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THE EVOLVING ROLE OF THE FEDERAL CFO

HEARING

BEFORE THE

SUBCOMMITTEE ON GOVERNMENT EFFICIENCY

AND FINANCIAL MANAGEMENT

OF THE

COMMITTEE ON

GOVERNMENT REFORM

HOUSE OF REPRESENTATIVES

ONE HUNDRED EIGHTH CONGRESS

SECOND SESSION

SEPTEMBER 15, 2004

Serial No. 108–267

Printed for the use of the Committee on Government Reform

(

Available via the World Wide Web: http://www.gpo.gov/congress/house

http://www.house.gov/reform

(II)

COMMITTEE ON GOVERNMENT REFORM

TOM DAVIS, Virginia, Chairman

DAN BURTON, Indiana

CHRISTOPHER SHAYS, Connecticut

ILEANA ROS-LEHTINEN, Florida

JOHN M. MCHUGH, New York

JOHN L. MICA, Florida

MARK E. SOUDER, Indiana

STEVEN C. LATOURETTE, Ohio

DOUG OSE, California

RON LEWIS, Kentucky

TODD RUSSELL PLATTS, Pennsylvania

CHRIS CANNON, Utah

ADAM H. PUTNAM, Florida

EDWARD L. SCHROCK, Virginia

JOHN J. DUNCAN, JR., Tennessee

NATHAN DEAL, Georgia

CANDICE S. MILLER, Michigan

TIM MURPHY, Pennsylvania

MICHAEL R. TURNER, Ohio

JOHN R. CARTER, Texas

MARSHA BLACKBURN, Tennessee

PATRICK J. TIBERI, Ohio

KATHERINE HARRIS, Florida

——— ———

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

JOHN F. TIERNEY, Massachusetts

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

ELEANOR HOLMES NORTON, District of

Columbia

JIM COOPER, Tennessee

BETTY MCCOLLUM, Minnesota

———

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 EFFICIENCY AND FINANCIAL MANAGEMENT

TODD RUSSELL PLATTS, Pennsylvania, Chairman

MARSHA BLACKBURN, Tennessee

STEVEN C. LATOURETTE, Ohio

CANDICE S. MILLER, Michigan

MICHAEL R. TURNER, Ohio

KATHERINE HARRIS, Florida

EDOLPHUS TOWNS, New York

PAUL E. KANJORSKI, Pennsylvania

MAJOR R. OWENS, New York

CAROLYN B. MALONEY, New York

EX OFFICIO

TOM DAVIS, Virginia HENRY A. WAXMAN, California

MIKE HETTINGER, Staff Director

LARRY BRADY, 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 September 15, 2004 ..................................................................... 1

Statement of:

Springer, Linda, Controller, Office of Management and Budget; Edward

Deseve, senior vice president and managing director, ACS State and

Local Solutions, Inc.; Morgan Kinghorn, president, National Academy

of Public Administration; and Virginia McMurtry, Ph.D., Congressional

Research Service ........................................................................................... 4

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

Deseve, Edward, senior vice president and managing director, ACS State

and Local Solutions, Inc., prepared statement of ....................................... 23

Kinghorn, Morgan, president, National Academy of Public Administration, prepared statement of .......................................................................... 14

McMurtry, Virginia, Ph.D., Congressional Research Service, prepared

statement of ................................................................................................... 30

Springer, Linda, Controller, Office of Management and Budget, prepared

statement of ................................................................................................... 6

(1)

THE EVOLVING ROLE OF THE FEDERAL CFO

WEDNESDAY, SEPTEMBER 15, 2004

HOUSE OF REPRESENTATIVES,

SUBCOMMITTEE ON GOVERNMENT EFFICIENCY AND

FINANCIAL MANAGEMENT,

COMMITTEE ON GOVERNMENT REFORM,

Washington, DC.

The subcommittee met, pursuant to notice, at 1 p.m., in room

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

(chairman of the subcommittee) presiding.

Present: Representatives Platts and Towns.

Staff present: Mike Hettinger, staff director; Larry Brady and

Tabetha Mueller, professional staff members; Amy Landeman, legislative assistant; Nathaniel Berry, clerk; Adam Bordes, minority

professional staff member; and Jean Gosa, minority assistant clerk.

Mr. PLATTS. A quorum being present, this hearing of the Subcommittee on Government Efficiency and Financial Management

will come to order.

As stewards of the taxpayers’ money, we in Congress are charged

with ensuring that each and every public dollar is spent wisely. Regardless of party affiliation or ideological bent, all of us that are

entrusted with the handling of public resources must be held accountable for using them effectively and safeguarding them from

fraud and misuse.

The Founding Fathers recognized the importance of the role of

stewardship. Section 9 of Article I of the U.S. Constitution requires

that, ‘‘a regular statement and account of the receipts and expenditures of all public money shall be published from time to time.’’

The role of financial managers has changed a great deal since

1789. While responsible stewardship is paramount, it no longer is

the only goal.

After 5 years of debate, Congress passed the Chief Financial Officers Act of 1990. The CFO Act became the cornerstone for a host

of management reforms. For the first time, Federal agencies were

required to submit to audit.

Congress imparted the importance and prominence of sound financial management by establishing a management structure that

places the chief financial officer in a position of power reporting directly to the agency head appointed by the President with the advice and consent of the Senate. The underlying goal was clear.

CFOs would become more than stewards. They would become strategists who were part of an agency’s top leadership team.

Strategic financial management does not end with a clean opinion. In fact, clean audits are merely a starting point. Timely, accuVerDate 11-MAY-2000 10:59 Mar 03, 2005 Jkt 000000 PO 00000 Frm 00005 Fmt 6633 Sfmt 6633 D:\DOCS\98352.TXT HGOVREF1 PsN: HGOVREF1
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rate and useful financial data is needed to manage and make effective decisions. Without this information, the Federal Government

cannot analyze costs and benefits or gather an accurate assessment

of program performance.

