Statement of Lorraine Lewis

**Inspector General**

**Department of Education**

**Before the**

**Subcommittee on Select Education**

#### Committee on Education and the Workforce

**United States House of Representatives**

**April 10, 2002**

Mr. Chairman and Members of the Subcommittee:

Thank you for the opportunity to provide an update on the status of
financial management at the Department of Education (the Department)
from the Office of Inspector General (OIG) perspective. Today, I will
provide: 1) an overview of the results of the Fiscal Year (FY) 2001
financial statements audits, and related recommendations, 2) an update
on OIG work in purchase cards, third-party drafts, and other internal
control areas and recommendations related to that work, and 3) an update
on investigative activity.

I look forward to continuing to work together with the Congress and
Secretary Paige to ensure that Department programs and operations serve
the nation's students and taxpayers with efficiency, effectiveness, and
integrity.

#### 

#### [RESULTS OF THE FY 2001 DEPARTMENT-WIDE FINANCIAL STATEMENTS AUDIT]{.underline}

We have identified financial management on our list of management
challenges of the Department for the past three years. The benefits of
sound financial management are two-fold. First, sound financial
management allows managers to make decisions based on reliable financial
information. Second, sound financial management ensures the basic trust
between a government agency and the public remains intact.

The Department has made, and continues to make, progress in this area.
Last April, the Secretary created a Management Improvement Team (MIT) to
focus attention on long-standing financial management issues. The MIT's
mandate included such goals as addressing outstanding recommendations
related to the financial statement audits and other audits from the OIG
and the General Accounting Office (GAO), ensuring an environment with
effective internal controls, and removing federal student aid programs
from the GAO High Risk List. The MIT's October 2001 report, *Blueprint
for Management Excellence* (Blueprint), includes impressive corrective
action items for improving the Department's programs and operations. The
Secretary has made it clear to Departmental managers that financial
management must improve and has established an Executive Management Team
to lead this effort. Two key players in this effort are the recently
confirmed Chief Financial Officer and the Assistant Secretary for
Management. This focused attention by Department officials is key to
continual progress.

The audit of the Department's financial statements for FY 2001 was
conducted by Ernst & Young, LLP. My office monitored progress and
completion of the work to ensure the audit complied with [Government
Auditing Standards]{.underline}, issued by the Comptroller General of
the United States. Once again, we commend Ernst & Young on the
professional manner in which it conducted this audit. Copies of the
auditors' reports are available on our web site at
<http://www.ed.gov/about/offices/list/oig/areports.html>. This is the
first year that Office of Management and Budget (OMB) guidance required
comparative financial statements be prepared and audited. Comparative
financial statements present the current year's financial information
alongside previous years' financial information. The Securities and
Exchange Commission has had a long-standing requirement for private
sector companies to report and audit comparatively. Comparative
information provides the public with more information with which to
assess the operations and financial condition of the reporting entity.

# 

# Financial Statement Opinion

For the second year in a row, the Department received a qualified
opinion on all five financial statements.

# Report on Internal Controls

The 2001 Report on Internal Control details certain matters that are
considered to be material weaknesses and reportable conditions under
professional standards. There is one material weakness\--financial
management systems and financial reporting. There are three reportable
conditions\--1) financial reporting related to credit reform, 2)
information systems' controls, and 3) reporting and monitoring of
property and equipment. This is an improvement from the FY 2000 audit
that disclosed three material weaknesses and two reportable conditions.
The following is a description of the results for FY 2001.

-   Material Weakness:

> *Financial Management Systems and Financial Reporting* (modified
> repeat condition). While progress has been made, the absence of a
> fully integrated financial management system and limitations in the
> process for preparing and analyzing interim and final financial
> statements hinders the Department's ability to accumulate, analyze,
> and present reliable financial information. The Department has
> implemented a replacement of the general ledger software package in an
> effort to address some of these problems.

-   Reportable Conditions:

    1.  *Financial Reporting Related to Credit Reform* (modified repeat
        condition).

