FROM THE OFFICE OF PUBLIC AFFAIRS

Mr. Chairman and members of the Subcommittee, I am pleased to appear today to discuss the Financial Report of the United States Government. I would like to thank you, Mr. Chairman, Ms. Schakowsky, and other members of the Subcommittee for focusing on improving Federal Government financial accountability and reporting.

The Department of the Treasury is dedicated to producing useful Governmentwide financial statements and has devoted considerable resources to this effort. While we are pleased to issue the FY 2000 Financial Report on time again this year, reporting not fully reliable financial results six months after the close of a fiscal year is simply not good enough. Working with the federal community, we have made incremental progress each year but incremental progress may not prove to be sufficient. We are committed to improving the process to make the financial statements more useful.

Treasury, in conjunction with the Office of Management and Budget (OMB), and the General Accounting Office (GAO), will conduct a comprehensive review of the financial statement production process. While we have made significant progress in performing the consolidation, particularly with respect to resolving differences in net position, classifying agency activity, reducing the number of adjusting entries, and making certain intergovernmental eliminations, the remaining challenges, especially with respect to consistency and intergovernmental eliminations, warrant a fresh look. This review will lead to recommended changes and improvements. Should any require legislation, we will report them to you. Additionally, later this year, Treasury will implement the first phase of our multi-year revamping of Governmentwide central accounting systems and processes for reporting budget execution information. This initiative will improve data access, reduce redundant reporting, and eliminate time-consuming reconciliations. This is a critical first step to improving overall federal financial management.

The Department of the Treasury continues to be a strong advocate for the preparation of financial statements by Government agencies and for Governmentwide consolidated financial statements. The Government Management Reform Act of 1994 (GMRA) requires that not later than March 31 of each year, the Secretary of the Treasury, in coordination with the OMB Director, shall prepare and submit to the President and the Congress audited financial statements for the preceding fiscal year. The statements cover all accounts and associated activities of the executive branch of the United States Government and are prepared in accordance with generally accepted accounting principles, as established by the Federal Accounting Standards Advisory Board (FASAB). The Financial Report of the United States Government for fiscal year 2000, which includes the financial statements, provides information to the President, the Congress, and the American people about the Government's financial position, the cost of its operations, its sources of financing, and stewardship information.

We are committed to producing financial statements that meet FASAB standards and provide timely, accurate, reliable and, most importantly, useful information. Since issuing the first consolidated financial statements just three years ago, we have been working closely with OMB, GAO, and the program agencies to improve the quality of the Financial Report. Within Treasury, the Financial Management Service (FMS) is responsible for producing these statements. This past year, FMS continued to focus on three critically important areas: first, ensuring that the financial information reported to us by the program agencies is consistent with the information in the agencies' own financial statements; second, identifying, reconciling and eliminating intragovernmental transactions; and, third, assisting agencies in reconciling their fund balances with Treasury records. We also worked to modernize and improve the systems used to report both the budget execution information and the accrual based information contained in this report. We had improvement in each of these areas.

The process of preparing the Financial Report begins in early February when about 130 Federal departments, independent agencies and commissions electronically transmit to Treasury approximately 2000 adjusted trial balances and related notes. It is essential that this information be consistent with the information presented in the agencies' financial statements, since the audit of the Governmentwide financial statements relies in large part on the separate audits of the agency-level financial statements. Our auditors, GAO reported this year, however, that they couldn't fully verify the information provided to us as consistent with the information in agency-level financial statements. This finding comes in spite of a process that requires agency Chief Financial Officers to prepare and Inspectors General to review a detailed, comprehensive worksheet that crosswalks the data submitted to Treasury to individual line items on the agency's audited financial statements. This process resulted in an unreconciled amount of $7.3 billion in changes in net position.

Additional improvements have been made in the accuracy of FY 2000 opening net position balances. Over the last year, Treasury worked very closely with program agencies to reach agreement on opening balances. An agency's opening net position balance as recorded by Treasury should agree with the agency's opening balance submission. Any difference should be explainable so adjustments can be made. Last year, the unexplained opening balance differences were approximately $70 billion. This year, considering an opening net position of over $6 trillion, the unexplained differences for all agencies are approximately $8 billion, with the Departments of Agriculture and Transportation accounting for $7 billion of the differences.