We have seen remarkable progress. In the past, the main focus

was on paying the bills. Accounting was a back-office function, and

reporting was not timely or useful to management. Accounting

standards for the Federal Government did not exist. Automated

systems, when they existed, were focused on recording transactions. Most were developed in-house and were not integrated.

Now we are moving from data entry to data analysis. We are beginning to see the development of cost information and performance data. A complete set of financial statements is produced at

every agency. We have a full set of accounting standards. More departments are developing single financial management systems,

eliminating redundancies, creating efficiencies, reducing the possibility of error and facilitating analysis.

As these changes continue, we will be closer to the original goal

of the CFO Act: strategic financial management; and we will continue to realize more value for the taxpayer.

This level of transformation could not have occurred without the

commitment of top leadership. The standing of the CFO in the

agency management structure was a key consideration during debate as the CFO Act was crafted. In order to continue the transformation as we must, the agency CFO must remain in a position

of importance and influence.

With the focus on improving agency management, Congress has

created several positions—the chief information officer, the chief

human capital officer and the chief acquisition officer—whose responsibilities complement and sometimes duplicate those of agency

CFOs.

Today, we will discuss the changing dynamics of financial management in the Federal Government and how these statutory officers can work together most effectively while maintaining the

unique fiduciary responsibilities of the CFO.

I certainly would like to thank each of our witnesses for being

here today. We appreciate your preparation for today’s hearing.

You bring a wealth of experience and expertise, and I certainly look

forward to each of your testimonies.

I now yield to our ranking member, the gentleman from New

York, for the purposes of an opening statement.

Mr. TOWNS. Thank you very much, Mr. Chairman, for holding

this hearing today on the evolving roles and responsibilities of today’s chief financial officer. As we continue in our pursuit of methods to make our government more effective in times of financial duress, I’m hopeful that today’s witnesses can share with us practical

and unique approaches on how to achieve such goals.

As we have discussed during previous hearings, the financial

management of agencies subject to the CFO Act of 1990 has improved steadily over time. For fiscal year 2003, GAO was able to

give 20 out of 23 agencies a clean audit opinion, which is the same

as last year’s outcome when factoring in FEMA’s move to DHS.

Furthermore, efforts to streamline effective financial management

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systems and controls among the legacy system of the newly created

Department of Homeland Security continues through progress.

However, there remains many issues that continue to challenge

today’s CFO, including the implementation of new technologies and

agency financial management practices, human capital development deficiencies, budget constraints and the streamlining of administrative procedures.

As demonstrated by agencies such as NASA and DOD, the implementation of effective and compliant financial management systems has improved. For fiscal year 2003, 17 agencies’ financial

management systems were not in compliance with the requirements of the Financial Management Improvement Act, the same

number as reported in fiscal year 2002. One specific agency, NASA,

has been deemed a high-risk agency by GAO for its failure to implement adequate financial management practices, even though

past attempts at system integration has already cost taxpayers

$180 million. While this is only one example, it serves as a reminder of the costs involved with flawed financial management

policies.

Let me conclude by saying I look forward to hearing from today’s

witnesses on these topics and hope they can share some insights

on how to establish effective policies that empower the modern

CFO.

On that note, Mr. Chairman, I will yield back.

Mr. PLATTS. As I mentioned, we have a great panel of witnesses

here today who bring a wealth of knowledge and experience to our

hearing.

First, we have the Honorable Linda Springer. Ms. Springer is the

Controller with the Office of Management and Budget, and we appreciate you being back with us again.

Next, we have Mr. Morgan Kinghorn, President of the National

Academy of Public Administration, and, as a graduate of

Shippensburg University in Public Administration, I appreciate

your work with the Academy.

The Honorable Edward DeSeve, Senior Vice President and Managing Director of ACS State and Local Solutions, Inc., and former

Deputy Director of Management within the Office of Management

and Budget. I appreciate you being with us and your service as

well with OMB in the past.

And, finally, Dr. Virginia McMurtry, Congressional Research

Service.

We appreciate all four of you. We have had a chance to review

your written testimony, and if you would like to either summarize

that or complement your written testimony with an opening statement and try to stay roughly within that opening statement period

of 5 minutes if possible.

So, Ms. Springer, if you would like to begin.

The practice of the full committee and the subcommittees is to

have everyone rise and be sworn in.

[Witnesses sworn.]

Mr. PLATTS. The clerk will note that all witnesses have affirmed

the oath, and we will begin with Ms. Springer.

4

STATEMENTS OF LINDA SPRINGER, CONTROLLER, OFFICE OF

MANAGEMENT AND BUDGET; EDWARD DESEVE, SENIOR

VICE PRESIDENT AND MANAGING DIRECTOR, ACS STATE

AND LOCAL SOLUTIONS, INC.; MORGAN KINGHORN, PRESIDENT, NATIONAL ACADEMY OF PUBLIC ADMINISTRATION;

AND VIRGINIA MCMURTRY, PH.D., CONGRESSIONAL RESEARCH SERVICE

Ms. SPRINGER. Thank you, Mr. Chairman; and I want to thank

you and Ranking Member Towns for your steadfast support for the

CFO community and for financial management in the Federal Government. More than any other committee, both from the House or

the Senate, you have been most attentive to our positions and our

mission and it’s greatly appreciated.

Just over 2 years ago, I joined the Office of Management and

Budget to become the Controller and head of the Office of Federal

Financial Management. At the time, approximately a decade had

passed since the enactment of the CFO Act of 1990, which created

the position of CFO at the major departments and agencies in the

Federal Government. As the statutory head of financial management of the Federal Government, I direct and oversee these CFOs

in carrying out their responsibilities. This vantage point, combined

with 25 years of private sector financial management experience,

will underlie the perspective I’ll share with you today about the

role and effectiveness of our CFOs.