Credit reform issues are complex and require an effective management
control structure to ensure appropriate financial presentation. The
Department needs to strengthen its credit reform reporting by improving:
monitoring and analysis of the underlying financial activity of its
credit programs; systems, policies, and procedures to streamline the
process for preparing credit reform disclosures; and coordination of the
various Department offices that oversee and account for the credit
reform activity.

2.  *Information Systems' Controls* (modified repeat condition). During
    fiscal year 2001, the Department has made progress in strengthening
    controls over information technology processes. However, continued
    effort is needed to further address control weaknesses identified by
    OIG, GAO, and the Department itself related to information
    technology and systems.

3.  *Reporting and Monitoring of Property and Equipment* (modified
    repeat condition). The Department needs to ensure that it can
    adequately account for its assets. By developing and implementing
    Department-wide policies and procedures, it could track and
    safeguard property and equipment. Prior to implementing the
    department-wide policies, the Department must first reconcile
    discrepancies between annual physical inventories and internal
    records.

# Report on Compliance with Laws and Regulations 

The 2001 Report on Compliance with Laws and Regulations disclosed no
instances of noncompliance with laws and regulations. As part of this
work, the auditors are also required to report whether the Department's
financial management systems substantially comply with certain financial
system requirements referred to in the Federal Financial Management
Improvement Act of 1996 (FFMIA). The auditors noted two instances of
noncompliance with the system requirements referred to in
FFMIA\--deficiencies in the general ledger system and the manual
adjustment process, and deficiencies in systems security.

# Status of Recommendations

One area that we have reported on in the past is the status of
recommendations from the previous Reports on Internal Control. From FY
1995 through FY 2000, there were a total of 160 recommendations. One
mission of the MIT and continuing with the Executive Management Team, is
to address those recommendations. Of the 160 total, 155 are now closed.
The recommendations contained in the audits of FY 1995 though FY 1998
are now closed. The audit of the FY 1999 financial statements contained
25 recommendations; all are closed except a recommendation regarding
reconciliation. The audit of the FY 2000 financial statements contained
21 recommendations. Four remain open: information systems,
reconciliation, reporting and monitoring of property and equipment, and
credit reform accounting and monitoring.

The audit of the FY 2001 financial statements included 14
recommendations. The 14 recommendations were in the following areas: six
in financial management systems and reporting, five in financial
reporting related to credit reform, two in reporting and monitoring of
property and equipment, and one related to information systems. The
Department is preparing corrective actions plans for these
recommendations.

# Challenges Ahead

In the audit cycle for FY 2002, the Department faces three critical
issues relating to the FY 2002 financial statements. First, the overall
time to prepare and audit the Department's financial statements has been
shortened by one month. OMB guidance requires FY 2002 performance and
accountability reports to be issued to OMB and Congress by February 1,
2003. Second, OMB guidance requires interim financial statements.
Unaudited financial statements are to be submitted to OMB by May 31, for
the six-month period ending March 31, 2002. Finally, the Department will
be using a new general ledger system to prepare its FY 2002 financial
statements. Implementing and using a new system frequently results in
additional challenges.

# Implementation of Oracle Federal Financials System

In January 2002, the Department replaced its existing general ledger
system with Oracle Federal Financials. We have completed audits of the
development and implementation of the new system. The Department
generally did not agree with the deficiencies we identified in testing,
training, security, and development. The Blueprint identified Oracle
implementation as a major goal, and the Department has planned steps to
address shortcomings in the system. Post-implementation shortcomings may
be identified by the independent verification and validation contractor
the Department has engaged and continued testing by the Department. Of
particular importance is the interface between the Department's Oracle
system and the systems containing critical data from the office of
Federal Student Aid (FSA).

# 

# **UPDATE ON OIG INTERNAL CONTROLS WORK AND RECOMMENDATIONS** 

Strong internal controls are essential to the integrity of the
Department's programs and operations. Our audits, inspections, and
reviews have examined a number of internal controls issues and have
resulted in recommendations for improvement. Our investigations also
focus on areas where there is risk of fraud and abuse due to weak
internal controls. In addition, GAO's oversight work has provided
important findings and recommendations relating to questionable
third-party drafts, purchase cards, and Pell grant disbursements, for
example. Given the scope of the Department's programs and operations,
and the amount of federal funds involved, GAO's work in identifying
fraud and improper payments has provided invaluable supplemental
resources to our oversight efforts. We have supported its efforts and
shared our work with GAO.

