U.S. GOVERNMENT PRINTING OFFICE

61–686 CC WASHINGTON : 2000

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

(II)

COMMITTEE ON GOVERNMENT REFORM

DAN BURTON, Indiana, Chairman

BENJAMIN A. GILMAN, New York

CONSTANCE A. MORELLA, Maryland

CHRISTOPHER SHAYS, Connecticut

ILEANA ROS-LEHTINEN, Florida

JOHN M. MCHUGH, New York

STEPHEN HORN, California

JOHN L. MICA, Florida

THOMAS M. DAVIS, Virginia

DAVID M. MCINTOSH, Indiana

MARK E. SOUDER, Indiana

JOE SCARBOROUGH, Florida

STEVEN C. LATOURETTE, Ohio

MARSHALL ‘‘MARK’’ SANFORD, South

Carolina

BOB BARR, Georgia

DAN MILLER, Florida

ASA HUTCHINSON, Arkansas

LEE TERRY, Nebraska

JUDY BIGGERT, Illinois

GREG WALDEN, Oregon

DOUG OSE, California

PAUL RYAN, Wisconsin

JOHN T. DOOLITTLE, California

HELEN CHENOWETH, Idaho

HENRY A. WAXMAN, California

TOM LANTOS, California

ROBERT E. WISE, JR., West Virginia

MAJOR R. OWENS, New York

EDOLPHUS TOWNS, New York

PAUL E. KANJORSKI, Pennsylvania

PATSY T. MINK, Hawaii

CAROLYN B. MALONEY, New York

ELEANOR HOLMES NORTON, Washington,

DC

CHAKA FATTAH, Pennsylvania

ELIJAH E. CUMMINGS, Maryland

DENNIS J. KUCINICH, Ohio

ROD R. BLAGOJEVICH, Illinois

DANNY K. DAVIS, Illinois

JOHN F. TIERNEY, Massachusetts

JIM TURNER, Texas

THOMAS H. ALLEN, Maine

HAROLD E. FORD, JR., Tennessee

JANICE D. SCHAKOWSKY, Illinois

———

BERNARD SANDERS, Vermont

(Independent)

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

THOMAS M. DAVIS, Virginia

GREG WALDEN, Oregon

DOUG OSE, California

PAUL RYAN, Wisconsin

JIM TURNER, Texas

PAUL E. KANJORSKI, Pennsylvania

MAJOR R. OWENS, New York

PATSY T. MINK, Hawaii

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

(III)

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

(1)

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 withVerDate 11-MAY-2000 13:42 Jul 19, 2001 Jkt 010199 PO 00000 Frm 00005 Fmt 6633 Sfmt 6633 E:\HEARINGS\61686 pfrm01 PsN: 61686
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in 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 can- not 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 main- taining 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

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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.

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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

5

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 reVerDate 11-MAY-2000 13:36 Jul 19, 2001 Jkt 010199 PO 00000 Frm 00009 Fmt 6633 Sfmt 6633 E:\HEARINGS\61686 pfrm01 PsN: 61686
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sults 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 Departmentwide 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

19

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 onestop 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

30

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 onestop 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

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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.

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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.

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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?

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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?

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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

36

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

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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

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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

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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.

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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,

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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

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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.

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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

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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 21⁄2 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

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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.

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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

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italized 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 longterm 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

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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 catchup 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?

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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,

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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

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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 socalled 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.

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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 comVerDate 11-MAY-2000 13:36 Jul 19, 2001 Jkt 010199 PO 00000 Frm 00193 Fmt 6602 Sfmt 6602 E:\HEARINGS\61686 pfrm01 PsN: 61686
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plete 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

191

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.]

192

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.]

193

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, Departmentwide 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——

194

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:]

195

196

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

197

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 asVerDate 11-MAY-2000 13:36 Jul 19, 2001 Jkt 010199 PO 00000 Frm 00201 Fmt 6602 Sfmt 6602 E:\HEARINGS\61686 pfrm01 PsN: 61686
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sistant 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.]

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