Under the CFO Act, the CFO is designated as the executive

tasked with financial management and related responsibilities at

the agency. While his or her statutory activities are often downstream from policy setting that leads to program enactment, the

CFO is an important member of an agency’s leadership team. From

budgeting and funding at the front end, through course management during program execution, to the final accounting and reporting of disposition of expenditures, the CFO is involved throughout

the entire lifecycle of nearly every agency’s initiative. This requires

CFOs to maintain a knowledge of the agency’s operations that is

distinguished by its high level of both breadth and depth.

This broad knowledge has made CFOs attractive candidates for

expanded duties at their agencies. A recent study conducted by the

CFO Council examined the variation in roles and duties of CFOs

at the 24 major agencies. Using nine functional areas, the study results support the assertion that CFOs have varied duties. Consistent with the CFO Act, 22 of 24 CFOs are responsible for financial

systems, operations and analysis, budget execution and performance management functions. There is one CFO that doesn’t have

budget execution and one CFO that doesn’t have performance management. Otherwise, all of the CFO Act responsibilities are being

held and are vested in the CFOs of the 24 agencies.

What is noteworthy is that the prevalence of the CFOs having

additional duties is very great. We have six that have personnel responsibilities, 10 procurement and 11 having grants management

functions. Additionally, all but four have budget formulation, which

is not actually covered by the CFO Act.

Clearly, the CFO is increasingly recognized as being positioned

to provide agency-wide leadership that other officials with more

limited portfolios cannot offer.

5

The CFO Council itself was established by the act to provide a

venue for CFOs to meet periodically and advise and coordinate on

their financial management activities. The CFO Council has accomplished its goals through a committee structure. These committees

were recently realigned to better respond to emerging issues and

support the needs of the Federal financial community.

There exists a good balance on the committees between CFOs

and Deputy CFOs. Deputy CFOs are typically career members of

the government; and CFOs, for the most part, not all, are political

appointees. But that provides continuity of institutional knowledge

and continuous progress of initiatives regardless of changes in political leadership. The Office of Federal Financial Management

partners with the CFOs in all of their committee work.

Currently, we have six committees: the Best Practices Committee, Financial Management Policies and Practices, Financial Reporting Acceleration, Financial Systems and E-Government, Improper Payments, and the Performance Measurement Committee.

For additional information on those committees, I would refer you

to the 2004 Federal Financial Management Report. I have extra

copies. It was distributed to each member of the subcommittee. It

is also available on the White House Web site.

Today’s Federal Government CFO is not the CFO of the past,

and that’s important to note. Successful CFOs in government as

well as in the private sector possess capabilities beyond just financial acumen and subject expertise. While Federal Government

CFOs have narrower portfolios than their private sector counterparts, they must still have the full range of leadership skills that

are found in CFOs of well-run private sector financial management

organizations. To be effective in the expanded areas for which

they’re responsible, these executives and their officers have to have

a comprehensive understanding of both operational and strategic

missions at their agencies. All of these characteristics support the

objective that agencies and the American citizens deserve decisions

that are informed by accurate and timely financial information and

that programs are executed in an environment of robust control

and cost consciousness.

Again, I thank you for allowing me to testify at this hearing and

I will be happy to entertain your questions.

Mr. PLATTS. Thank you, Ms. Springer.

[The prepared statement of Ms. Springer follows:]

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Mr. PLATTS. Mr. Kinghorn.

Mr. KINGHORN. Thank you, Mr. Chairman and Mr. Towns.

As President of the National Academy of Public Administration,

an independent, nonpartisan organization chartered by Congress to

give trusted advice to public leaders, I’m pleased to appear before

you today and give you my perspectives as to the impact of the

CFO Act. The views presented today are my own and are not necessarily those of the Academy as an institution.

Shortly before the enactment of the CFO Act, I was recruited to

become the first Controller and CFO of the Internal Revenue Service. IRS, like other Federal agencies, was not required to prepare

financial statements. Yet the CFO Act named the IRS as one of the

first pilots to undergo the financial statement preparation and auditing process. It’s not often remembered that the first agencies

that went through this were pilots because it wasn’t clear this

could be done in the Federal Government.

The IRS, like the other organizations, was quite unprepared for

this when I arrived, demonstrated by the fact there were fewer

than five accountants in the newly created CFO office, six nonintegrated regionally controlled accounting systems for the appropriated accounts as well as other significant shortcomings.

Fast forward 14 years to the present day. And, as we have heard,

there have been many significant both strategic and operational

successes, but I would like to share you my perspective having

been a CFO and been at OMB prior to the creation of the controller

organization.

First, the quality of CFOs at the departmental level is high, very

high in my mind, and CFOs have the ear of the political leadership. At the most fundamental level, quality and effectiveness of

these processes do begin with people. In 1990, there was considerable debate whether the CFOs at the departmental level should be

political and whether deputies should be careerists. That approach

proved to be the outcome and I believe it has served us exceedingly

well. I believe the qualification listing contained in the CFO Act,

coupled with the significant responsibilities listed in that act as

well as others, have really created an environment in which only

individuals with strong financial management qualifications are

now likely to ever become a departmental CFO.

The integrity and usefulness of financial data has greatly improved. That most departments and many bureaus have received

unqualified opinions on their financial audits does mean there is

improved integrity in those data. Such success lays a strong foundation for enabling increased use of financial data for complex decisionmaking.

Third, the CFO has moved from the back room to the board

room. CFOs now have a place at the management table. There

clearly is value in having a statutory basis for such broad spans

of authority. The act’s requirement that the departmental CFO report directly to the agency head has also helped to enable the CFO

to move from the back room to the government’s version of the

board room. The impact has been healthy and often has occurred

at the operating bureau level.

