, the beginning of
the new fiscal year 2000. It is only about 6 months away. These
are described as cost-based user fees, and the Inspector
General and the General Accounting Office testimony state that
one of your major problems in FAA is the lack of a cost
accounting system and that this is the key to your ability to
establish cost-based user fees. So, I would ask Mr.
Schellenberg as Chief Financial Officer of the FAA, where do
you stand in terms of implementation of a cost accounting
system?
Mr. Schellenberg. As far as the cost accounting system is
concerned, we will deliver during the third quarter of fiscal
year 1999 the first major phase of the cost accounting system.
This will constitute the cost information, the fully allocated
cost information, that will involve that portion of the air
traffic system involving the en route and oceanic air traffic
operations.
This will allow for two things. This will allow for the
issuance of an interim final rule on those fees that are
currently authorized; that is a limited slice known as the
overflight fee, and that will be able to be issued before the
end of this fiscal year. We will then also have in place the
costing information necessary to support the President's fiscal
year 2000 budget at the $1.5 billion level. Should there be
enabling legislation that would allow us to go ahead, the cost
accounting information will be prepared for that. We will then
institute the balance of the cost accounting system delivered
also in phases.
We will complete the first phase being the remainder of the
air traffic system. We will then take the other agency elements
such as the regulatory process, space transportation, those
pieces, culminating in the last piece being delivered in fiscal
year 2001. So that according to our present schedule, which I
have good confidence in, we will proceed to have in place the
necessary cost accounting pieces to support those charges
should they be authorized as contained in the President's
budget.
Mr. Horn. Well, I am delighted to hear that, Mr.
Schellenberg. I would just simply Mr. Meche, has the Inspector
General reviewed the FAA cost accounting system designs and
plans, and, if so, do you have any comments or concerns about
the planned system?
Mr. Meche. We have, Mr. Chairman. We made an initial review
of the system last year and issued a report in August 1998. We
identified four major issues with the development of that
system. We pointed those out to FAA, and they are considering
them in the schedule that they are doing right now to address
those concerns. So, yes, we have looked at that. We have not
looked at anything associated with the piece that is being
developed right now that is going to support the overflight
fees. We are waiting for FAA to have that piece in place, and
as soon as it is we will audit it to see that the amounts are
cost-based and that they are valid and legitimate costs going
into accounts.
Mr. Horn. Tell me how the overflight fees work? I am just
not that familiar with it.
Mr. Schellenberg. We have the authority to impose a fee on
aircraft that fly through U.S. air space but neither takeoff
nor land within the United States. So, that to an extent that
someone is flying through our air space, the premise is that
they are not otherwise paying taxes for their operation in air
space. We capture through our air traffic system their
presence, and we will impose a cost-based fee for that
operation with U.S. air space.
Mr. Horn. Is this because they are utilizing the
information that your radar service is providing?
Mr. Schellenberg. We are providing them air traffic control
services within the United States, and since they neither
takeoff nor land here, there is no basis for otherwise charging
them.
Mr. Horn. Can you give me a few examples of which airlines
do this that don't land here; don't take off here, and overfly
us?
Mr. Schellenberg. Well, there have been a number of
airlines, Canadian airlines were that way for a long time.
Mr. Horn. Just go directly to Mexico, let us say, out of
Toronto.
Mr. Schellenberg. Right, or come from Pacific destinations
and fly through U.S. air space and land in another country; any
number of those.
Mr. Horn. Fascinating. You guys in FAA ought to be the tax
collectors for the country if you have figured out how you can
tax people going over the air. [Laughter.]
Mr. Schellenberg. Well, we have had our problems.
Mr. Horn. I learn something new everyday; that is why we
hold these hearings. That is my factoid to do something with
tonight.
Anyhow, your testimony laid out a number of other areas
where cost accounting was important. Could you elaborate a
little bit on that; I am fascinated?
Mr. Schellenberg. Essentially, we view that there are two
fundamental reasons for having cost accounting: one, you talked
about, the necessary piece to support user fees, but really
more and more important than that is the fact that the FAA
needs to know how much it costs to deliver its services, so
that we can effectively manage this agency in the most
effective and efficient way. Until we have that in place, we
are making choices often based on assumption rather than hard
data.
