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THE EVOLUTION OF FEDERAL FINANCIAL MANAGEMENT: A REVIEW OF THE NEED TO CONSOLIDATE, SIMPLIFY, AND STREAMLINE

HEARING

BEFORE THE

SUBCOMMITTEE ON GOVERNMENT MANAGEMENT,

FINANCE, AND ACCOUNTABILITY

OF THE

COMMITTEE ON

GOVERNMENT REFORM

HOUSE OF REPRESENTATIVES

ONE HUNDRED NINTH CONGRESS

FIRST SESSION

JUNE 22, 2005

Serial No. 109–53

Printed for the use of the Committee on Government Reform

(

Available via the World Wide Web: http://www.gpoaccess.gov/congress/index.html

http://www.house.gov/reform

(II)

COMMITTEE ON GOVERNMENT REFORM

TOM DAVIS, Virginia, Chairman

CHRISTOPHER SHAYS, Connecticut

DAN BURTON, Indiana

ILEANA ROS-LEHTINEN, Florida

JOHN M. MCHUGH, New York

JOHN L. MICA, Florida

GIL GUTKNECHT, Minnesota

MARK E. SOUDER, Indiana

STEVEN C. LATOURETTE, Ohio

TODD RUSSELL PLATTS, Pennsylvania

CHRIS CANNON, Utah

JOHN J. DUNCAN, JR., Tennessee

CANDICE S. MILLER, Michigan

MICHAEL R. TURNER, Ohio

DARRELL E. ISSA, California

GINNY BROWN-WAITE, Florida

JON C. PORTER, Nevada

KENNY MARCHANT, Texas

LYNN A. WESTMORELAND, Georgia

PATRICK T. MCHENRY, North Carolina

CHARLES W. DENT, Pennsylvania

VIRGINIA FOXX, North Carolina

——— ———

HENRY A. WAXMAN, California

TOM LANTOS, California

MAJOR R. OWENS, New York

EDOLPHUS TOWNS, New York

PAUL E. KANJORSKI, Pennsylvania

CAROLYN B. MALONEY, New York

ELIJAH E. CUMMINGS, Maryland

DENNIS J. KUCINICH, Ohio

DANNY K. DAVIS, Illinois

WM. LACY CLAY, Missouri

DIANE E. WATSON, California

STEPHEN F. LYNCH, Massachusetts

CHRIS VAN HOLLEN, Maryland

LINDA T. SANCHEZ, California

C.A. DUTCH RUPPERSBERGER, Maryland

BRIAN HIGGINS, New York

ELEANOR HOLMES NORTON, District of

Columbia

———

BERNARD SANDERS, Vermont

(Independent)

MELISSA WOJCIAK, Staff Director

DAVID MARIN, Deputy Staff Director

ROB BORDEN, Parliamentarian

TERESA AUSTIN, Chief Clerk

PHIL BARNETT, Minority Chief of Staff/Chief Counsel

SUBCOMMITTEE ON GOVERNMENT MANAGEMENT, FINANCE, AND ACCOUNTABILITY

TODD RUSSELL PLATTS, Pennsylvania, Chairman

VIRGINIA FOXX, North Carolina

TOM DAVIS, Virginia

GIL GUTKNECHT, Minnesota

MARK E. SOUDER, Indiana

JOHN J. DUNCAN, JR., Tennessee

EDOLPHUS TOWNS, New York

MAJOR R. OWENS, New York

PAUL E. KANJORSKI, Pennsylvania

CAROLYN B. MALONEY, New York

EX OFFICIO

HENRY A. WAXMAN, CALIFORNIA

MIKE HETTINGER, Staff Director

TABETHA MUELLER, Professional Staff Member

NATHANIEL BERRY, Clerk

ADAM BORDES, Minority Professional Staff Member

(III)

C O N T E N T S

Page

Hearing held on June 22, 2005 ............................................................................... 1

Statement of:

DeSeve, G. Edward, vice chairman, Board of Directors, National Academy

of Public Administration .............................................................................. 16

Kearney, Edward F., managing partner, accompanied by Cornelius E.

Tierney, Kearney & Co. ................................................................................ 25

Kinghorn, Morgan, president, National Academy of Public Administration ................................................................................................................. 5

Letters, statements, etc., submitted for the record by:

DeSeve, G. Edward, vice chairman, Board of Directors, National Academy

of Public Administration, prepared statement of ....................................... 19

Kearney, Edward F., managing partner, accompanied by Cornelius E.

Tierney, Kearney & Co., prepared statement of ........................................ 28

Kinghorn, Morgan, president, National Academy of Public Administration, prepared statement of .......................................................................... 8

Platts, Hon. Todd Russell, a Representative in Congress from the State

of Pennsylvania, prepared statement of ...................................................... 3

Towns, Hon. Edolphus, a Representative in Congress from the State

of New York, prepared statement of ........................................................... 52

(1)

THE EVOLUTION OF FEDERAL FINANCIAL

MANAGEMENT: A REVIEW OF THE NEED TO

CONSOLIDATE, SIMPLIFY, AND STREAMLINE

WEDNESDAY, JUNE 22, 2005

HOUSE OF REPRESENTATIVES,

SUBCOMMITTEE ON GOVERNMENT MANAGEMENT,

FINANCE, AND ACCOUNTABILITY,

COMMITTEE ON GOVERNMENT REFORM,

Washington, DC.

The subcommittee met, pursuant to notice, at 2:44 p.m., in room

2247, Rayburn House Office Building, Hon. Todd Russell Platts

(chairman of the subcommittee) presiding.

Present: Representatives Platts, Gutknecht, and Maloney.

Staff present: Mike Hettinger, staff director; Dan Daly, counsel;

Tabetha Mueller, professional staff member; Jessica Friedman, legislative assistant; Nathaniel Berry, clerk; Adam Bordes and Mark

Stephenson, minority professional staff members; and Jean Gosa,

minority assistant clerk.

Mr. PLATTS. The hearing of the Government Reform Subcommittee on Government Management, Finance, and Accountability will

come to order.

We are going to dispense with full opening statements. But we

are delighted to have our witnesses with us and apologize for keeping both them and our other guests here today waiting while the

votes were proceeding on the House floor.

This hearing is the first in what will be a series of discussions

on how best to consolidate, simplify and streamline the laws that

govern financial management for the agencies of the U.S. Federal

Government. Currently, there are more than 800 statutory pages

that govern financial management, some dating back to the 1920’s,

and a pretty complex and challenging collection of laws over those

many decades for our Federal financial managers to interpret and

implicate as they go forward with their assigned responsibilities.

We have been delighted in having some discussions, and now

here today with us are representatives from the National Academy

of Public Administration. We appreciate this advisory panel that

has come together and begun to do some research on behalf of the

subcommittee and in conjunction with the subcommittee members

and staff, in looking at the Federal financial management practices

and how we can better streamline, eliminate duplications, eliminate things that are no longer necessary, that are really makework, as opposed to substantive and useful information. And we

certainly are glad to have our witnesses here, the information you

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have already shared with us, and to continue this dialog as we go

forward.

I think what we will do is go forward into our opening statements. We are also, as part of this hearing, announcing the formation of the Congressional Management Caucus. That will be a bipartisan, bicameral effort focusing on financial management in the

Federal Government to try to be a clearinghouse for efforts to keep

this issue, or these issues, in the public limelight and emphasize

the importance of these efforts to assure that we have a more efficiently run Federal Government.

We are delighted to have several witnesses with us here who

have extensive experience in financial management. Representing

the National Academy of Public Administration we are going to

hear from Morgan Kinghorn, the Academy’s president, and Mr. Ed

DeSeve, vice chairman of the Academy’s board of directors.

Mr. Kinghorn and Mr. DeSeve, we appreciate your being here

and again appreciate your willingness to help lead the effort in this

partnership as we go forward.

We are also going to hear from Ed Kearney, a certified public accountant and managing partner of Kearney & Co., and we look forward to all of your testimonies.

We will begin with roughly 5-minute opening statements and

apologize again because of the time. We will try to stick to that and

perhaps we can get to a good discussion.

Mr. Tierney, you are joining Mr. Kearney. I think I didn’t mention that. We are glad to have you, as well, as part of our panel

here today.

So with that, Mr. Gutknecht, did you have anything you wanted

to say to begin? Otherwise, we are going to go right to our opening

statements.

[The prepared statement of Hon. Todd Russell Platts follows:]

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Mr. PLATTS. And, Mr. Kinghorn, if you would like to begin.