And, fourth, CFOs are positioned to be key players in departmental decisionmaking, probably the fundamental important issue.

12

The authorities contained in the CFO Act and related acts have

given increasingly powerful authorities to the CFO to integrate financial and programmatic information to improve agency operations. Not all CFOs have the internal organizational authorities

to accomplish all this, but I believe they are placed well to do so.

What are the remaining issues facing us in the next decade?

First, we need to recognize that management functions must be

reintegrated. There has been an increasing statutory balkanization

of the Federal Government’s management functions. Although the

Chief Information Officer and the Chief Human Capital Officers

have more recent statutory authorities and framework, neither is

as powerful or as prescriptive as the CFO Act. In my mind, they

should not be. I believe financial management is the most central

and potentially integrating function in management. But all management operations need to be more unified. Even within the CFO

world itself, there is a wide array of CFO responsibilities even at

the departmental level, and I think that inconsistency needs to be

examined. The management issues today are so much more complex, systems so much broader in their impact that there needs to

be an integrating management focus short of the Secretary or agency head. In my mind, the CFO or perhaps an Under Secretary of

Management/CFO might be the solution.

Second, we need to leverage our financial management investments to focus on what is really more important in my mind and

that is internal performance. We need to focus as much in improving decisionmaking at the program operational level as we have for

accounting. We have invested hundreds of millions of dollars in improving financial operations, and it has now moved beyond improving those accounting operations, and ensure that financial and administrative systems are utilized to help investment decisionmaking in our core programs. I believe one tool to accomplish this

objective is managerial cost accounting, which I believe is the key

mechanism that can link dollars spent and outputs and outcomes

achieved. The governmentwide standards need to be fully implemented.

Third, CFOs need to take advantage of being at the table. We

must ensure that CFOs are not only there but they know what to

do once they are there. More CFOs need to see themselves and act

as business partners with program operations. Many bureau CFOs

come out of a particular discipline, usually accounting or budgeting

like I did. Often their focus has been relatively narrow. And the

CFOs need to see themselves and act as active players in improving broad organizational improvement, rather than a simple narrow discipline.

Finally, continuing attention by this committee and the administration is crucial. Departments and agencies still must undertake

Herculean efforts to achieve unqualified opinions. Many have found

it difficult to keep those clean opinions. Improvements in process

systems and people must continue with the kind of oversight you

have been given. Much of the focus of the CFO Act has been at the

departmental level and on accounting process. I believe the next

decade needs to be focused on the needs of the Program Manager

at the operating bureaus and the operating level and the bureau

CFOs, where increasing attention must be given to the utilization

13

of data in making decisions, not just simply reporting accounting

transactions.

Thank you for allowing me to share with you my observations on

the implementation of the CFO Act.

Mr. PLATTS. Thank you, Mr. Kinghorn.

[The prepared statement of Mr. Kinghorn follows:]

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Mr. PLATTS. Mr. DeSeve.

Mr. DESEVE. Thank you very much, Mr. Chairman.

Before I start, I came in 1993 to the Federal Government as the

Chief Financial Officer of the Department of Housing and Urban

Development and was honored to have Linda’s job as Controller at

OMB and then as Deputy Director. During that time, my official

residence was in Monroe County, PA. I was born and spent 23

years in Albany, NY.

Let me not read my testimony, because you have copies of it, but

make two or three points.

First, the CFO function has evolved over time, and I think the

stewardship of this committee can begin continuing its next evolution. When the CFO function was put in place, it focused very

narrowly on audited financial statements, and then it focused on

financial systems, because you couldn’t have financial statements

without good information and couldn’t have good information without good systems. Those went hand in hand.

At the same time, additional laws began to come into play, the

Debt Collection Improvement Act, the Federal Financial Managers

Information Act, those in the context of the CFO Act as well as

Clinger-Cohen and FASA and FARA. We began having a burgeoning set of—I hate to use this word because it is a Federal word—

stovepipe legislation, which were integrated often at the level of

the CFO.

What was really important and exciting to me as I worked as a

CFO and with CFOs is the interaction about real things.

Today, Secretary Rod Paige talked about the great decline in delinquency rates and default rates of the student loan program. He

said the default rate was down around 5 percent. That may still

sound too high, but we have all seen rates in the teens in that program. That was not exclusively but largely as a result of attention

paid by OMB, which continues to be paid by OMB—Linda, I try to

be seamless here—as between generations of OMB.

I think of people like Kathy Stack, for example, in a program site

at OMB working assiduously with the financial people, the CFOs

at the agency levels and the subagency level in the Department of

Education to create an important program, the Direct Lending Program, and bring financial integrity to it.

That is the evolving role of the CFO. It is beyond financial statements, and it is even beginning to be beyond, to some extent, just

implementing GPRA to getting results. What are the results? What

do they matter for the American people and how can we understand the proper communication of those results within a financial

context? Are we doing the right things, doing them well and efficiently?

So I think it is a good time for this committee to step back and

look broadly at things like internal control. I understand the committee is moving in that direction.

One of the questions that people have asked me, including our

former Deputy Counsel to the White House is, well, isn’t SarbanesOxley, if imposed on the Federal Government, going to create serious problems? The answer is no. It is quite the reverse.

If you look at the structure of reporting and analysis that goes

on within the Federal Government, it is beyond the standards, I

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believe, imposed by Sarbanes-Oxley. The number of times when I

had to talk to the Cabinet Secretary about his need to sign off on

a particular internal control report were great when I was the

CFO. This is a time when HUD was plagued by scandals, and

those scandals related to improper management of assets. So it

wasn’t about audited financial statements but about apartment

buildings in Chicago that were vacant because there were improperly administered loans by the Department of Housing and Urban

Development that led to the rundown nature of those properties.

So the CFO Act needs to be more real. It needs to have more of

an emphasis on reality.

In terms of its organizational structure—I’m sorry—an evolving

emphasis on reality.