So, what we are trying to pull together is unassailable
information that says it costs you this much to do your
services. If you begin to compare one facility to another and
we see the cost of operation in one is significantly different
from the other, I think you recognize this, as we do, that the
powerful impact that that can have on encouraging better
operation that is more efficient.
So, that, on the one hand, just having the information and
knowing what your costs are will have a salutary effect on the
agency. When we couple that information as we will with the
performance information and how well we are delivering our
services, then it becomes more powerful yet, and then I think
we have the technique that the GPRA anticipated. We would
balance those two pieces and I think greatly improve how we
serve the public and at the cost that it takes to do that.
Mr. Horn. Well, that leads to another question which I
would like to have your opinion on it. You have a goal,
obviously, and it is commendable, to receive a clean opinion on
your 1999 financial statements on September 30th, and I would
be curious how you plan to accomplish this given the various
serious problems that the auditors, the General Accounting
Office, the Inspector General have all said that FAA has, and I
guess the question, to me, at least, is in the year 2000, that
budget has been prepared, recommended by the President, were
you there in time to get some input from the role of the Chief
Financial Office in FAA, and if you need any personnel
resources in order to get the job done or did you come into the
system too late to get your ore into the boat and see what they
would do with it?
Mr. Schellenberg. I came right in the middle of that
process, and I think we have appropriately participated in an
effective way.
Mr. Horn. OK, so you are not short on resources?
Mr. Schellenberg. No, sir.
Mr. Horn. Or did you recommend--well, let me ask you this:
did any of your recommendations get cut at either the
Administrator's level--this is the kind of thing OMB can't
punish you over; once we ask it, you have to give us the truth.
[Laughter.]
And we don't listen to them anyway. But the question is
obvious, did the Administrator cut your request back? Did the
Secretary of Transportation cut it back? Did OMB cut it back?
Who killed Cock Robin in brief? Cock Robin is probably
regulated by FAA somewhere. [Laughter.]
It flies, doesn't it? Or was he a little boy?
Mr. Schellenberg. You always have me in that wonderful box.
I can tell you, I am a good bureaucrat, and like any other
bureaucrat, we would like to have more money that we can get.
But what I can tell you is this: that where it has come to the
question both in fiscal year 1999, plans for 2000, so far as
the Administrator is concerned in providing and finding the
dollars necessary to pursue these two critical initiatives. She
has always been in the position of ensuring that we find the
dollars to do so, so that I am convinced, whether it be a part
of the 2000 process or whether it be a part of how we execute
the budgets that we have, that we will find the dollars to make
this happen.
Mr. Horn. Well, I will let that one pass. [Laughter.]
So, just let us know under oath if you have to, and if you
have anything else to say, we will put in the record where the
whole world can see it. [Laughter.]
Environmental clean-up liability. I also sit beside--my
other assignment is on Transportation and Infrastructure. I sit
on that subcommittee, and we are very interested in this. Mr.
Boehlert is pursuing some very good strategies on this, but the
amount estimated for future clean-up of environmental waste,
including fuel storage tanks, has increased dramatically since
last year. The estimate increased by over $2.2 billion; that is
an increase of over 237 percent. The obvious question to you,
Mr. Schellenberg, is what has caused this huge increase and was
something missed in prior years?
Mr. Schellenberg. Mr. Chairman, unfortunately, that is
something that I have little direct knowledge of. I will be
happy to do some research for you and provide the information.
[The information referred to follows:]
The FAA reported, in Environmental and Disposal
Liabilities, $1 billion in FY97 and $3.2 billion in FY98, an
increase of $2.2 billion. Most of this increase, $1.5 billion,
is the result of our greater recognition of, and our improved
ability to estimate, the costs associated with the
decommissioning of radars and navigational aids as Global
Positioning Satellite (GPS) is implemented. As these facilities
are decommissioned, it is incumbent that the FAA restores the
land to its original condition. The remaining additional costs
are associated with added costs for the replacement of fuel
storage tanks; cleaning up and preventing releases of hazardous
materials; and complying with OSHA and environmental mandates.
Mr. Horn. Well, is this an FAA responsibility or is this is
a Department of Transportation responsibility with all of your
various components, Mr. Kleinberg?