The Secretary has made an effective system of internal controls a top
priority. The Blueprint contains plans to strengthen the control
environment in the Department. The Secretary has also spoken to all
Department employees about the importance of having a culture of
accountability, convened a Department-wide group to foster this culture
throughout the entire Department, and charged his Executive Management
Team to lead this effort. Recently, he required that all Department
employees must complete on-line internal controls training by April 30,
2002. In addition, OIG representatives have provided advice on internal
controls training for managers and supervisors conducted by the
Department.

Our reports have identified weaknesses in controls over purchase cards,
third-party drafts, cellular phones, the contract payment process, and
government equipment, for example. Although the Department has made
progress by eliminating the use of third party drafts, as one example,
more improvements are needed.

# 

# Travel Cards

We have recently completed an audit of travel card use. Current
Department policy requires all employees who travel more than once a
year to apply for an individually billed travel card. We found that:
cardholders made purchases and ATM withdrawals for personal use, made
excessive ATM withdrawals, and did not always use their cards when
required. We referred the cases of employees who used cards improperly
to their principal offices for appropriate administrative action. Our
investigators are examining cases where there was evidence of possible
fraudulent activity. We recommended several changes to address these
deficiencies including implementation of guidelines to monitor travel
card activity, employee training, and immediate cancellation of cards
held by persons who left the Department. Based on our findings, the
Department has initiated several corrective actions to address our
recommendations; more corrective actions are planned.

# Purchase Cards

In 2000, at the Department's request, we reviewed its internal controls
over the use of purchase cards. We found that, while the Department had
established procedures to ensure the financial integrity of the purchase
card program, these procedures were not always current and were not
always followed. We reviewed and tested controls in each principal
office. At the conclusion of each review, we met with the head of the
office and discussed results and actions he or she should take to
improve controls. We also issued a capping report to the then Deputy
Secretary with 22 recommendations to strengthen the control environment,
provide an assessment of internal and external risks, strengthen control
activities, strengthen information and communication over the use of
cards, and strengthen monitoring over card use. The Department
established 27 action items to address our recommendations, and these
items have all been closed.

We recently completed a follow-up audit on controls over purchase cards.
We found that while the Department has taken action to address the
internal control weaknesses identified in prior OIG reviews over
purchase cards, more improvements are needed to discourage abuse of
these cards. We recommended the Department develop internal control
review guidelines and conduct on-site internal controls reviews (reviews
conducted at locations where the purchase card activity and approval are
performed). We also recommended that the Department reassess the number
of cardholders assigned to each approving official.

The Department concurred with our recommendations and has planned steps
to address these recommendations. The Office of the Chief Financial
Officer (OCFO) has developed guidelines to conduct testing of purchase
card transactions both on-site and through documentation submission. The
OCFO also advised us that it will continue to work with program offices
to realign approving officials and cardholders to a manageable level.
Finally, the OCFO apprised us that it will require training for newly
appointed approving officials.

Based on our experience inspecting and auditing the Department's
purchase card program, we volunteered to develop a guide for use by
auditors and inspectors in conducting reviews of an agency's government
purchase card program. We plan to distribute the guide throughout the
Inspector General community by the end of this month.

# Records Management

The maintenance of records is essential to a good internal control
environment. Records provide the necessary documentation needed to
support decisions, be they policy decisions or financial decisions. The
Federal Records Act requires federal agencies "make and preserve records
containing adequate and proper documentation of the organization,
functions, policies, decisions, procedures, and essential transactions
of the agency." There are also other laws that address records
management requirements for both paper and electronic records, such as
the Paperwork Reduction Act, the Freedom of Information Act, and the
Government Paperwork Elimination Act. Because of the importance of
records management, we have also examined the Department's electronic
and paper record management policies and procedures. We found that
records liaison officers lacked appropriate records management training,
and that principal offices are not disposing of records properly. We
recommended that the Department develop more specific records management
guidance and policies, provide additional records management training,
and determine whether principal offices are using proper storage
facilities.