In terms of its organizational structure, I strongly support the

chief operating officer model where there is a chief operating officer

at the deputy secretary level. One size doesn’t fit all.

I’m on the Business Advisory Board of the National Science

Foundation. The National Science Foundation, while an important

grants-making agency, doesn’t have a significant base of financial

or real property assets. The O&M responsibility, although significant, is not a big factor there. It’s more being able to set GPRA

kind of performance measurements for the grants and make sure

that the grantees, both in terms of financial integrity and performance, meet those standards.

One set of rules for NSF and another set of rules for the Department of Education in terms of the role and the organizational

structure is OK with me. The statute itself was ambiguous. It was

ambiguous on budget development and on reporting relationships.

We spent a lot of time trying to organize the relationships in various agencies and departments. So I think the committee allowing

some flexibility within a single point of accountability at the secretary’s office, if there is an Under Secretary of Management tradition as there is in the State Department, so be it, I can live with

that. We want to see the functions of the CFO broad and evolving

to meet real program needs and real things the American people

care about.

Thank you very much.

Mr. PLATTS. Thank you, Mr. DeSeve.

[The prepared statement of Mr. DeSeve follows:]

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Mr. PLATTS. Dr. McMurtry.

Ms. MCMURTRY. Mr. Chairman, thank you for the invitation to

testify at this hearing.

A rewarding aspect of working at CRS over the years is to follow

a major reform measure such as the Chief Financial Officers Act

through the legislative process to assess initial implementation and

then to continue tracking subsequent developments. My testimony

reflects this institutional memory perspective, rather than the expertise as a financial management practitioner as reflected among

others on the panel. The written statement was intended to provide

a historical background on the CFO role and to highlight important

developments affecting the evolution of the CFO position and agency management. I will note some of the key points from my statement.

The 23 chief financial officers established by the 1990 law constituted an important group of new actors in the leadership structure for Federal financial management. To promote their accountability, the CFOs serving in the Cabinet departments and two

other major agencies were to be appointed by the President and

confirmed by the Senate. All the CFOs were to report directly to

the secretary or agency head.

The CFOs are responsible for all financial management operations, activities and personnel in their agency. Among other

things, the CFOs are to produce financial information, establish integrated financial management systems and monitor budget execution.

While all the CFOs share the same broad statutory responsibilities, the roles of the CFOs in the organizational structure of the

respective agencies differ considerably. The broad duties for the

agency CFOs conferred by the 1990 law have been augmented by

subsequent amendments and related legislation, as already has

been noted.

The CFO Act provided for an interagency Chief Financial Officers Council to advise and coordinate activities on a wide variety

of financial management issues. In the mid-1990’s, the Council was

revitalized with adoption of a charter that expanded membership

to include the 23 career deputy CFOs and also approved the creation of four new Council officer positions, provided for the establishment of the standing committees for the first time and stipulated that, henceforth, meeting agendas were to be set by the

Council officers rather by OMB alone.

From 1995 to 2000, the annual financial management reports as

required by the 1990 law were issued jointly by OMB and the CFO

Council. As recounted in the report during this period, priorities for

Federal financial management were being set with considerable

CFO Council involvement. From 1995 to 1999, the reports included

a table reflecting CFO organizations and the agencies. In 1999, the

agencies reported that all agency CFOs exercise managerial responsibility over finance operations and analysis and, at that point,

23 were responsible for financial systems and 20 had responsibility

for budget formulation and execution.

Previously, in 1997 and some other years as well, the data presented on CFO organizations was broken down in greater detail to

indicate other management functions performed by the CFOs. This

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is included in Table 1 on page 5 of my statement. And here we saw

as early as the mid-1990’s some of the CFOs were responsible for

implementation of GPRA in 14 agencies. They performed procurement functions in 10, and at that point 8 CFOs had grants management responsibility. Less common were personnel responsibilities and the information resource management role outside the financial systems.

Data from recent studies have already been cited in previous testimony, and things have changed somewhat in terms of the CFOs

performing more of the major roles. From 2002 to 2004, the CFOmandated financial management reports increasingly have reflected the priorities of the Bush administration’s management

agenda. One of five governmentwide initiatives is improved financial performance. The CFOs play a major role as their agencies

strive to meet the criteria to get to green on the scorecard.

The CFOs and the Council are involved with the budget and performance integration initiative. With OMB focusing on and providing leadership for the initiatives and the agenda, the roles of the

CFOs and the CFO Council continue to develop. The CFO Act created the agency CFOs as a distinct group of Federal financial management officials with their own accountability, not just a group of

supportive officials following directives from OMB. The evolution of

the relationship between the agency CFOs and the CFO Council

and the leadership of OMB will likely continue to be of interest for

purposes of congressional oversight.

If I may take a couple of more minutes, I would like to offer some

brief observations on the CFO in the Department of Homeland Security. The Homeland Security Act of 2002 provided for a CFO position in the new Department. But, unlike the appointment procedure for CFOs in the other Cabinet-level departments, the CFO in

Homeland is appointed by the President but is not subject to Senate confirmation.

The law also made no reference to the CFO Act itself or to Chapter 9 of Title 31 where the CFO duties are codified. Likewise, there

was no mention of membership on the CFO Council. The CFO in

Homeland presently reports to the Under Secretary for Management.

One version of the Department of Homeland Security Financial

Accountability Act, S. 1567, which would bring the CFO for DHS

directly under the CFO Act passed the Senate under unanimous

consent last November. A related bill, H.R. 4259, was approved by

the House under suspension of the rules on July 20, 2004.