Mr. Kleinberg. Each organization determines its liabilities
associated with all of those types of operational activities as
they take place throughout facilities that they either have or
have abandoned in some cases, and they usually go through an
analysis of that and get the lawyers in to figure out what the
upper levels are. So, we can, if you want, assemble it through
the Department, Department-wide if you would like, but it
generally comes--we will assemble it from the component
agencies of the Department.
Mr. Horn. But this figure is really tied, is it, to the
FAA, this $2.2 billion?
Mr. Kleinberg. Yes.
Mr. Horn. And, so you have a bigger--few more billion, and
I assume the railroad----
Mr. Kleinberg. The Coast Guard, actually, has many, many
facilities that they took over from Defense that have clean-up
problems, Governor's Island being one.
Mr. Horn. Yes, I have held hearings there, and you are
right on that, and I can see where Coast Guard would have it no
different than the Navy in reality which, by the way, I guess
we authorized you two new Coast Guard cutters yesterday,
because the Navy wouldn't give them to you, and that really
ticked me off. I voted for it, but I told Secretary Perry when
we were both in Panama together, he was looking at the military
stuff and three of us were looking at the drug situation, and I
said we need some platforms in the Puerto Rico to Panama area
and up the west side of Mexico where we could track these drug
planes which are just--they just sort of spit in your eye as
they go over you, and they dump this stuff about 20 feet off
the Puerto Rican sands or in Puerto Rico right under our noses.
So, we were all ticked off, and we did unload on General
McCaffrey that as far as we are concerned they ought to start
checking everybody from Puerto Rico that lands anywhere in the
mainland United States, because there is no question drugs are
being brought in, and they were just helpless to follow the
radar thing and a few Navy ships that nobody's using, keep a
couple in the Persian Gulf, and give us help is my attitude
here. So, anyhow you have two cutters coming out of us,
assuming the appropriations came, and I am sure you are going
to give a good case for that.
I think the Coast Guard does a superb job. I didn't like
you moving the 11th Coast Guard District from Long Beach, CA up
to Alameda, but I think you do a superb job.
Mr. Kleinberg. Thank you.
Mr. Horn. Anyhow, so what has caused this thing now? Is
this strictly FAA property or is it things they have funded
through the Airport Improvement Fund that you get stuck with in
terms of environmental waste?
Mr. Kleinberg. I am informed that it is FAA property, sir.
Mr. Horn. FAA property, OK. Do you think that is pretty
accurate, Mr. Meche.
Mr. Meche. Yes, sir, that is correct.
Mr. Horn. I guess some might have said this questionable
number impact the fiscal year 1999. You have the estimate for
the fiscal year 2000. Are we even worse off now or will
something be done between now and September 30?
Mr. Schellenberg. I am informed we book the estimate each
year, and there is no anticipation that it would go down by
2000.
Mr. Horn. OK. Mr. Meche, did the Inspector General look at
this number and see if it made sense?
Mr. Meche. We have not looked at that number, Mr. Chairman.
Mr. Horn. OK, and I would like to know if you do look at
it, will it possibly affect next year's opinion?
Mr. Meche. I can certainly tell you we will look at it.
[The information referred to follows:]
[GRAPHIC] [TIFF OMITTED] T1686.152
Mr. Horn. OK. We found with the Department of Defense,
their environmental waste group, it just takes forever to get
anything done. We will all be in Medicare 20 times over, I
think, before they get something done, and then all these bases
that have been closed sit there, and you can't put them into
economic development or anything else.
OK. GAO on the importance of financial statements. What the
Inspector General has said they reported numerous areas in
FAA's financial statements and several areas reported that they
were unable to complete their audit due to a lack of records,
similar reasons where we have discussed some of that, but I
guess I would ask the General Accounting Office to explain to
us for the record what it means, the ramifications, if FAA is
unable to prepare reliable financial statements that can be
audited?
Ms. Calbom. You know, Mr. Chairman, the financial
statements really are the public report card that an agency
gives the taxpayers. It is similar to what any publicly held
company reports to its shareholders. Shareholders are able to
quickly look at what they got for their money, because
company's report earnings per share; I mean, profit is the name
of the game. As far as Government agencies, what taxpayers get
for their money is outputs and outcomes, and there is an
overall reporting scheme that the Federal Accounting Standards
developed, and I was touching on it a little bit earlier.