The Department developed a corrective action plan to address our
recommendations. One of fourteen action items, development of a records
management training program, has been closed to date. We will continue
to monitor the Department's records management program.

# Contract Monitoring

We recently completed an audit of the Department's controls over
government property provided under FSA contracts. We evaluated controls
at three FSA contractors and found that these contractors were not
appropriately accounting for government property. Specifically, we found
that contractor records were inaccurate and incomplete, equipment was
not properly identified, and some purchases were not utilized and
disposed of on a timely basis.

We recommended that FSA develop and implement a plan for monitoring
government property that includes a clear definition of
responsibilities, reconciliation of purchases of government property
with contractor records, and compliance with Federal Acquisitions
Regulation requirements. The Department concurred with our findings and
recommendations.

[Information Technology Security]{.underline}

Another component of internal controls is strong information technology
(IT) security. As more of the Department's programs rely on automated
processes, it becomes more critical that the Department's systems are
capable of ensuring the availability, confidentiality, and integrity of
the data they contain. The information systems used to administer
government funds should be secure from unauthorized access, intrusion,
disruption, and loss. The importance of IT security is also heightened
by the mandate to expand electronic government contained in the
President's Management Agenda.

### 

The Department has recognized the importance of IT security and has
initiated a number of actions to strengthen security. The Blueprint
focused on better management of information technology and set specific
goals and timetables for strengthening IT security. The Department also
identified over 600 security weaknesses and indicated that it corrected
more than 120 of these weaknesses. In addition, the Office of the Chief
Information Officer has conducted two security day events designed to
increase security awareness throughout the Department.

[Federal Student Aid Programs]{.underline}

In federal student aid programs, our work and the GAO's has also
revealed the need for better internal controls in the area of accurate
data exchange among the systems that operate these programs. During
GAO's work on improper payments, it referred to our office seven
schools, two of which we were already investigating, which seemed to
have a high percentage of Pell Grant recipients over age 70. Those
investigations are still pending.

We are also involved in data-mining activities by looking at data in the
Free Application for Federal Student Aid (FAFSA) and records in the
National Student Loan Data System (NSLDS). The FAFSA is the vehicle used
by the Department for applicants applying for federal student aid. NSLDS
data is submitted from a number of sources: guaranty agencies, Pell
grant program, schools, and debt collections. It is critical that this
data is valid, reliable, and timely.

We previously performed audit work on overawards of federal student aid
by negotiating a matching agreement with the Internal Revenue Service
(IRS). For that audit, we matched income reported on the FAFSA to income
reported to the IRS. Based on our results, we recommended, and the
Department concurred, that it match income data provided on the FAFSA
with IRS data to help prevent overawards of student aid funds. The
Higher Education Act Amendments of 1998 provided some authority for the
verification of income. The Department has performed two sample matches
with IRS, and continues to work with IRS and OMB to address further
legislative changes for a permanent match. This legislative authority is
requested in the President's FY 2003 budget request. We recommend that
Congress pass such legislation.

The need for this match was again highlighted in March 2001 when, in
just one investigation, 26 people were charged with fraudulently
obtaining more than \$2.6 million from the Department in the form of
grants, work-study, and loans. To date, 25 people have pled guilty. Our
work in these cases also led to over \$2.8 million in civil settlements
and judgments. A data match of income information with IRS might have
prevented these ineligible awards.

While no set of internal controls can guarantee that mistakes will not
happen or persons intent on committing fraud will not succeed, we
continue to recommend that greater program monitoring and enforcement
should be done by FSA to protect the integrity of the programs. Last
year, we issued three audit reports that cited significant deficiencies
in FSA's oversight of schools in the areas of program reviews, tracking
and resolving audit recommendations, and recertifying foreign schools.
Corrective actions are not yet completed on these audits. We recently
issued an audit report that found FSA had not sufficiently monitored the
financial responsibility of schools. We also audit higher education
institutions directly. We have recommended that FSA take the necessary
actions to address compliance problems at schools that we have audited,
including seeking repayment of funds where appropriate. These reports
and others may be found on our website:
<http://www.ed.gov/about/offices/list/oig/>.