Supporters of the DHS Financial Accountability Act contend that

the CFO Act and related laws should apply consistently across the

executive branch and that the unequal status currently accorded

the CFO in DHS degenerates the CFO position and the importance

of financial management in DHS. The CFO position with its fiduciary responsibilities carries with it special needs for accountability, which Senate confirmation reinforces. In short, those in favor

of bringing the CFO in DHS directly under the CFO Act argue that

confirmation is important, that reporting directly to the secretary

is significant and that statutory symmetry, including membership

in the CFO Council for all Cabinet-level CFOs, is desirable.

29

A Senate amendment was filed last week to add the text of H.R.

4259 to the Homeland Security Appropriations Act, but the amendment was not offered on the floor. It is my understanding that the

House-passed version of the DHS Financial Accountability Act has

now been cleared in the Senate, and H.R. 4259 will likely be

brought up under unanimous consent on the Senate floor in the

near future.

Thank you.

Mr. PLATTS. Thank you, Dr. McMurtry.

We were hoping to have gotten word by the time you finished

your testimony to say it has been, but H.R. 4259 is apparently

scheduled or to be scheduled here in the very near future and to

be sent to the President.

[The prepared statement of Ms. McMurtry follows:]

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Mr. PLATTS. Again, my thanks to each of you for your written

testimonies and your oral testimonies here today. I would like to

start off on the questions asking you to expand.

Each of you touched on the role of the CFO as defined in the

CFO Act. Are the statutory parameters specific enough or too

broad? And what each CFO is required to be doing, as opposed to

possibly being involved with, should we be fine tuning it to deal

with the fairly diverse approach of CFOs across the Federal Government?

Ms. SPRINGER. I will start with one thing that I think is just happening without the legislation, but it would be nice if there were

a legal basis for it, and that is the budget formulation. I think that

a CFO that doesn’t have explicit budget formulation responsibilities is hard-pressed to be considered a CFO in the fullest sense,

whether it is in the private sector or the Federal Government. And

I was surprised when I went back to read the legislation again to

find that it was budget execution that was mentioned but not formulation. I would recommend that at the next opportunity that be

something that be remedied.

Mr. PLATTS. That is certainly one that jumps out to me when we

talk about strategic planning. It seems you need to be part of that

budget formulation. And, as Dr. McMurtry’s table shows us, the

fact that some significant agencies—Department of Education,

HUD, Agriculture—do not have—they have budget execution

only—their CFOs—makes the point that there is a significant

amount of the Federal Treasury within those departments where

the CFOs don’t have that role.

Mr. KINGHORN. If I may, I would certainly concur on budget formulation. If you only have execution, you are a clean-up hitter.

There is nothing you can fix in the execution phase of the budget.

You can track, count and report, but unless you have an integral

role of developing that budget—because, as you know, decisions

about budgets are made 3 years before the budget starts.

In general, I think the act is pretty broad. One of the issues that

you might want to consider that might resolve some of trying to fix

the 18 or 20 different functions is the concept of what financial

management means. When it was enacted and that term was

used—and even to this day, having come out of the budget world,

financial management to many people sort of means accounting. I

view it much broader than that. I would view the act as very broad.

I would even view financial management to include formulation. If

you don’t want to get into a game of trying to fix every function,

I think the act itself is very broad.

I think I would agree with Ed that sometimes you have to fit a

particular organization. Back when I was Deputy Assistant Administrator for Management at EPA in all the 1980’s, the functions we

had were everything in the financial world. We had grants management, we had financial management, we had human resources,

and we had IT and everything. And there is basically at that agency level reporting to the administrator a single office that could

bring together all those tough issues. So we really had no question

of who was or was not the CFO. That is now split into three different political food chains.

45

And, again, in this day and age when you bring up a financial

system, grants are involved, IT is involved, every function that you

can think of, and it is no longer possible to have this increasingly

diverse balkanization of management functions unless you have a

single individual office that can be held accountable for the success

or failure of those functions.

Mr. PLATTS. So the example in DHS, the Under Secretary of

Management where those various entities—positions are being funneled through, that approach is an example that’s out there that

you would embrace?

Mr. KINGHORN. The statutory recommendations that are being

proposed, I think I would. I would probably even go further and indicate that office should also be the Under Secretary of Management/CFO. The CFO needs to be slightly at an elevated level than

the other management functions.

Mr. PLATTS. And within DHS, it is Under Secretary versus at a

Deputy Secretary level?

Mr. KINGHORN. I would prefer a deputy secretary level, but that’s

just my bias. And there is a lot going on at Homeland Security. It

is a brand new structure, and sometimes it is difficult to put all

these functions in one place, but I think I would support it for the

long run.

Ms. MCMURTRY. One other thing I might note here looking back

at the historical perspective, which is what I have to offer, when

the CFO Act was enacted, there were provisions for each agency—

more than provisions, there was a requirement that each agency

prepare an organization plan to be submitted for OMB’s approval

to show how the various functions required by the CFO Act were

going to be performed in the agency. And I think that because of

the various developments that have occurred since the initial act,

while we don’t want to get bogged down in paperwork and organizational charts, it might be useful to think about agencies focusing

on just whether the CFO has the structure within the agency or

department to perform all the broad responsibilities that are given

to them and expected of them.

And so while I think that we don’t need arrangements to be identical in each agency, where you have a situation now that some

CFOs are performing only three or four functions and others—it’s

not that they are performing the function wholly, it’s not the CFO

would perform the procurement function as a sole responsibility,

but rather that they be involved and have some managerial responsibilities in the area so they can keep the breadth that they need

and have some authority to go with their responsibilities.

Mr. DESEVE. If I could make two comments.

One, leaving out budget development was not accidental, wasn’t

just an oversight of the committee. The Appropriations Committee

has weighed in heavily in many agencies, and the fact that the Department of Agriculture still does not have a CFO with responsibility for budget development is not an accident. You are bucking a

trend, and you may want to talk to your friends in the Appropriations Committee both about this as well as about engaging in

GPRA and being part of GPRA.