Basically, we have our budgetary statements now that are
supposed to reconcile your budget activity for the year. Then
you have your basic financial statements that tell you, ``OK,
what did I spend that money on that I received? What are the
investments the taxpayer made? What are the balances on the
books related to those investments today?'' And then you have
your performance reporting which is a fairly new concept in
Government, but it is a very important one, because that is the
piece where you say, ``All right, what did I get, and how much
did it cost me?'' And when you get all those pieces together,
then the taxpayer can start to say, and, more importantly, the
Congress who is overseeing these activities, ``All right, was
it worth it to me to receive that outcome for this much money?
We budgeted this amount to this agency; here is how they spent
it; here is what they got. Was it really worth it, and should
we be shifting priorities?'' Across Government, we are far away
from being able to do that, but you have to take things one
step at a time, and the step that I think we are all here today
focusing on that is critical to the whole process is getting
these financial statements. That middle link has to be a good
solid link or you will never get the rest of it.
Mr. Horn. I agree with every word you said, Ms. Calbom.
Your eloquence is right on the spot and headed in the right
direction. There is no question that once Congress passed the
Results Act, as we call the Performance Act--and we have
strategic plans now going, and a lot of Federal agencies didn't
have the slightest idea what we were talking about on the
strategic plan, and yet every one of us that has been in local
government or on the local Chamber of Commerce or running a
university or whatever it is or a corporation that has stock on
the New York Stock Exchange and so forth, all of those in the
last 20 years have developed strategic plans. What is our
mission? And just as you say so very well, how do we measure
what we are accomplishing?
And we will be looking at Australia and New Zealand that we
have given quite a platform to here 2 years ago when we started
in on that. They are the only two countries in the world with
results-oriented governments. The only place in the United
States I know it exists in government is Oregon. The State of
Oregon has gone out and it isn't easy, as you know, to relate
financial data to measurement of satisfaction of the clientele,
but let us face it, we have trillions of dollars down the line
that things are going to cost, and we have to figure out what
do we do best with the most reasonable amount of money to
please the taxpayers, which we are all here to serve, both in
the executive branch and the legislative branch.
So, I think that we are on the right track, especially when
you can use the user fees, because I don't know how many people
will take you into court if you didn't have a data base to back
it up. I have seen it happen on the Airport Trust Funds all
over the place, but I think you are on the right track, and I
want to thank you all for testifying here today.
It is obvious that we still have a great deal to go on
financial accounting, but it is absolutely necessary. I think
you obviously agree with that, and we certainly agree with you
agreeing with that.
If both Justice and Federal Aviation were corporations,
they would be struggling to stay in business given the
financial reports. Publicly held corporations have to
accurately report their finances to stockholders, to boards of
directors. Public agencies have to be held to the same high
standard for their stockholders, namely, the taxpayers of the
country, and I am glad to see the interest that both the
General Accounting Office, the Inspector General, the
Department of Transportation, and the Federal Aviation
Administration has in this, and I am glad you joined the team,
Mr. Schellenberg, because I am impressed with what you had to
say and get on top of this situation.
It is not easy; we all know it, but it is going to take a
couple of years to turn this thing around, and that is true
everywhere. All we can do is work steadily at it, and I wish
you well, and I hope next year about this time you will have a
lot more to say or you won't even be up here. [Laughter.]
Mr. Schellenberg. I will opt for the second one.
Mr. Horn. So, merry holidays, Merry Christmas. Thank you
very much for coming.
Mr. Schellenberg. Thank you.
Mr. Kleinberg. Thank you.
Mr. Meche. Thank you.
Ms. Calbom. Thank you, Mr. Chairman.
Mr. Horn. I am going to thank the staff that prepared this
fine hearing, and we can start with J. Russell George, the
staff director and chief counsel--he is off on other business;
Bonnie Heald, I see in the corner back there, director of
communications, professional staff member for the Subcommittee
on Government Management, Information, and Technology, and the
right arm on this hearing happens to be the left arm, Larry
Malenich who is the GAO detailee; Mason Alinger, over there in
the corner, principal staff assistant and clerk, and Kacey
Baker, an intern, was here, but she helped on this; Faith
Weiss, for the minority; Ellen Rayner, the chief clerk for the
minority and our two court reporters, Kristine Mattis--is it,
have I got that right? And Carl Huang. I thank you all, and,
with that, this hearing is adjourned.
[Whereupon, at 4:10 p.m., the subcommittee was adjourned.]