Our work also continues to show that the Federal Family Education Loan
Program is vulnerable to fraud when individuals who claim to be enrolled
in a foreign school are not actually enrolled. We have recommended that
FSA require a verification of the borrower's enrollment in a foreign
school prior to disbursement of federal funds.

1.  **[UPDATE ON CERTAIN OIG INVESTIGATIONS]{.underline}**

We are nearing completion of several investigations of criminal activity
involving Department employees and others. We will continue to work with
the FBI, the Department, GAO, and others to seek prosecution of criminal
actions and to deter others from seeking to defraud the Department.

# Telecommunications Case

Since 1999, we have been conducting an investigation of a major fraud
scheme involving 19 individuals, including eight Department employees.
Elizabeth Mellen, the contracting officer representative for a contract
the Department had with Bell Atlantic, ordered numerous items for her
personal use and for the use of several family members, some of whom
were Department employees. She also fraudulently authorized overtime pay
to a Bell Atlantic (now Verizon) and a Lucent Technology technician. Ms.
Mellen's actions, and those of others, defrauded the government of more
than \$300,000 in property including computers, printers, scanners,
cordless phones, and a 61-inch television. In addition, more than
\$700,000 in false overtime was charged to the Department.

To date, 15 defendants, including seven Department employees, have pled
guilty, and one individual went to trial on this wide-ranging conspiracy
and was recently found guilty of three charges\--one count of conspiracy
and two counts of theft of government property. The remaining three
defendants are scheduled to go on trial later this year.

# Impact Aid

Last year, three individuals were indicted for conspiring to illegally
receive, conceal, and retain stolen property using \$1.9 million in
Impact Aid funds. In January 2002, two of these individuals were
arrested; we are working with the FBI to locate and arrest the third
individual. Our efforts to date resulted in the return of approximately
\$1.7 million in Impact Aid program funds to the Department.

# Puerto Rico

We have extensive investigative and audit work involving the Puerto Rico
Department of Education. We found that the Puerto Rico Department of
Education (PRDE) awarded five Title I fixed-price contracts to National
School Services of Puerto Rico without full and open competition. PRDE
also did not determine each line item of cost included in the
fixed-price contract. For this reason, PRDE and the Department could not
be assured that the highest quality services and products were received
at competitive prices or whether certain vendors were given preferential
treatment or arbitrarily excluded. Moreover, resources used to pay
unreasonable amounts could have been used for other projects or for
learning centers at needy elementary schools, as provided for the terms
of the contract.

Our subsequent investigation of the Puerto Rico Department of Education
led to the indictment and arrests of 17 individuals, including the
former Secretary of Education for Puerto Rico, for several felony
charges including extortion, program fraud and money laundering. The
indictment alleged that defendants conspired to extort more than \$4.3
million from contractors. These defendants were taking money for their
personal use and were providing money to their political party. Guilty
pleas by the former Secretary of Education for Puerto Rico, Associate
Secretary of Education, a contractor who is a relative of the former
Secretary, and another contractor provided for a \$2.9 million
forfeiture\--\$1.3 million in cash and \$1.6 million in property and
cash\-- to the U.S. Government.

# Purchase Cards

Our ongoing investigation related to fraudulent purchase card use
recently led to guilty pleas by two employees of a private furniture
vendor, Aaron Rents. These individuals conspired with a Department
employee and facilitated the use of a government credit card to purchase
household furniture for the personal use. The charging documents stated
the vendor's employees concealed the true nature of these purchases by
falsely invoicing the government for the purchases of office furniture.

Our work will continue to reflect our commitment to promoting the
efficiency, effectiveness, and integrity of the Department's programs
and operations.

This concludes my statement. I would be happy to answer any questions
that you may have.