I come from a tradition of strong chief financial officers. When

I was the Chief Financial Officer of the city of Philadelphia, there

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were three individuals reporting to the mayor. One was the managing director, who took care of the operations of the department and

the housekeeping functions, whether that was personnel or whatever. Second, the director of finance, which was my job. I did taxation. I did accounting. I did budgeting. I did information technology, because in those days it was bound up with financial management. I did everything but post audit. I didn’t audit myself.

And so I believe, for example, in a place liked DHS, it is perfectly

appropriate to have an Under Secretary for Financial Management,

that going through a single entity, have the CFO, the chief information officer, the chief human capital officer, the chief procurement officer all reporting to a single individual significantly dilutes

financial management and what we need to do is elevate financial

management and make it a prime companion to program management. The two need to be interlocked and working together.

What is the revenue collection responsibility of DHS? It has the

second largest revenue collection function in the Federal Government in the Customs Service. That’s a lot of money. I forget the

current number, but it is tens of billions of dollars that is collected

through Customs. What are the internal controls there? Isn’t that

important? And I could go on and on.

I firmly believe the CFO at the same level as the chief management officer is appropriate. Now would I modify that view? GAO,

for example, has the chief mission support officer as well as a chief

operating officer and the CFO is embedded at GAO within mission

support. Why? Because they don’t have a lot of financial management functions. I am not in any way denigrating the Government

Accountability Office, but it’s not inappropriate that they have that

structure. But if there is significant financial responsibility, there

ought to be a chief financial officer reporting directly to the Office

of the Secretary. And the initial intent of the CFO Act of having,

one, the Senate confirmation and the direct access or DHS bill of

trying to kind of take that hybrid approach of maintaining that direct access—Senate confirmation—but also with dual reporting to

the Under Secretary.

Mr. PLATTS. I have additional questions, but I would like to yield

to the ranking member, Mr. Towns.

Mr. TOWNS. Thank you very much, Mr. Chairman.

Mrs. Springer, let me begin with you, in your testimony you

mention how CFOs are now also assuming additional responsibilities, and there’s two schools of thought. Some people say that’s

good, and some say it’s bad. What are your views on that?

Ms. SPRINGER. What I’ve seen is that CFOs have too many responsibilities beyond the CFO Act, that it dilutes their ability to be

as effective as they should on the basic CFO functions as they are

listed in the act.

So, for example, without naming an agency, one individual that

had the full breadth of all the new responsibilities—the IT officer,

not just for financial systems but for all the IT resources, was—I

believe had personnel responsibilities, had a variety of these additional ones that have since been listed in separate acts and separate pieces of legislation. But when they had all of them, they were

not as effective and they were slower to achieve some of the management successes that we have seen in other agencies.

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I believe that the CFO responsibility with the act and with the

addition of the budget formulation, which I think is more akin to

a CFO’s job than personnel, that’s a full-time job for our CFOs. So

I think it is better to have a dedicated personnel manager. I think

it’s better to have a designated CAO for acquisition and a designated CIO that have certain skill sets that are germane to those

responsibilities that a CFO may not have.

Now having said that, I believe that the CFO, as has been stated

by someone earlier, has a higher level of prominence in the organization, not because the other responsibilities aren’t important but

because everything that’s done has a financial aspect to it, in my

mind, in the agencies. I don’t believe every aspect, everything, has

the same level of involvement for those other positions, but I would

recommend that the CFOs stick to things that are strictly financial

and financial management.

Mr. TOWNS. Not grants management.

Ms. SPRINGER. Grants is a little bit more borderline, but when

you get to personnel and CIO responsibilities, I think it should be

by someone else who brings a more dedicated skill set.

Mr. TOWNS. Anyone else want to add on that?

Ms. MCMURTRY. I want to say one thing on the personnel issue.

It is my recollection that in report language, if not in the actual

statute, the CFO is expected to perform some personnel duties with

regard to financial management personnel. They advise on the appointment of the deputy CFO, and my recollection is that they also

were expected to be involved in recruitment of agency financial personnel below them and also to be involved in training, again, of financial personnel. It’s a limited segment, but it’s the special needs

that financial management has. I think there was some thought as

the legislation was being drafted to give the CFOs a piece of that

responsibility.

Ms. SPRINGER. If I could followup, if I may. I agree with that,

and that would make sense in the structure I envision. Where I

would draw the distinction is in the chief human capital officer

that is pervasive through the whole organization.

Mr. TOWNS. Mr. Kinghorn, our committee has spent several hearings this year focused on the financial management of Federal

agencies, including the number of clean audits received at the

agency level. Can you identify for us ways in which the CFO community can improve upon current efforts of the government to

achieve a governmentwide clean audit?

Mr. KINGHORN. When I went to IRS, again—and it has been 8

or 9 years or maybe even more now—it took a long time for the

IRS to get a clean opinion. I was there 5 years. I was the first and

still the longest-lasting CFO of Internal Revenue, and I had to put

a new financial system in, and we did that successfully in the first

18 months. That meant 2 or 3 years of not achieving a clean opinion because the system wasn’t yet working and that would help get

me there. And then we realized we had a wonderful financial system in place but the business processes were a mess.

That is a relatively contained organization; and most of our problems at IRS were, frankly, not in terms of accounting on the revenue side but really the appropriation side, the appropriated accounts, which were really a basket case, frankly. Three years after

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I left, finally got a clean opinion. Two years, they sort of got one,

but then lost it. But it took 8 years for the IRS, which is really

mostly appropriated accounting—you look over to the defense,

which is comprised of over 200 financial systems. I had six to get

rid of. They have 200. That is incredibly difficult. And, frankly, the

attention of this administration and the oversight in the last 4

years to specific issues of financial management has really helped

to enable people to get things done.