STATEMENT OF MORGAN KINGHORN, PRESIDENT, NATIONAL

ACADEMY OF PUBLIC ADMINISTRATION

Mr. KINGHORN. Thank you, Mr. Chairman and members of the

committee. As President of the National Academy of Public Administration, an independent, nonpartisan organization chartered by

the Congress to give trusted advice, I am pleased to appear before

you to provide some interim perspectives on the Academy’s review

concerning how we believe financial management can be approved

in the Federal Government. The views presented today are my

own, and not necessarily those of the Academy as an institution.

We are doing this review really in response to your request in

March to the Academy, where you asked us to reflect on the current set of financial laws, regulations, procedures, and current

practices, and consider how best to improve our current financial

environment and, perhaps more importantly, develop a set of recommendations that would be helpful to the committee in strengthening further the financial management of the Federal Government

as we move forward in the 21st century.

In your charge to us, you directed us to be wide ranging in our

thinking and to include such diverse topics as benefits from consolidating the myriad of laws and regulations to methods to enhance

the strategic focus of financial managers as well as nonfinancial

managers. The Academy is really excited about this opportunity because after 15 years of significant progress in financial reform, we

believe it is time to assess how the Federal Government can best

build on the successes of the past and avoid the pitfalls.

We have developed a working group of our Academy Fellows who

are thoroughly familiar with financial management practices of the

Federal Government, as well as industry best practices. These Fellows have extensive hands-on experience, as well as academic acumen, and will form the core of our working group. In addition, we

can draw on a great number of the other 550 Fellows of the Academy.

One of our Fellows, who is also the vice chair of the Academy’s

Board, Ed DeSeve, is here with me today to give you his own feedback and perspective on our discussions to date.

We have established a work plan whereby our Fellows and I will

meet with a series of experts across the Federal Government to receive their input on how best to improve the elements of financial

management. We will hold these informational gathering sessions

at the Academy and will solicit input from entities such as the CFO

Council and the CIO Council, as well as its members, the program

management and program performance community, the budget

community and key representatives from the private sector, including the accounting consulting professionals who are also involved

in these financial improvement processes.

To date, we have held two sessions with a variety of members

of the CFO community and really received a wide-ranging series of

comments and suggestions from both political appointees as well as

members of the Senior Executive Service. Based on the comments

from these two sessions and input from other Fellows, I can share

with you a few of the more significant themes that have emerged.

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First, we have focused exclusively on financial accounting systems and accounting process improvements to the exclusion and

detriment of better budget and program and financial performance

systems. There is no doubt that financial management and reporting of the financial information has dramatically improved since

the initiation of the CFO Act and three or four—several acts that

are related to that act that expanded the authorities.

Most Federal agencies now receive an unqualified audit opinion,

and many agencies have improved their systems so as to facilitate

the preparation of financial statements and provide some better information to decisionmakers. But we have not paid similar attention to systems and processes that would bring about improved integration between the budget formulation systems and the financial accounting systems.

Similarly, the linkages between budget, cost and performance

management systems have been slow to materialize as agencies

have tended to put their investment moneys primarily into improving their accounting systems.

Second, in looking to the future, since the gathering of data

about program performance has recently become a much more important element of government management, the linkages between

program performance and budget development and accounting and

cost systems need to be much clearer to government managers,

both financial and nonfinancial.

With the evolution of GPRA, the creation and now the implementation of the management and program performance rating system,

we have seen an increasing interest by Federal program managers

that they are now more conscious of the need to stress strategic

planning, the linkage between plans and budgets and the overall

linkage back to actual program performance. And it is clear in

many of our discussions to date that government managers, financial and nonfinancial, need to become better aware of the necessary

linkage between accounting, cost information and program performance.

Third, the streamlining and consolidation of Federal management laws and regulations would be beneficial. Several CFOs observed that there are many different statutes, regulations, and

OMB circulars that address the same requirements which have

evolved over a period of time to address very specific problems and

issues. And I think the consensus so far would be extremely beneficial to examine these requirements and consider consolidation of

the directives in a more comprehensive form, perhaps a single statute and a single comprehensive circular.

Fourth, organizational placement of the CFO and other offices involved in broad financial management implementation is handled

differently in each agency. There is no clear consensus yet among

our group on this issue. Some argue that the management function

should be responsible to one senior departmental official since

there is clearly linkage among them in both program and system

design and, most importantly, process implementation. One cannot

develop a comprehensive budget, for example, without information

and data from the budget world, the world of accounting and cost

data, and the world of strategic planning and performance management. Others, however, argue that just because there is an operVerDate 11-MAY-2000 11:57 Sep 08, 2005 Jkt 000000 PO 00000 Frm 00010 Fmt 6633 Sfmt 6633 D:\DOCS\22901.TXT HGOVREF1 PsN: HGOVREF1
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ational linkage, organizational responsibility and performance is

better achieved by having separate, focused areas of responsibility.

Others argue that all finance-related functions should be under

the CFO—budget formulation and execution, as well as accounting

and reporting—but that other related activities such as performance and strategic planning are best achieved and implemented

separately.

The importance of Senate confirmation of departmental CFOs

was discussed among our participants and the consensus to date

suggests strongly that the Presidential appointment and Senate

confirmation of departmental CFOs, for example, is important unless there is a governmentwide decision made to reduce the overall

number of Senate-confirmed positions.

The related issue of a Chief Management Officer was discussed

with one scenario being that the CMO be Senate confirmed and all

other management positions reporting to the CMO would not be.

Obviously, there is a wide range of organizational options available, and just as obvious, very passionate feelings about this issue;

and we will have additional information and recommendations

available for you when we complete the process.

Mr. Chairman, the Academy welcomes the opportunity to really

review and work with you on this important subject over the next

several months, and we feel confident we can provide you some

value-added for the committee and bring to you some sound recommendations.

The Academy also appreciates your leadership on these issues. I

know everyone at this panel. We have worked together at different

times, and it is nice to have serious people interested in serious

issues. And we are particularly excited about the establishment of

the Congressional Management Caucus.

Thank you, Mr. Chairman.

Mr. PLATTS. Thank you, Mr. Kinghorn.

[The prepared statement of Mr. Kinghorn follows:]

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Mr. PLATTS. Mr. DeSeve. And actually I apologize. My staff is

making sure I am following the proper procedures. I forgot to ask

all of you to stand to be sworn in for your testimony. So Mr.

Kinghorn it will be after the fact for Q and A. But I would appreciate if you raise your right hands.

[Witnesses sworn.]

Mr. PLATTS. Thank you. The clerk will note that all the witnesses

affirmed the oath.

And now we will continue with Mr. DeSeve.

STATEMENT OF G. EDWARD DeSEVE, VICE CHAIRMAN, BOARD

OF DIRECTORS, NATIONAL ACADEMY OF PUBLIC ADMINISTRATION

Mr. DESEVE. Thank you, Mr. Chairman. I am pleased to be here

today to discuss my perspective on how the Academy thinks financial management can be improved in the Federal Government. As

Mr. Kinghorn noted, I am the vice chairman of the Board of Directors of the National Academy and a professor and director of the

Management Finance and Leadership Program at the University of

Maryland School of Public Policy.

For many years I have been a senior executive at State, local and

Federal levels of government. My service in the Federal Government included being the Chief Financial Officer, at the Department

of Housing and Urban Development, Controller at OMB and Deputy Director at OMB.

The views presented today are my own and not necessarily those

of the Academy as an institution.

Mr. Kinghorn has discussed with you how we at the Academy

have organized our work plan to review your charge to the Academy, and he has given a general framework under which we will

do the work. We believe our work will lead to recommendations

that will be extremely useful to your committee.

What I’d like to do today is to spend a few more minutes giving

you some comments from the meetings that we have had so far.

And these are some headlines. We are sure there will be more to

follow.

First, generally in financial management we have managed to

downplay or overlook the Department of Treasury as a major player in the financial management world. Treasury, we think, can provide strong leadership if given the opportunity.

I am told—this is an aside—I am told that there was a turf battle around the time of the CFO Act within the administration, and

the decision was made to give OMB the function and not to give

the Treasury the function of chairing the Chief Financial Officers

Council. So there is some history here that perhaps could be revisited if legislatively you decide to open up the issue of overall organization within the Federal Government.

The discussions in our meetings have centered on several elements such as the need for the Treasury Department to provide

timely data, their need to perform cash reconciliation, the need for

more modern systems to facilitate the transmission of data and

often, most cited, the need for the Department to operate in close

coordination with OMB. It is a structural thing we think needs to

be looked at.

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Well within the scope of this committee is the coordination between the CFO Act and the ITMRA, also known as Clinger-Cohen.

Several executives have suggested that the two acts need to be harmonized to ensure that the objectives of Congress are being met by

those two laws, particularly given the CFO responsibility for financial systems. I think, again parenthetically, that people were worried that the CFO has the responsibility for implementing financial

management systems and the CIO has the responsibility for implementing information systems, and if the two of them aren’t working together well, that there is a potential for a problem. So there

may need to be some ironing out of the demarcations of the boundaries between those two actions.

