FROM THE OFFICE OF PUBLIC AFFAIRS

Mr. Chairman and members of the Subcommittee, I am pleased to have the opportunity to appear before you today to discuss the Financial Report of the United States Government. This is my fourth appearance before your subcommittee on reporting the government's financial results and while we continue to make progress, the government still has a considerable distance to go before the quality of its financial reporting will be equal to what the taxpayers deserve. At times this process has been frustrating but I am optimistic that we will achieve our objective. Your tireless pursuit of sound government financial management has been an important element of our continued improvement.

Treasury shares your commitment to improving the state of federal financial management and in particular reporting financial information that is timely, reliable and most importantly useful. As explained more fully in the testimony of OMB Controller Mark Everson, one of the five government-wide initiatives in the President's Management Agenda addresses improved financial performance. One component of this agenda item is the acceleration of the timing of agency and government-wide financial reporting. OMB has established a deadline of November 15, 2004 for agencies to submit their fiscal 2004 audited financial statements and December 15, 2004 for the government-wide financial statements. In support of this endeavor, the Chief Financial Officers Council has created a Financial Statement Acceleration Committee, which I chair. The committee has set out to identify existing agency best practices for expedited preparation and issuance of audited financial statements as well as barriers to timely preparation. This information will be essential to making changes across government in the way that we process financial information. Accelerated reporting will finally allow adequate time to have the financial statements considered in the budget process, and in time for decision-makers to fully consider financial performance in the management of their programs.

The Fiscal Year 2001 Financial Report was issued on March 29^th - on time for the 5^th consecutive year. The report showed a financial loss of $514.8 billion, compared with the budget's FY 2001 $127 billion surplus. The primary components of the difference between the budget and accrual numbers are increases in the liability for military health liabilities of $388.6 billion, and an increase in the liability for veterans disability of $115.2 billion, both of which are recognized as costs in FY01. As a result, for the first time, the liability for Federal employee (civilian and military) pension and other post retirement benefits ($3.36 trillion) exceeds the Federal debt held by the public ($3.32 trillion). Further, the report includes an update on the latest financial projections from the Social Security Trustees' Report, released on March 26, about the Social Security and Medicare programs.

I highlight these items because they provide outstanding examples of the type of unique information contained in the Financial Report and point out the importance of disclosing these results. Similar to the private sector, the financial statements of the Federal government are presented on an accrual basis in accordance with generally accepted accounting principles (GAAP). In the case of the Federal government, GAAP is developed by the Federal Accounting Standards Advisory Board. The Financial Report presents a complete and integrated picture of the government's assets, liabilities, cash flows and costs. The report also discloses the Government's extensive stewardship responsibilities and commitments. As mentioned above, a new law requiring expanded military retiree health benefits was enacted that resulted in an increase in the government's liability for post retirement health benefits by almost $300 billion. These benefits are payable in the future but the obligation to pay them has already been made. Only the accrual-based Financial Report presents this government-wide consolidated information in context to the public, providing a more transparent picture of the Government's financial operations and position.

Treasury is committed to producing accurate and useful governmentwide financial statements. Reflecting this commitment, the following changes were made to improve its usefulness and better disclose the government's activities to the Congress and the public. This year, for the first time, the report presented comparative financial statements displaying the current and prior years. This format facilitates financial analyses and highlights trends that may be of importance to analysts of the government's activity. In addition, we have added two new financial statements. The Reconciliation of Net Operating Revenue/(Cost) to the Budget Surplus explains the differences between the accrual-based loss and the budget surplus. These differences are generally due to liabilities or future payments being recorded in the current year's financial statements, while the budget does not record these amounts until the payment is made. The Disposition of the Budget Surplus explains how the excess cash collected over cash payments made was used (for example, the amount of the budget surplus that was used to reduce the debt held by the public). In addition, we have begun reporting costs by agency rather than function. This is consistent with the new Presidential budget presentation and will provide a better basis for program performance analysis. It also is more understandable by the public. These changes were made possible through the dedicated efforts of the staff of the Financial Management Service and Treasury's accounting policy office.

The General Accounting Office (GAO) has again given a disclaimer of opinion, but also acknowledges that progress is being made in addressing the impediments to an opinion on the Financial Report. Across the agencies, specific progress was noted. For example, the Department of Agriculture and certain other key agencies made significant improvements in estimating the cost of the government's lending programs and the net loan amounts expected to be collected. Additionally, two agencies that did not receive unqualified opinions from their auditors last year were able to do so this year. However, the serious financial management and systems problems at the Department of Defense remain a huge obstacle in overcoming the impediments to reaching an opinion on the government-wide report. Defense has evidenced a serious commitment to improving the financial situation with Secretary Rumsfeld publicly stating that effective financial management reform is one of his top priorities.