We continue to take actions that improve data accuracy. As agencies become more comfortable with the data reporting requirements, we will experience even greater improvement. A clear indication of progress was a reduction in the number of adjustments submitted during our review process from 575 for the fiscal 1999 Financial Report to 280 this year.

The audits of the agencies' financial statements have disclosed that the agencies continue to have difficulties identifying transactions with each other so the transactions can be reconciled or "eliminated" for Governmentwide reporting. If these transactions are not eliminated, total Government assets, liabilities, revenues, and expenses are misstated by the net amount of these transactions. While GAO reports a $250 billion absolute value of reported differences, the net amount for the fiscal year 2000 statements was $1 billion after Treasury's reconciliation.

Excellent progress continues to be made in reconciling certain intragovernmental transactions that represent the largest dollar amounts. As a result, these transactions can be properly accounted for and reported in agency financial statements and also properly identified and eliminated at the consolidated financial report level. For the second year in a row, we were able to resolve the intragovernmental elimination issue for borrowing and investment transactions between program agencies and either the Bureau of the Public Debt or the Federal Financing Bank. We lack specific explanations for only about $3 million in Public Debt and Federal Financing Bank borrowing and investments out of a total of more that $2 trillion. We are confident that these transactions have no material impact on the financial statements, since the values presented in the statements are rounded to the nearest hundred million.

This year, we focused on addressing issues regarding transactions between the program agencies and the Office of Personnel Management (OPM) and the Department of Labor as well as buying and selling transactions between program agencies. During FY 2000, Treasury established new procedures for reconciling transactions with OPM relating to employee retirement benefits. To assist agencies and OPM to reconcile transactions in pension, health and insurance benefits; Treasury, OMB and OPM implemented additional guidance and disclosure requirements. These disclosures helped resolve differences and are required to be reviewed and audited by the agencies' respective auditors. While we still have work to do, we were able to significantly reduce the unexplained differences from $1.5 billion in FY 1999 to $.6 billion in FY 2000. We will work with agencies to formulate additional guidance based on the progress we made this year.

With regard to buying and selling transactions between Federal agencies, Treasury has been working with a consultant to develop a buy/sell model that allows for eliminating such transactions and moving the costs to the end user. This model produced significant improvements this year and we hope that next year the information will be sufficient to justify that the buy/sell transactions are immaterial at the Governmentwide level.

Treasury continues to assist agencies in reconciling their fund balance amount with the amount reported to them by Treasury. The fund balance amount is an agency-level asset account that reflects the available budget spending authority of that agency. Treasury has implemented an internet-based Information Access System that provides agencies information about potential deposit and disbursement discrepancies. Agencies are responsible for resolving the differences in a timely fashion. This year, Treasury provided special assistance to the Departments of Agriculture and Defense and the Postal Service in identifying and/or writing off very old differences. Today, the discrepancies most often are a result of timing differences and are resolved in a few monthly cycles. On a Governmentwide basis, as of September 30, 2000, there were about $.5 billion, $1.1 billion, and $8.5 billion of net differences between our records and those of the program agencies in three key areas - Deposits, Disbursements, and Checks Issued, respectively. For the most part, these differences are timing differences (much like your checkbook and your bank statement) and most are quickly resolved by the agencies. For example, when you review only those differences that are 6 months old or greater, the differences are $.2 billion, $34 million, and $66 million respectively.

In order to capitalize on improvements over the last few years, program agencies' reconciliation of fund balances must be a management priority and a routine, on-going accounting function. Agencies have made much progress in institutionalizing the process. To further facilitate this, as more fully discussed later in my statement, Treasury is redesigning its systems to simplify the process to improve the availability of the data.

As you have heard, the current state of Federal financial reporting is not satisfactory. I am confident that a creative and committed effort by Treasury, program agencies, OMB, the CFO Council, and GAO combined with adequate funding can result in breakthrough changes. In the short term, we will make the changes that can be made to improve the preparation of the Financial Report of the United States Government. For the long term, we are taking considerably more aggressive action.