Third, the organization of financial and budget data and related

information has not been uniformly useful to successful program

management. Here again, I think around the time of the CFO Act,

we decided to start, and almost in the way I believe Chinese writing is interpreted—that is, from the right to the left—in a sense

we started at the back end of process with an audit and moved forward to the budget process itself.

We think that needs to be revisited, that the almost exclusive

focus, or very heavy focus, on audited financial statements and

timely audited financial statements needs to be looked at in the

context of what is needed by the program managers on the front

line every day.

We think that information should be useful, useful and useful—

useful to the people who use it each day, useful to the people who

oversee that function and, finally, useful to the Congress as they

go about their business. And it may be that the information we

have now does not fill that bill.

Fourth, the linkage between enhanced internal controls and performance management has greatly improved the public stewardship of government programs, but more needs to be done. Internal

controls are extremely important to make sure that funds are spent

wisely, that malfeasance, misfeasance and nonfeasance is avoided.

But at the same time, the effectiveness of the program needs to be

similarly demonstrated.

The consolidation now into performance and accountability reports is a good step forward. I believe, and either Mr. Kearney or

Mr. Tierney tell me that I am wrong, but we currently have at

least FFMIA, FMFIA, GPRA, the CFO Act, the IG Act and GMRA

all being dealt with and perhaps well dealt within the context of

performance and accountability reports.

It may be that Congress wants to look at those reports and specify the contents of these reports in general so that we have gone

back and made honest people of those who have done something

very creative, trying to blend all of those items.

We also feel that the role of the inspector general in the 21st century needs to be reconsidered. The IG was given audit responsibility in the CFO Act and expanded in the Government Management

Reform Act, and many IGs have done a very good job. Others were

not well prepared for that function. They can be good partners, especially as the audit of performance information or at least the examination of performance information becomes important along the

way.

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As I mentioned earlier, I am pleased to be with you here today,

and financial management has been my profession for more than

three decades. I have functioned at various levels, and I am now

teaching students who will be the financial managers of the future.

So I would like to assist you in any way I can, and certainly the

Academy is at your disposal in this matter.

Thank you.

Mr. PLATTS. I thank you, Mr. DeSeve.

[The prepared statement of Mr. DeSeve follows:]

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Mr. PLATTS. Mr. Kearney.

STATEMENT OF EDWARD F. KEARNEY, MANAGING PARTNER,

ACCOMPANIED BY CORNELIUS E. TIERNEY, KEARNEY & CO.

Mr. KEARNEY. Mr. Chairman, thank you. I am the managing

partner of Kearney & Co., a CPA firm. We provide audit, accounting and consulting services exclusively to Federal Government

agencies.

Joining me today is Neil Tierney on my left. Neil is the author

of almost every single book that has been written on Federal auditing and Federal accounting in the past 30 years.

We are pleased to have the opportunity to appear before the committee today. We think that the efforts to consolidate, streamline

and promote efficiency in all of these laws are certainly needed and

very, very timely.

Rather than read my testimony, I would like to just hit on a few

of the high points in the interest of time.

What we see today is 23 years’ worth of layered laws and directives. Each law has a unique emphasis, and despite good intentions, we believe that the stewardship reporting has lagged somewhat. If you look at the number of laws themselves and the timing

of the laws over the past 23 years, we think it creates confusion

in agency financial managers. We have multiple laws requiring financial audits. We have multiple laws covering systems control.

As an auditor and an accountant, we see both sides, both from

the review perspective and from the side of those people that are

actually performing the functions; and what we see is an uneven

application of the laws and requirements varying by agency budgets and skill levels of the financial managers.

Implementation of each one of the requirements associated with

the laws takes many years, and given the fact it takes many

years—and very often we see agency administration turning over

in as few as 12 to 18 months—it is quite possible that some of the

initiatives passed in earlier years never reached fruition, or are

never completed because a new administration might be emphasizing something slightly different or something new. That is one of

the risks that we have seen to the layering of these initiatives over

the years.

We also find that staggering the requirements over the years

sometimes also creates a problem in agency officials. If we look at

the Defense Department, for example, today, the Defense Department was excluded from the application of the CFO Act when it

passed in 1990. But today they are working diligently to prepare

auditable financial statements, and they are still several years

away from completion of that effort. That is almost 15 years before

they began the effort, and we are still looking at several more after

that.

With the mobility of the work force, what we see as a problem

moving between the civil and defense side of the businesses are

just different skill levels and different understandings of the requirements as they apply to the government.

We believe the CFO Act probably had the largest impact on financial management. The audit concept is trust, but verify, and

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that requires each agency, once a year, to have their financial

statements prepared and audited by an independent organization.

In the years following the passage of the CFO Act, what we

found in the early opinions of each one of the Cabinet-level agencies was that despite FMFIA being passed in 1982, which mandated strong structures of internal control, the reality was, many

agencies had not achieved the goal; and until we attempted to verify it through audit, we just didn’t see that.

The gap between the private sector and the Federal sector, we

believe, is narrowing, and we think that is a good thing. The agencies are being required to prepare financial statements and have

them independently audited. That is what we do in the private sector to ensure that people are honest. And there is a joke that people are basically honest, and they are even more honest if you

watch them like a hawk. I am not suggesting that we have a problem everywhere, but having somebody look at things after the fact,

we think, is helpful.

The Federal Government has adopted recently the internal control structure used by the private sector in the latest publication

of OMB A–123. It has adopted the COSO framework, which really

says that everything in internal controls in the Federal Government is what is expected in the—or what is in the private sector

is what is expected in the Federal Government as well.

There still are differences between the two sectors. It is important that legislation reflect those differences. By way of example,

when you pass laws that suggest, for example, that the financial

statements of the Defense Department include plant property and

equipment be valued in the same manner that you do in the private sector, that may not be practical. It may not be cost efficient.

So we need to find other ways to get around that so it is a good

common-sense application.

Correcting the systems and all of the difficulties identified during

the audit process has a price, and that price is not always included

in agency budgets because of the way that they are structured

today. Most of the cost of financial management is really in the

budget of either the IG or the CFO. It may be time to consider a

levy on appropriations or major programs that makes sure that

when problems are identified during the audit cycle they can be

cured in a very timely manner, because today, with the way the

budget structure works, it may be a year before anybody gets a

chance to work on solving those problems.

The final point that I think I would like to highlight is that Federal financial managers must be homegrown. Although we are fortunate to have Mr. DeSeve on the right, who is currently teaching

people in Federal financial management, at the University of Maryland, and on my left, Professor Tierney had taught, many years,

government financial management, most universities do not do

that. And since you don’t have programs in Federal accounting and

Federal auditing, we don’t groom the people that we need. Everybody needs to be homegrown.

More importantly, there is no incentive for research. And since

there is very little research being done in this area, with the exception of research that is done on a voluntary basis, it may be time

to look at demonstration projects where we encourage agencies to

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attempt to do things differently. I don’t know what the vetting

process would be for that, but nonetheless, it may be time to look

at doing something like that.

Mr. Chairman, that is all I have to say in my opening remarks.

We look forward to working with the committee. Again, we are

pleased to be here. We think the efforts of this organization are

very timely and very much needed. Thank you.

Mr. PLATTS. Thank you, Mr. Kearney.

[The prepared statement of Mr. Kearney follows:]

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Mr. PLATTS. I understand, Mr. Tierney, you don’t have an opening statement, but you are going to be available for questions.

Again, we appreciate the four of you being here, and especially

the wealth of experience that each of you brings to this discussion,

and not just here today, but in the months to come, and your willingness to be point persons for us on the private side in gathering

information, narrowing sights and the real-world impact of some of

these laws in the last several decades and what would be achieved

by some of the consolidation.

Mr. Kearney, I think you just referenced in your statement, and

it might have been Mr. DeSeve, about over the years all of these

laws are passed, with great attention, the result is a pretty confusing myriad of laws. And if you are a new financial manager out

there, not even new, but in a new position, a new level, the ability

to accurately comply with all of these laws in an effective manner

is going to be a little challenging.

That is certainly what this hearing is about, and this dialog that

we have begun is about, is to try to streamline it to allow a more

efficient process to happen and allow Federal managers to do what

they are trained to do and want to do, which is to be good managers, good stewards of financial tax dollars, and help their departments and agencies to be well run.

I have a number of issues I would like to touch on. I will start

with Mr. DeSeve.

In your comments and one of the items you highlighted was just

the focus of managers and financial community often is about that

clean audit, getting an unqualified opinion. And you specifically

referenced not the daily information benefits and that if we really

have at DOD a more efficient financial management system so that

every day of the year the decisionmakers over there know what

moneys are in what accounts and what their supplies are and what

they need, that they are going to be able to more effectively fight

battles and win wars.