With respect to those material weaknesses that are unique to the Financial Report, Treasury is actively working with OMB and the agencies to remove them as impediments to achieving an opinion on the Financial Report. One such weakness relates to the preparation of the consolidated financial statements, and the need to establish consistency between the agency financial statements and the compiled information used for the consolidated financial statements. Treasury, in consultation with OMB and GAO, is developing and implementing a new system and procedures to prepare the consolidated financial statements that will directly link information from the agencies' financial statements to amounts reported in the consolidated financial statements and to facilitate the reconciliation of net position. This new process will involve compiling information from agency submissions taken directly from their financial statements and associated "closing packages," with these closing packages containing the data necessary to prepare the report. In some cases, the data will be audited as part of the audit of the agencies' financial statements. In other cases, auditors at the agency level will provide audit assurance through the application of agreed-upon procedures. In addition, a thorough review of the standard general ledger (SGL) is in process that will verify that the SGL contains all of the accounts necessary to facilitate the reconciliation of net position, especially between intragovernmental and public activities.

This year for the first time, FMS staff did a complete analysis of the balance sheet numbers reported by the agencies and those reported in the statements. This work involved a detailed comparison and crosswalk of the information agencies reported on their financial statements to the data they provided independently to FMS for the preparation of the Financial Report. In a very encouraging sign, the analysis indicates that no line item differs by more than $270 million and total assets of $926 billion and total liabilities of $7.4 trillion differ by $143 million and $369 million respectively. These differences are a significant improvement from earlier years, indicate consistency of the balance sheet information and reflect the marked improvement in the quality of the information.

Another area of recurring material weakness relates to intragovernmental activity and balances. The government currently lacks clearly articulated business rules to ensure that agencies record transactions with each other consistently and correctly. This makes it difficult for agencies to reconcile balances with each other, resulting in inconsistent information being reported to Treasury. These inconsistencies can result in total government assets, liabilities, revenues, and expenses being misstated and raise concerns about their reliability. The problem is a data problem as pointed out by GAO in its audit report. Beginning with Fiscal Year 2001, OMB and Treasury required agency chief financial officers to report on the extent and results of intragovernmental activity and balances reconciliation efforts. The inspectors general reviewed these reports and communicated the results of their reviews to OMB, Treasury, and GAO. A substantial number of the CFO Act agencies did not fully perform the required reconciliations for Fiscal Year 2001 citing reasons such as (1) trading partners not providing needed data, (2) limitations and incompatibility of agency and trading partner systems, and (3) human resources issues.

OMB has initiatives underway to address this data quality problem. Additionally, business rules are currently being developed that will standardize the recording of agency transactions with each other. Meanwhile, as part of the development of the preparation process, Treasury is implementing a methodology that will effectively eliminate intragovernmental activity. However, until the underlying data is accurate, there will continue to be potential problems with the presentation of the government's activity.

The Treasury Department continues to develop a governmentwide accounting system that will greatly improve the agencies' access to data, reduce redundant data reporting, and eliminate reconciliations between the cash amounts shown on agency and Treasury books. The redesigned system will be Internet-based and will be implemented in a modular, phased approach over the next several years. The necessary accounting information will be captured at the initiation of the business transaction instead of after the funds have left the Government, as is presently the case. In addition, Treasury will provide an account statement so that agencies will know their fund balances on a daily basis.

Treasury's Financial Management Service continues to improve our SGL 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 SGL compliant accounting systems, the reports continue to improve. The SGL and the full implementation of the SGL is a critical part of Treasury's goal to make financial data more accessible, more available, more accurate, and more useful for management decision-making.

Improving financial management and accountability is a top priority for Treasury and we are taking a lead role. We will work closely with OMB and program agencies to raise the bar in financial management improvements. As I mentioned earlier in my testimony, Treasury, OMB, and GAO have reevaluated the process we use to prepare the government-wide financial statements. Our goals include accelerating the time frames for issuing year-end audited financial statements 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 the commitment and support of management throughout the Federal Government. It is reasonable to expect such support since improved financial performance is part of the President's Management Agenda.

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. We look forward to working together with all affected parties to reach that end.

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