Our most critical short-term challenges remain in the three areas pertaining to preparation of the Financial Report that I have already discussed. As indicated in the message from the Secretary in this Financial Report, we intend to conduct a comprehensive review of the processes necessary to produce the financial statements. In the area of intragovernmental transactions, at the request of the principal agencies, the Joint Financial Management Improvement Program has initiated an effort to better define the problems and identify areas for focused attention. While the outcome of these reviews is unknown, it is certain that it would permit Governmentwide statements to be prepared earlier than 6 months after the close of the fiscal year.

Additionally, we must fully develop the process for a complete reconciliation of the budget results with the financial statements' results of operations. An analysis by our consultant and the fact that the unreconciled amount is $7.2 billion this year indicates we are on the right track. As we continue to reduce the unreconciled transactions reported on the Statement of Operations and Changes in Net Position, we will be fine-tuning the reconciliation report. We will also provide comparative financial statements at the appropriate time. One other area where usefulness can be dramatically improved is in the content of our reports. Adding consolidating schedules containing agency financial results to this report would make it much more informative. While this is not presently within our capability, we will be looking for ways to capture this data in the future.

Recently, we modified our systems and processes to provide agencies with easier and quicker access to certain budgetary information through the Internet. Using our legacy central accounting system, agencies can obtain web-based access to such information as statements of differences, and ledger and trial balances. With this system, agencies can access their statement of differences the day after submitting their month-end reports and then submit corrected reports to resolve any out-of-balance conditions during the same accounting month. As we roll this out Governmentwide over the next 7 months, we are confident that this will go a long way toward assisting agencies with reconciling their fund balances more timely. Furthermore, Governmentwide implementation also provides a good preview of our long-term approach to redesigning Governmentwide accounting processes.

Treasury's new Governmentwide budgetary accounting system will be implemented in a modular, phased approach over the next several years. The redesigned system will be internet-based, and users will be able to access the FMS portal 24 hours a day, 7 days a week. We will capture necessary accounting information, including the Treasury Account Symbol, at the initiation of the business transaction instead of after the funds have left the Government, as is presently the case. This will reduce redundant reporting among the agencies, OMB and the Treasury. Also, it will reduce after-the-fact reconciliations for payment and collection transactions. Additionally, Treasury's plan is to provide a daily account statement for each Treasury Account Symbol. The statement would show the beginning balances, increases and decreases to the account based on collections or disbursements, and the closing balance. With that level of information, agencies will know their fund balances on a daily basis. A fully operational system will provide agencies one-stop shopping for accounting data and information retrieval.

We continue to improve our Standard General Ledger based reporting systems. Using the Federal Financial Management Improvement Act of 1996 as a base, these systems strive to collect data needed by OMB and GAO directly from agency accounting systems. Just as manufacturers reject components that do not meet specifications, our new reporting systems reject reports that do not meet specifications of the U.S. Standard General Ledger. As agencies move toward Standard General Ledger compliant accounting systems, the reports continue to improve.

The FACTS II system, jointly developed with OMB, became fully operational with year-end 1999 reporting. Agencies submit one budget execution report for both OMB and Treasury. This provides consistency between OMB and Treasury numbers. Most importantly, FACTS II loads the prior year results directly into the budget formulation process, which help budget offices ensure that the budget process begins with what actually happened the previous year.

Improving financial management and accountability is a top priority for Treasury and we are prepared to take a lead role. We will work closely with OMB and program agencies to raise the bar in financial management improvements. As I mentioned at the beginning of my testimony, Treasury, OMB, and GAO will reevaluate the process we use to prepare the Governmentwide financial statements. Where that will take us and how much of the current process we retain remains to be seen. Our review may indicate that it may not be workable within 30 days of completing agency financial statements to produce the Financial Report, complete the consistency evaluation, and obtain an audit opinion. Our goals include accelerating the timeframes for issuing year-end audited financial statements, providing for comparative reporting, and moving toward the preparation of quarterly statements by program agencies. We will also consider new ideas such as audit committees and the use of pro forma financial statements with budget submissions. These changes will require sufficient funding in the future that we will request at the appropriate times.

Our ultimate success will be achieved when we reliably and accurately report on the distinctly different financial activities of many agencies of Government as if they were one entity and do so in a time frame and a manner that is truly useful.

Thank you, Mr. Chairman. This concludes my formal remarks and I would be happy to respond to questions.