Do you want to expand on that issue and what you—feedback

you have gotten and how you think we can better get everyone to

buy into not just getting that unqualified opinion, but to truly get

useful information in a timely fashion?

Mr. DESEVE. The CIA talks about actionable information. I understand I am not on the Intelligence Committee, and the Representatives here may be; but we don’t have actionable information

in the Federal Government for program managers. So setting a

standard for financial managers that says that on a real-time basis

both cost and revenue information should be made available to the

agency and to the people in oversight capacity.

Now, one of the things we have seen is that some agencies are

starting to close their books every month or close their books every

quarter, which is a good thing. Certainly, closing their books in a

timely fashion, it used to be the standard, was somewhere between

4 and 6 months in order to be finished; it is now down to between

30 and 60 days for the audited financial statements to be finished.

If that is possible, then real-time financial information for managers on the cost of their programs, the availability of appropriations in their accounts, and the revenues that they are generating,

if it is a revenue-generating activity, is certainly a standard that

35

we can seek. I think that program managers will warm to that

standard, will come to that standard.

My friend John Hamre, who was the—at the time, the Controller

of the Department of Defense, used to tell me how useless most of

the information he was getting was and how practical he felt certain other information was. So the question is, ‘‘How do we involve

the program managers in understanding the practicality, the usefulness of that information to them?’’

It is harder to put that in a statute than it is to put in the standard of auditing because there are groups that have spent time—the

Federal Accounting Standards Advisory Board and others, that

spent time setting audit standards. So it is a bit more difficult, but

a congressional piece of legislation that set the goal in trying to integrate this information, make it available on a continuing basis.

When I was at the city of Philadelphia I had a daily cost report

on my desk. It was broken down by major activity. It was broken

down by major spending category, a daily revenue report on my

desk. And I used those every day in managing the number of fulltime equivalents I could allow, the ceilings and contract spending

that I could allow in that circumstance. So that is what we are

really talking about.

Mr. KINGHORN. Could I quickly add, I think—I mentioned before

that I think the investments we have made in accounting systems—and I put one in at EPA in the Dark Ages and then one at

IRS when I went there in 1990, both, I guess, successfully because

they worked and gave us data.

The question is really—most of these systems, including mine,

were designed for and by accountants and primarily used to, first

of all, be able to develop financial statements relatively easily and

efficiently with accurate data; and second, if it was a problem, to

make better payments more accurately and quicker.

What we then tried to turn to, though, was, what does that mean

for a program manager running a compliance program at IRS or

running an air quality program at EPA? And essentially doing that

part of it really meant nothing to them. They had no better information for the program than they did before. They might have had

a better belief the data was accurate, but they really didn’t have

any better program information.

So I think what we are hearing here is that for the next 10 years

we have really got to turn this focus around to involving program

managers, first, in developing the reports that come out of these

systems. Most of the reports that are generated by these new accounting systems were, again, designed by the accountants so they

could make payments quicker, more accurately; and if they are

lucky, for the budget shops who may not have been so much involved to at least have better budget information at a very gross

level. But the program managers were rarely, if ever, involved.

And so, until you involve a program manager, running CMS or

running Social Security, sit down with the people designing these

systems and say, ‘‘Here are the six reports as the head of this program that I would like to see, they will never be built into that system.’’ I think our focus really has to turn this around, not to lose

accounting interest, but in effect, turn it around to the program

manager.

36

Mr. PLATTS. And your comments open up a number of avenues

I would like to explore, and maybe first, and I want to get to Mr.

Gutknecht with questions too.

But, Mr. Kearney, you referenced that one of proposals about

getting a buy-in of the program managers to this big picture—and

in the levying of the expense of doing the cost of internal controls,

does that get to some of what the other gentlemen have just talked

about, getting program managers, if they are having to pay for it

out of their own funds—that is, naturally they are going to be a

little more in tune with what is being done and the benefits of it

if it is coming out of their budget.

Is that the type of thing you had in mind from your testimony?

Mr. KEARNEY. It is to a point.

One of the things that I think it does, it reinforces the fact that

everybody’s responsible for the controls and financial management

of an agency, and Sarbanes-Oxley has really reinforced that in the

private sector today. So reinforcing that in the Federal sector, I

think, works very very well.

But the points that were made about involving the program managers a little bit more, I also think, carry a lot of merit, especially

when you look at the fact that we are implementing COTS packages today, the commercial off-the-shelf software packages that

frankly need significant modification to work in the Federal arena.

That may be indicative of the fact that we are doing things a little

too differently from the private sector. We might need to rein it

back in with the help of the program people, who are also not being

satisfied with the information needs they have.

Mr. PLATTS. OK. Thank you.

Mr. Gutknecht.

Mr. GUTKNECHT. Thank you, Mr. Chairman.

Thank you very much for coming today. And some of the stuff

that you have presented to us, including the alphabet soup of various management agencies, some of that blew past me like a Nolan

Ryan fast ball.

Mr. DESEVE. That was my purpose, sir, to confuse you.

Mr. GUTKNECHT. I do mean, seriously, thank you.

It strikes me from a management perspective there are several

things at play and I think you have touched on this, and I am

going to put some of it in language that at least I understand. And

let me give you a specific example.

I think part of the problem we have, and not just at the Federal

Government, but the Federal Government is such a large bureaucracy, I think in some respects it is endemic in every bureaucracy.

But part of the problem we have is an attitudinal problem, and I

will illustrate that.

I would suspect that the people at the Social Security Administration are doing a marvelous job of getting the checks out. I don’t

know how many checks they mail out every month, but it is a lot

of checks. And I think they do a very good job of making certain

that the debits and the credits all match, and that we know exactly

how much money is going into or coming out of the Social Security

trust fund.

But a little over a year ago, well over a year ago now, I had an

inspector general from Social Security come to my office, and he

37

told me that it was his estimate that we are paying over $1 billion

a month—well, I’m sorry—potentially up to $1 billion a month in

Social Security benefits to dead people. And when I raised that

issue with some of the other people at Social Security, well, again,

they gave me some bureaucratic-speak. But at the end of it all, it

really boiled down to, well, that is not our problem.

And I don’t know how you change the attitudes in some of the

agencies. I don’t know how you give them a sense of mission, a

sense of purpose or a sense of urgency. And I am not sure you can

do that with accounting controls.

We had an inspector general come back this year and his esti- mate was—he said, well, it is significant, but it is less than $1 billion a month. But either way it is real money. And in the ensuing

year, Social Security has done nothing that I know of to see if we

can’t rein in on the money that is going out to dead people.

Would any of you care to comment on that?

You know, this goes beyond accounting controls and auditing procedures. I mean, this attitude that it’s not really our money is one

that we have to fight all the time. And we have to figure out ways

to do a better job of that. I think that’s a big enough piece to chew

on. Go ahead.

Mr. DESEVE. Let me try.

We went through a very similar problem with the Medicare program, and the problem is still there. The first audit of the Medicare

program showed—and I am doing this from memory, and I apologize—that it was about $30 billion a year of improper payments,

or unmatched payments, where you couldn’t quite figure out the

service that was being paid or it was too high or too low. So you

would have to net some of that out.

The Secretary at that time, along with the Inspector General,

worked very hard to make it everybody’s problem. And I think the

role that this committee can play there is to ask them to come back

with a plan for doing whatever they think is right and proper, to

solve as much of the problem as possible.

In the old food stamp program, when we had paper food stamps,

we used to think that States did a good job if the improper

issuance was less than 5 percent. I don’t know what it is in the

electronic area. And everybody in the oversight community agreed

that a State under 5 percent was doing the best it could, that there

was some breakage in the system.

So I think if you could engage with Social Security, have them

develop a plan for eliminating these erroneous payments, bring it

back to the committee, along with the IG, and engage a conversation.

What I tell my students is, ‘‘look, lay a plan out that you think

is appropriate and then get people to agree to it. If they won’t

agree to it, then you’ve got to go back and fix the plan.’’

So I think in that instance, for erroneous payments, getting all

the usual suspects together and having you provide the leadership

and the oversight, having the IG do the work, having the CFO at

Social Security—who will probably hate me in the morning for having suggested this—is very good.

But we certainly did that at HUD when we had some terrible

problems in mortgages. I remember sitting with Mrs. Mikulski’s

38

staff at the time and laying out the plan for dealing with some of

the loans that had gone terribly wrong. So I would suggest that

would work well here.

Mr. KINGHORN. Giving a little perspective on that, 15 or 20 years

ago, before the CFO Act was passed, there were a lot of agencies,

and still are some of them, who had real trouble with collections

process. Education was one of them. Other agencies were involved,

Social Security, Medicare and Medicaid.

And with the passage of the CFO Act and the fact that agencies

took heat for not getting clean opinions, which all of those agencies

had problems with in the beginning, the light was shined on those

issues because they were clearly in IG reports years before. In trying to get a clean opinion, you really had to look at your financial

processes and realize the reasons why you had a billion a month

in certain programs.

Fast forward now 20 years later, at least my reading of the people that are on the line responsible for this, I doubt—I mean, I was

very shocked that someone would say openly or tell the IG or the

IG would say, they don’t care. I sense they do care now.

And I would agree with Ed. I think they have better tools. They

have better financial information to know not only where their

problems are, but hopefully why they have problems. And I would

agree. A light shined on issues constantly tends to get things improved.

And the sense is, in government, that they can wait us out. I

think you can make it pretty uncomfortable to wait out on those

big issues. But I would bet because of the last 10 or 15 years, Education certainly now is much more interested and has its act together on that issue, whereas 15 years ago I think they did say,

it’s not my problem; my job is to get money out to students and

to schools. Now they say, ‘‘My job is to do that, but I realize if I

am wasting a billion a month, that’s a billion that could go toward

those customers.’’

So I would really recommend shining the light on it. And through

these innovations they have a better idea of the problem and what

causes the problem, which they didn’t have 8 to 10 years ago.

Mr. GUTKNECHT. If I could just say that—Mr. Chairman, my

apologies. We are going to have a series of votes, right?

Mr. PLATTS. Apparently it’s just going to be one. Previous question is what we’re being told. We are checking.

Mr. GUTKNECHT. OK. But that was lots of bells.

But let me just add to that point. We, the Congress, have become

enablers because when we hear about departments or agencies that

can’t pass their audit, that can’t account for literally hundreds of

millions, if not billions, of dollars. The remedy which our appropriators usually serve up the next year is, well, I guess we’ll just have

to give them more money. And in some respects, we do.

I think that attitude, that sometimes is fostered by us in Congress, perpetuates the problem because I have seen agency after

agency that couldn’t pass an audit, that had serious financial problems, and the next year their budget went up. And the law teaches.

And the Congress teaches.

So, again, thank you. And this is—but I do, I think the suggestion that somehow we send a clear message that it is the responVerDate 11-MAY-2000 11:57 Sep 08, 2005 Jkt 000000 PO 00000 Frm 00042 Fmt 6633 Sfmt 6633 D:\DOCS\22901.TXT HGOVREF1 PsN: HGOVREF1
39

sibility of the people in whatever agency to develop a plan; and it

is our job to make certain that plan is implemented and reviewed.

Thank you.

Mr. PLATTS. Thank you, Mr. Gutknecht.

And apparently it is the previous question, and now apparently

they are going to do a roll call on the rule, not voice it, so there

will be two votes.

I think we will go and get in as many questions as we can and

see where we are, whether we try to have me sprint over and back,

or see if we can get far enough along.

Mr. Kearney, one of your comments was, one of the challenges

of the public sector is because we do things so differently and we

basically have to have everybody homegrown for financial management in the Federal Government.

And you touched on, maybe we have gone too far away from the

private sector and should be looking at trying to get back. And our

hearing, our dialog, has begun with—about streamlining, consolidating. But by your comment, it may be that we all should be more

serious about also refining not just consolidating what we have, but

looking at what we should be doing differently, meaning similar to

the Federal or the private sector, as opposed to the way the Federal Government’s done it.

Are there examples of that you would want to highlight that we

should be looking at, things that jump out that maybe—20 years

ago maybe were justifiable, but today we need to rethink?

Mr. KEARNEY. Well, the concern that I was really trying to express was that there hasn’t been a lot of new initiatives. There

have not been a lot of changes. We still do accounting with the

budgetary and the proprietary accounts, the way that we always

did. And it is probably a good time to encourage some agencies to

possibly work toward something simpler.

Maybe we don’t need the same complexity in the budgetary and

proprietary accounting accounts that we have today, and by selecting an agency or two that could be a demonstration project, maybe

we could find out if there are better ways to do things.

And I mention—I mean, even in light of Mr. DeSeve’s comment

about the report he received every morning in the city of Philadelphia, it had basic management information that he needed to do

his business that day.

We punish financial managers in the Federal Government that

deviate too far from whatever the rules are. Today, we have a

rules-based system that probably could lend itself to being a little

more principles based, and by identifying opportunities for change,

or that might foster change or new or creative original thinking,

then we can go a long way to making things better.

And my comment on moving toward the private sector model is

really a practical observation that would probably increase the

number of financial people that we have, so they don’t all have to

be completely homegrown.

Mr. PLATTS. On the one hand, trying to incentivize for managers

to think outside the box and be more creative: The other side of

that is that in the sense of when they do things that maybe we

don’t want, or are not appropriate, what are the consequences for

not following the various financial management laws for the last

40

20-some years. In the private sector there are more direct consequences—firings, demotions, stock options that aren’t given,

whatever it may be.

But one of the things we keep hearing in regular hearings here—

and it is really a question maybe for all four of you—is, how do we

convey? And a little bit of what Mr. Gutknecht said is that if you

don’t follow these Federal laws as internal controls under the Integrity Act, whatever the requirements are, there are consequences.

Sarbanes-Oxley is very much about consequences in the private

sector. But—and an example right now is, we passed new legislation last fall that the President signed regarding the new Department of Homeland Security regarding financial accountability, that

they will have an audit of their internal controls after the 2005 fiscal year and basically a 2-year lead-in—and they would like to

push that back, even though the President just signed that bill,

and say, well, we are not going to be able to comply; if we don’t,

so be it, in essence, is the way I read their response because there

is not necessarily any spelled-out consequence for the Secretary or

the CFO over there, if you don’t do this, your pay is docked or

whatever.

Is there a way to have more accountability across the board that

should be part of this look of consolidation, streamlining, and that

whatever our end result is that you comply or pay the consequence?

Mr. DESEVE. I am still waiting for the first person to be criminally sanctioned under the Anti-Deficiency Act. Each year I would

get half a dozen anti-deficiency cases which I have thought, on

their face, some of them were potentially sanctionable, and I

couldn’t get the Justice Department to pursue them. Now there is

a sanction that is in place.

Mr. PLATTS. And we see that probably a month ago, I think it

was, was it DOD and the computer, $130 million was spent. And

I said, well, has anyone been demoted? Have we sought

recoupment of the money that was paid for something that doesn’t

do what it’s supposed to do?

And the answer was, not to the best of our knowledge.

I think it was actually Justice, in fact. It was not DOD; it was

Justice. They said, no, not to best of our knowledge, no one’s suffered any consequences for the failure to really look out for the taxpayers.

Mr. DESEVE. I think the—one way to approach it, when I was

a political appointee in the Department of Housing and Urban Development, I actually had as an object lesson Judge Arlen Adams,

who was sitting in Philadelphia. And there were dozens of HUD

employees who were indicted by that grand jury, and several who

went to prison as an object lesson. The rest of us in HUD were fairly focused at that point. That focused our attention because Judge

Adams continued to sit.

I think the issue is to let the political appointees within the departments, as opposed to the career staff, know that you will be

asking them to come and explain the problems that existed.

Obviously, Mr. Mueller, I am sure, explained what went on with

the FBI system, but letting him know that the Assistant SecVerDate 11-MAY-2000 11:57 Sep 08, 2005 Jkt 000000 PO 00000 Frm 00044 Fmt 6633 Sfmt 6633 D:\DOCS\22901.TXT HGOVREF1 PsN: HGOVREF1
41

retary—that the Deputy Director of the FBI, the Assistant Director

of the FBI should be similarly culpable. And almost like putting a

letter in their files, if you will, not quite the same thing, but having

this committee have hearings and make findings that something

went wrong: ‘‘it was your watch, and we want you to come and explain what happened and we are going to make that a matter of

record.’’

That scared the hell out of me. I mean, it really did. I worried

each day that there would be something in the Washington Post.

Again, it was Mrs. Mikulski at the time, and she had a clerk who

was a pain in the neck, who I would name but he is a friend of

mine now. And I was just terrified that they would come down and

open something up and try to embarrass the Secretary.

Now they were the same party, so there wasn’t quite as much

incentive for that embarrassment. But I think holding people up to

the light of day and asking them to explain why they didn’t, on

their watch—I teach the 9/11 Commission report as a case study.

There’s a lot of careers in the 9/11 report that are never going to

be the same as a result of the findings in that report.

So that is where I would go with it, and I think only this committee or committees like it can do that.

Mr. PLATTS. Mr. Tierney.

Mr. TIERNEY. Mr. Chairman, I guess I am the only one at the

table to say I am older than Ed DeSeve.

Mr. DESEVE. Excuse me. May I stipulate that Mr. Kinghorn is

older than I am.

Mr. KINGHORN. I am not speaking.

Mr. TIERNEY. But this question—I chaired many years ago a

Government Accounting Association committee and also one by the

American Association of CPAs. Both of those led to reports that

were basically a major piece of—the CFO Act came out of those reports. Both government officials and executives and people with

the—at that time, it was called the Financial Executives Institute,

of the private sector, Fortune 500, many of whom spent time in the

Federal service. They left their careers in the private sector, did

time in the Federal service.

They had the same conclusion, and it was in both of these reports that the laws, as written, made no one responsible for doing

something. It was like ‘‘the head of the agency shall,’’ and then, of

course, the head of the agency changed three or four times in 3

years. And then when something went wrong, no one to blame, so

there is nobody accountable either way.

So people weren’t made responsible by—well, certainly not name,

but by a specific position; and to hold the head of the agency responsible when they are 5,000 feet above the problem that occurred, was made almost unenforceable.

The other thing is that I appreciate what the committee is attempting to do because in preparing for this session, I took quite

an interest in it, and just curiosity, looked it up; in the 1990’s, the

decade of the 1990’s, more financial management legislation was

passed than in any 10 years in the history of the country. A lot of

well-meaning people, your colleagues and predecessors, tried to do

things. I think what we ended up with was an overwhelming number of laws that we haven’t fully digested.

42

So I did some other research and found that every so often, or

at least once before, predecessors in Congress had faced that same

thing. In fact, I speak of the Budget and Accounting Procedures Act

of 1950. That law, I found, changed 106 laws that went before it

over the past 40 years. The 1921 act set up GAO, the FBI Bureau,

the budget; those laws were on the books and a lot of others. And

in 1950 that act cleaned out 106 laws and parts of many other laws

too.

So this is a challenge, but I think it is needed. I think most of

what has to be said in laws has been said. It is a case of refinement, picking out the things. Ed mentioned—Ed DeSeve, Ed

Kearney—about the need for audits, and trust and verify. I think

that is fine. I think we need that because when you look at the

CFO Act, and people point to the success of the CFO Act, the only

things that have succeeded are the things that were audited.

At last count, there was about 20, maybe a couple of dozen items,

in the CFO Act, financial management, that should have been

done, but basically the things that were done were the things that

were audited. So you can’t—you know, you can’t really knock the

trust and verify, because the things that were done are the ones

we verified.

Mr. PLATTS. Mr. Tierney, I don’t want to cut you off, but if you

can hold the thought, I am going to run over and get two votes in.

I think I can be back in about 7 minutes, if you will bear with me.

You can time me.

So we are going to stand in recess, hopefully for no more than

7 minutes.

[Recess.]

Mr. PLATTS. And for the record, if they hadn’t kept the vote open

for an extra 8 minutes on the first one, I would have made my 7

minutes. But politicians, promises, promises. Right? So my apologies for having you wait.

Mr. Tierney, as I ran out the door, in your comments you touched

on the breadth of new laws in the 1990’s and the substantive nature of those, and we are in a sense still digesting and moving forward with some of those. Is our effort at all premature because we

haven’t allowed the work of those new laws to be fleshed out and

moved forward in a positive way? Or is it here we are in 2005, this

is a good time to see, well, they are all in place, and they are starting to be implemented and better understood, so it is a good time

to be looking at this from how to streamline or consolidate?

Mr. TIERNEY. No. I think the timing is just right. I think it is

just right. In fact, we see—as you have heard at the table this

afternoon, we have heard that if things are not followed up and

that, they don’t happen. A few things that happened to the CFO

Act where the ones that were—the things that were audited. We

have some agencies 15 years later that after a while you figure,

well, maybe they just don’t want to do it. Because we are not talking rocket science here, we are talking about transactions that happen every day, money is spent every day, and it is recorded somewhere. I mean, it is not that difficult.

Mr. PLATTS. Expanding on that to you and to, again, all of our

witnesses. One of the specific issues—and we are getting into some

more specifics as opposed to the broad big picture, but the idea that

43

the CFO Act, because of requiring audits, requiring a specific act

forced the Department’s agencies to actually respond because it

was more delineated. In that bill that I referenced earlier with

DHS and the internal control audit requirement that is specifically

to that Department, the rest of the departments are now governed

by the new regs put out by OMB where they have to review their

internal controls and make an assessment and perhaps do more depending on their assessment.

Should we be maybe leaning more toward that internal control

audit being more pervasive across the Federal departments and

agencies, or at least the larger departments and agencies, or should

we let the OMB reg circular run its course and see how that comes

back?

Mr. TIERNEY. Well, I think the OMB at this point has tried to

pull together the essence of the legislation. I do think that controls

are a big piece of the answer, the emphasis on controls. But that

gets you immediately into the details. And I say controls from a

couple of standpoints.

In many agencies I will describe what I characterize what they

call the fiscal controls where somebody signs a piece of paper authorizing. But historically, as we look at the Federal agencies, sad

to say, many of the Federal agencies are still running with what

we in the trade call the legacy systems, the old system. And with

innovation, improvement and that, I think data computerization

has changed the whole equation that—and I am not sure, I don’t

have any evidence to back it up, some evidence, but not a perfect

case to make, that we haven’t changed the controls to meet the automation. So I think you get into the details.

I think it is a case of controls and as well as the audit. A lot of

people are trying very diligently to bring together these pieces of

legislation. OMB with the 123 has basically adopted SarbanesOxley except for the audit.

Mr. PLATTS. And we are delighted with OMB, I mean, in essence,

that a cooperative effort, that while we would only request the

mandatory internal control audit for DHS in return, in essence, for

OMB being maybe more diligent through the circular approach of

having this review conducted and then identifying whether any additional departments or agencies should have an actual audit done

of their internal controls. I would be interested if—Mr. Kinghorn.

Mr. KINGHORN. Mr. Chairman, I think what revisions to A–123

really were is really trying to bring in this COSO approach that

was mentioned, the Committee on Sponsoring Organizations, which

came out actually of the Coopers & Lybrand firm that I was a partner of a long time ago. I wasn’t involved in that. But the idea there

is that everything an organization does is internal control. It is not

just the finance piece, not just accounting, it is how you as CEO

operate and what kind of culture you establish, etc. So I think we

should give them a lot of credit to do that.

My guess is in their heart of hearts, many of the folks over there

where several of us used to work probably would have liked to have

gone further. I think if you probably scratch the surface, they

might like to consolidate statutes, but my guess is from their perspective they don’t see that as a short-term objective, nor is it

something perhaps they want to do.

44

I think the value—if you look at the OMB circular 123, I think

in one of the sections they themselves mention 14 incredibly broad

sources where you as an organization in management can go to all

the information on all the problems you have. And those 14

sources—these are broad categories—then fall back to the 20 or 30

acts.

So there is no shortage of information where you find your problems. If you go to sort of a performance report, you go to SSA, Social Security, who has a certificate of excellence from AGA—and I

was actually involved in the review of the first time they got their

certificate years ago—it comes out at 12 megs on the Internet to

download and 240 pages. It is telephone-book-like. And it represents this enormity and complexity of what statute, what function you go to. And I think that creates enormous waste in terms

of just the ability to understand.

So I think the OMB approach here was—I think what really

was—consolidate some things, I think, very helpfully and really try

to reemphasize, which was very popular 20 years ago. Twenty

years ago when I came into this business, that is all we did was

internal control reviews. We had management reviews on program.

Then the CFO Act came in, and it went back to an accounting focus

and financial statement focus. So this is really a return to the past.

And I think if done well, with the consolidation of statutes so it is

not so confusing, I think could be a good start.

Mr. PLATTS. It is, in essence, trying to reaffirm the merits of the

Integrity Act of 1982 and the internal control requirements of that

act 23 years later.

Mr. Kearney, did you have something else you wanted to add?

Mr. KEARNEY. I might add on the A–123, you had asked earlier

about is there any penalty for not conforming to whatever the laws

might call for. A–123’s approach prior to doing the audit opinion

on internal controls, I like what they are doing at OMB. And they

are saying as long as there is not systemic or consistent problems,

an audit opinion wouldn’t be required. So you really are imposing

a bit of a penalty on the agencies. As long as they do what they

are supposed to, the audit opinion isn’t required. To the extent

there are recurring problems, there will be an opinion. So I think

that is an approach worth——

Mr. PLATTS. So if you stay on top of it, you don’t have to go

through the effort and spend the money on that internal control

audit incentive not to get that problematic.

Mr. KEARNEY. Correct.

Mr. PLATTS. A number of times throughout your testimonies, a

number of you have mentioned, and Mr. Kearney just did, about

legacy systems and technology and ability to modernize and really

have the benefit of today’s technology that gives us what we are

looking for in information and relates to the conflict that was referenced earlier, the CIOs, CFOs, and how to better mesh those two

positions. And is that something that we should be taking a close

look at as part of this streamlining is to have better coordination

between those two positions?

Mr. KINGHORN. I will speak for myself, because we have talked

a little bit about the group, a group we have. And we haven’t gotten into this, but it is one of the areas we are going to get into.

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But from my experience—I was at IRS from 1990 to 1995; I was

brought in from the outside to really create a controller CFO function, and it was in their second stage of failing on their major systems. And it was not for lack of trying, it was a very long-term

project, but there were two systems. There was one system in 5

years that I was there that was successful in being brought up, and

it was the financial system that was brought up just as the CFO

Act was passing. It is not because I brought it up; it is because of

the structure which we used. I was in charge of that system and

funded that system in conjunction with the CIO operation, but everyone knew who was responsible. And I think that is the key.

Many of these systems have very confused management structures internally and in organizations, as some of the fellows in our

group have asked, who is in charge, the CFO or the CIO? It is not

an organizational issue. Someone has to be in charge and responsible that if it fails, Kinghorn is out of here. The problem—you

don’t see Kinghorn out of here—it is unclear even to the heads of

agencies of who was in charge. So I think clarity of responsibility

is key.

Second, the funding is key. And I think that was crucial.

And the final thing is that we don’t give enough interest to the

project management aspects of these large systems. We tend to

overmanage contractors by layering upon the contractors an additional management oversight. And then I think agencies fail to

manage what they should manage, which is the very high-level

oversight and quality control of the contractors. So it would be an

area we really should get in with you.

But I think you have to have responsibility of who is in charge.

It is not an organizational issue, although I think in most cases,

if it is a financial system, the CFO should be in charge of overall

working with the CIO. If it is a new system for Medicare and Medicaid, the program manager of that program should be in charge

and responsible, not the CIO, but it has to be in conjunction with

the CIO.

Mr. PLATTS. Mr. Kearney.

Mr. KEARNEY. I might add that we have a similar problem in the

private sector as well. And whenever you are undertaking a large

systems effort, as we are going to suggest it, you do need one

throat to grab. And if it is the CFO that is ultimately responsible,

that is the person that should have a greater role in what is being

done even though the CIO might be providing the technical expertise.

I think it is definitely a good area to get into just simply because

of the size of the projects. And I am not sure that there is an easy

solution. Many years ago when I ran Sallie Mae’s Loan Accounting

operations, the only way I was able to solve my systems dilemma

was to have the CIO staff come to work for me until 6 or 12

months went by and I had my systems up and running, because

ultimately it was me that was on the hook, and those systems supported my operations. My ledgers used to be under my desk; today

they are on somebody’s data base someplace, but it is still me that

is responsible for the function. So I do think that it is definitely

within the scope of what you are doing, and I do think you have

a tiger by the tail.

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Mr. PLATTS. An encouraging send-off. Well, we are glad to have

you guys helping to grab hold of that tail with us.

Did Mr. DeSeve—Mr. Tierney, did you have anything on that?

Mr. TIERNEY. Not on that point.

Mr. PLATTS. OK. Mr. DeSeve, one of your points you highlighted

was with the IG position and what was envisioned, and maybe the

challenge of that position today, the kind of conflicting roles. And

I spoke to a good number of the IGs at their annual convention this

year about a month back or so in Philadelphia, and one of the

things I said to them I thought was appropriate, their guy there

in the place of our Founding Fathers in Philadelphia, and also in

the time we are in with men and women in harm’s way as we are

gathered there in Iraq and Afghanistan, and, to me, the importance

of IGs being courageous as our Founding Fathers were courageous,

because IGs to me are—their budgets are basically handled by who

they are actually supposed to be watching and the secretary and

whoever their agency head is. And it is a position that if you find

your wrongdoing and follow that wrongdoing in an appropriate

way, you are not going to be a very popular individual within your

department or agency, and all the more they need to be courageous.

One of the things you touched on was term-limiting IGs, and I

was wondering if you want to expand on anything with that of how

we can lessen the confusion, the confliction, the conflicting responsibilities of IGs, and really empower them as was originally envisioned by the IG Act.

Mr. DESEVE. One of my great pleasures was serving as chairman

of the President’s Council on Integrity and Efficiency and the agency councils below that, the PCIA as well as ECIA. And I got to

know IGs pretty well, and their functions are severalfold. First, in

some agencies there is a real law enforcement function, where the

IG will go in and create sanctions against an individual or group

who are taking money from the Federal Government. The Labor

Department has a great deal of that kind of activity. That needs

to be bolstered, it needs to be recognized, it needs to be understood,

but it can’t dominate the rest of the agency along the way.

The second thing they have or were given in the CFO Act is

audit responsibility. So here we have a guy who is—or a gal who

spends a lot of time worrying about who should be able to carry

a gun—that is one of the things they can do, they have delegated

authority to allow firearms to be used by their individuals and on

the other hand is worrying about, gee, what are the new accounting standards coming out of what used to be JFMIP—I have to get

that in—and the Federal Accounting Standards Advisory Board.

Those are conflicting roles.

Then there is the third role, the role in the middle, where mismanagement, nonfeasance, misfeasance as opposed to malfeasance

comes in.

So I think that a relook and recognizing those three roles, having

this committee reauthorize almost the IG statute to go back and

look at it, to open it up, and to give them a set of responsibilities

that provides clarity among their roles is thing one.

Mr. PLATTS. Not necessarily separating out any of those roles

anywhere else, but just better delineating within.

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Mr. DESEVE. I think they are quite appropriate. The CFO can’t

be the auditor; he can’t audit himself. If we create a separate law

enforcement function, it is going to get confused, I think. And

somebody has to be the overseer of good management, and so I

think that the independence of the IGs is absolutely essential. And

I think that, by and large—and I had to handle complaints against

IGs when I was in the government. By and large the IGs have done

a spectacular job of bringing integrity to the agencies, but some of

them haven’t had to recognize the multiple hats they were wearing;

or, if they did, they didn’t have an institutional sanction, they

didn’t have a law that said you are in the program management

business, buddy; or here is the way in which you will execute the

audits along the way. So I think that is No. 1.

No. 2, there is good news and bad news. President Reagan, as

I understand it, fired all the IGs when he arrived in the Federal

Government, then he reappointed the ones that he cared about.

That certainly was an interesting precedent. The IGs still talk

about it, that everybody got fired, and then some people got rehired

and some people didn’t.

On the other hand, other IGs believe that they have a right to

the office perpetually; that to fire an IG is tantamount to firing a

bishop or a cardinal. You can’t do that.

So I think that the idea of term limits, if the head of the FBI

can have a term limit, if the head of the FAA can have a term

limit, or the head of Social Security can have a term limit, putting

a term limit that overlaps a potential of the administration, it allows for reappointment for a period, makes a lot of sense because

there is then an expectation that there will be turnover at some

point. That there will be an evaluation, there will be either a reappointment or a termination, one or the other—they simply won’t

be reappointed or they will—gives a new administration some discretion across the pool of IGs so that during their 4 years they can

replace some IGs who have perhaps run out of gas. That happens

occasionally.

So I do favor some kind of term limit, but within the context of

the delineated institutional responsibility and clarification, and engaging the IGs as to what they think about that. That is what we

are really proposing is to bring the IGs in and have them talk to

us about what they think their roles are.

Mr. PLATTS. Hand in hand with the term limit would be that it

is also a positive affixed term, meaning you are appointed for 5

years, and so you know are there and don’t have to worry about,

well, if I do something the administration doesn’t like.

Mr. DESEVE. That is right. Jane Garvey was the FAA Administrator for the first 2 years of the Bush administration and had been

appointed by President Clinton. Greg Woods was the head of the

Student Financial Assistance Program, had been appointed by

President Clinton and so on. So, yes.

Mr. PLATTS. And my understanding, that is something as part of

the work of the Academy and your advisory committee you have

put together is to reach out to IGs and to further explore some of

their ideas.

Mr. DESEVE. Yes.

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Mr. KINGHORN. Let me share, if I may, I think another consideration, which would be sort of another level, is 20 years ago, 25

years ago, if you looked at the makeup and qualifications of most

of the IGs, it goes a little bit to this point in a way. Most of them

would be sort of like the neo-attorneys of the world: professional

CPAs, accountants, really focused on the accounting function, internal control function. If you fast-forward it now, I haven’t quite kept

up with all they are, but I think most of them now are probably

law enforcement types or of predominantly that world. And I think

like any organization, neither one is right or wrong, but if you look

at qualifications for Inspectors General, I think we could give some

thought to what we want in that leadership.

If you have an accountant type, you are going to get an interest

in accounting and internal control. If you have a law enforcement

type, you are going to get that with accounting below that level.

And I think some thought needs to be given, given all the other

controls in government, which of those two or others that you

would like to have laid out, if any, because leadership does change

the focus of an organization.

Mr. PLATTS. That actually relates to a specific question. We

talked a lot about the CFO Act and the qualifications or the background of individuals. Deputy CFOs have a requirement for 6 years

with specific experience, and there is no such requirement for the

CFO themselves. Is that something we should be looking at to—we

have the Senate confirmation requirement, which hopefully then

ensures more scrutiny of their qualifications and is going to lead

to that, but should there be some statutory as far as what the

qualifications are?

Mr. DESEVE. I seem to remember there were some more general

guidelines in the CFO Act. When it was passed, there was a fairly

huge debate on how specific the act should be in terms of requirements, and I think rightly so. It probably came down at the time

on a more generic you had to have something in your background

that looked like financial management. There were several CFOs,

not to be named at the table, that came in at the very beginning

who were, in my mind, less than qualified, who had something in

their background about financial management, but probably

weren’t of a sufficient stature.

I think, since the last 10 years, 11 years, really starting probably

in depth with the Clinton administration, to give them credit, the

CFO quality, I think, is incredibly high. And if you look at their

backgrounds—I think it would be very difficult to get through

someone who did not have something that looked and smelled like

a CFO background.

Well, I am sure this will come up, and it has come up a little

bit in our discussion so far. I think we will have recommendations

for you that, if you chose to strengthen those words, here is what

might be appropriate. I would be very wary, frankly, of having an

accounting requirement, because some of the best CFOs don’t know

anything about accounting, and some of the best ones do. So it is

really more about management and structure. If you look at the

CHCOs, the Chief Human Capital Officers, trying to organize now

around their world just like the CFOs did, they are struggling because they think they need CHCO expertise at the most senior

49

leadership level. And my sense would be they really need management and leadership expertise. And if you can get them combined

with your functional expertise, great. If not, I mean, my best controllers in IRS in the field were former compliance officers, who, because they went after people on taxes, they were CPAs, so it

worked. But they knew the program, so they really related well.

So I would be a little wary of making it look and smell like an

accounting function per se, but I think some of the qualifications

will certainly have some comments from CFOs on that.

Mr. PLATTS. Mr. Tierney, and if I remember, you were involved

in the work that led up to the CFO Act.

Mr. TIERNEY. Right. I might add that the—I would like you to

pursue it. But having said that, I want to let you know a failure

last time. Tenure for the CFOs, just like we were talking some

kind of a tenure of office for the inspector generals, it honestly

failed last time. You will see that in the record of the CFO Act. But

it goes to something Ed mentioned with respect to systems. These

are big systems. It takes a year or two to issue the contract, another 2 or 3 years to do it, 5 years or more, and Morgan’s organization says 18 months is the most we get out of an appointed official,

executive, senior executives who might be very qualified. But in

that time span you could have three or four. There is no corporate

memory. Industry—that is one thing that industry doesn’t suffer as

much as the government. That turnover is just enormous. And it

is just difficult to get corporate memory except with the career civil

servants or maybe a CFO that has agreed to do 4 years, or we were

talking about 4 to 6 years in some of the proposals to Congress, the

testimony. But it did not happen. It did not happen.

I think, with some of the systems and putting in the controls in

place, those are long-term projects. And it is just difficult to lose

the leader that had an interest and get the people energized with

the next leader and the next one and the next one.

Mr. PLATTS. I have seen that as a newer subcommittee chairman

in just a little over 2 years now here and in my time with a number of departments where we started working very closely with

CFOs, and the turnover happens, and you are starting over. And

you have a good initiative and good progress, and then you start

anew, and you really lose that momentum. And I took note of that,

that average turnover every 18 months is one of the challenges, is

having that consistency.

Mr. Kinghorn, with the Academy’s review, is there a general

timeframe that you envision your efforts as you seek comments

from the various individuals in the community that you think you

will be ready to come back with some more detail?

Mr. KINGHORN. I think we planned with staff that we are looking

at September and October as sort of the first real output. But what

we would like to do is, like today’s hearing, as we roll this out,

share with you and your staff some of the findings. But I think

what we would plan to do, the ultimate work plan was in September, October to come up with sort of the 10 or 11, whatever the

number is, areas that really deserve your focus of the 500 things

you could do with some specificity. And then we will have other information in addition to that, but perhaps work with you on an onVerDate 11-MAY-2000 11:57 Sep 08, 2005 Jkt 000000 PO 00000 Frm 00053 Fmt 6633 Sfmt 6633 D:\DOCS\22901.TXT HGOVREF1 PsN: HGOVREF1
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going basis to flesh that out more specifically; you will say the first

three aren’t of interest to us, and we will focus on these four.

So September, October. But I think what we would try to do is

to try to do this on an ongoing basis.

Mr. PLATTS. And that is the timeframe we internally have looked

at of trying to, I will say, narrow the scope, because one of the challenges here is going to be how big this effort could be and what is

manageable and feasible, given some of the history of some of these

different acts, what was tried in the past, and are we going to fight

those same battles again, or are we likely to take the approach

that, well, we are not going to put the effort over there because we

are unlikely to succeed, and it is more appropriate to use our resources on another part of the effort. So we certainly welcome that

feedback throughout the process and then as we get more detailed

in the fall.

Mr. DESEVE. Mr. Chairman, while we are doing that, may I ask

you to do something for us? Would you think about the role of the

appropriators as consumers of financial information, not as people

who give money or withhold money? Because one of the frustrations that many CFOs have is that the process, for example, of

budget preparation involves preparing the President’s executive

branch budget and turning around and preparing a different set of

information for the appropriators, often using a different account

structure. Structure is terribly difficult to do a crosswalk from the

President’s budget back to account structure the way the appropriators would like to have it.

The other thing that I learned—so if you could help us by thinking and maybe having some of the staff talk with some appropriations staff about how important information coming up to the appropriators could be rationalized and made a byproduct of financial

management systems.

At the same time, I will tell a very quick story. The most uncomfortable testimony I ever gave in my life, I think, was before Mr.

LaFalce, who had been chairing the Small Business Committee of

the House, and he was an appropriator. And I learned more about

credit reform in that committee than I had ever known before. I

figured, why am I being called before an appropriations committee

to testify about credit scoring?

Well, it was very simple. Credit scoring affected the number of

small business loans that could be given out throughout America.

The way we had structured our financial management process

around thinking about the nature of the cost of a loan was perfectly

linked to the appropriations process and the way loans were given

out. Once that happened, the Small Business Administration immediately changed their procedures, changed their processes for

tracking loans, tracking loan cohorts, tracking loan performance,

because the industry groups were beating them up about we don’t

have enough loans to give out.

Mr. LaFalce—I used him only as an example—obviously was

very engaged. So when the appropriators become consumers of financial information, it changes the behavior of the agencies as

well, which is not to suggest that the oversight committees aren’t

important. You are, because you are our window to the appropriators. Often they don’t listen to agencies; they have their own instiVerDate 11-MAY-2000 11:57 Sep 08, 2005 Jkt 000000 PO 00000 Frm 00054 Fmt 6633 Sfmt 6633 D:\DOCS\22901.TXT HGOVREF1 PsN: HGOVREF1
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tutional memory which is different than anybody else’s institutional memory. So if there is a way for you to help us——

Mr. PLATTS. We are certainly glad to try to share that insight

and facilitate some of that dialog with the appropriator staff, especially to really get into the nitty-gritty of that data.

Mr. DESEVE. We are not trying to change anything. Although I

want to applaud Mr. DeLay; we are of different parties. I thought

the bold move that he and others took this year in looking at the

rationalization of the appropriation committee structure was very

important. I may be out of the Democratic Party for saying something nice in public about Mr. DeLay, but it was a bold move, and

it is the kind of thinking that will itself improve financial management. When it is easier to present information in a rational way

to a rational group, I mean by that a rationalized group, it just

helps everybody.

Mr. PLATTS. Any other comments that any of you want to share

before we wrap up?

I want to again thank each of you for being here as we publicly

begin a process that we have had some dialogs about and look forward to continue the discussion, and having your insights is going

to be very important and very helpful to this effort, and those who

described trying to grab this tiger by the tail. The more assistance

we have, the more likely of any success we will achieve. So we welcome your input and appreciate your patience here today in getting

started later than planned, and then also having a break for the

votes.

So we will keep the record open for 2 weeks for any of my colleagues for statements or any other information you want to share.

This hearing stands adjourned.

[Whereupon, at 4:28 p.m., the subcommittee was adjourned.]

[The prepared statement of Hon. Edolphus Towns follows:]

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