On the organizational issues, when I went to the IRS, I was an

outsider. I was the first executive into IRS from the outside; and

if I had not the placement in that organization of reporting—four

people reporting to the Commissioner, no one would have listened

to me. And I had concerns then, people thinking I had too much

authority. And it really goes to DHS. In most organizations, particularly I believe in compliance organizations, which IRS is, and

most programs, there is a desire to get the program done. And I

think in DHS, having consulted with that organization in its previous components, it is a very difficult place to improve financial

management because people believe in the program. So unless you

really place within DHS in a position of true authority, I think reporting to the Secretary, the CFO function, I think it is going to

be very difficult to pull together multitudes of systems that didn’t

work well before they were consolidated and try to get it done.

I think the issue around placement is very important. That won’t

make it happen, because you need the right people and the right

functions. I think without placement, you are going to have a very

difficult time in a diverse environment like DHS.

Mr. TOWNS. I yield back.

Mr. PLATTS. Thank you, Mr. Towns.

Continuing on the discussion about these different roles and the

importance of CFO versus some of the other more recent statutory

positions, has OMB given any guidance to the departments and

agencies regarding either the alignment of the CFO and these

other positions and factors to consider in what—how broad the

CFOs responsibility should or shouldn’t be?

Ms. SPRINGER. OMB hasn’t issued a particular circular or work

product that defines those roles. We believe that the legislation for

each of those has addressed and has identified different positions.

The CIO, the chief human capital officer, CAO and CFO, each of

those has legislation to varying degrees that defines the roles and

responsibilities of each of those positions and we think establishes

those as unique positions.

To the extent that a secretary decides to have the same individual occupying more than one of those positions and more than one

title, it would be similar to the private sector saying your chief

human resources officer is also going to be your chief financial officer, going to wear two hats. But the roles themselves are what they

are. We don’t believe there is a need for OMB to come up with an

additional description of the CFO’s role, for example, because we

look to the CFO Act for that, as we do for the chief human capital

officer and the others. Each secretary is left to make the decision

as to how many hats to give a given individual among those four

different positions.

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Mr. PLATTS. Within your CFO Council committee structure, your

Best Practices Committee, is there any discussion of ‘‘in department X, I’m wearing two different hats,’’ ‘‘here’s how it is working

and not working.’’ Is that type of dialog occurring?

Ms. SPRINGER. Formally and informally there is. The CFOs talk

among themselves about what makes them successful and what

challenges they have and where they are placed in the organizations.

We also did a survey, as you know, roughly a year ago. The

Council asked the Department of Labor, whose CFO volunteered to

do the survey of the responsibilities and to update previous surveys. So that grew out of the Council’s interest in surveying the

landscape. So, from time to time, we will formally look into that,

and there are varying opinions. There are some CFOs that would

say they like the breadth of wearing several hats, and there are

others that are happy to have a more focused approach that more

aligns with their skill sets.

Mr. PLATTS. In response to the Department of Labor study, I

would be interested in the general reaction of the CFO Council

members to the disparity when that came out. Were they surprised

that Education had four of the core function areas, versus Commerce, where they had eight. Did they want to look into it further

to find out why two different departments have a significant difference?

Ms. SPRINGER. The strongest reaction that came out of the panel

that we had to discuss this was the budget formulation issue and

the absence of that, and that is why I keep going back to that. No

one expressed a strong desire, for example, to have personnel that

didn’t already have it.

But they felt, as CFOs—and I agree with them wholeheartedly—

that if they didn’t have budget formulation—they didn’t have that

seat at the table at the front end—as was mentioned earlier, that

they were more coming in at the back end, and that more of the

execution, which they felt a CFO really should have, was at the

front. And so they really did feel an issue with that, whatever the

history was.

Mr. PLATTS. And that leads to, for all four of you, that issue of

budget formulation and your opinion in a broad sense, or if there

is any specific example you want to give. You’re familiar with different agencies, like IRS or HUD—in the level of authority or actual impact that CFOs are having from a strategic planning standpoint.

Several large ones do not have that budget formulation, it leads

me to believe in those departments, those CFOs have less input

into strategic planning of their departments.

Even where they have the budget formulation responsibility, I

would be interested in your thoughts as to why they have the responsibility and involvement. Are they truly being engaged and actively included in the strategic planning process?

Ms. SPRINGER. I think that’s a fair question to ask, Mr. Chairman, and I think it’s safe to say that they would feel that they

were more involved, to whatever extent they were involved now.

But they would feel that they were more involved if they had the

budget formulation piece, and I think they would welcome that.

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Mr. KINGHORN. Let me give you an example of where it really

is crucial, and it goes back to my experience. I arrived at IRS about

3 months before the end of the fiscal year; and the one question

I did not ask the Commissioner—foolish me—was, How was your

budget for next year? They had a $500 million shortfall on labor costs. It was the third

year they had done that. And the main reason that resulted was

that there were lots of decisions being made in the formulation

stage on personnel policy with the unions that greatly affected the

ability to pay.

So what I did, because I had those functions finally consolidated

was, we did a major study in the CFO office that looked at what

were the drivers of labor cost. We developed a model. And that became very sensitive because—that’s why it is a sensitive issue because we had to go into the programs and force them to become

more careful in how they develop their budgets. And 2 years later,

they did not have a labor problem because we were able to look at

it in formulation.

What was happening in execution was, they were taking money

away from the IT program to pay for people’s labor costs, the only

place to go.

So I think that’s the clearest example to me of why you’d want

to do it. And I think also the reason it’s so sensitive is because it

gets the CFO really into the pockets of the program operations,

which is where I think it should be.

Mr. DESEVE. I have to go back in history for just a second, Mr.

Chairman. What we find, that I hadn’t really looked at—the labor

at Department of State—carefully, but it’s consistent with what I

know, historically there were assistant secretaries for management

and budget and that had administrative functions as well. Often

departments grafted on the CFO function or grafted on the CIO

function, onto those existing organizations, rather than creating an

independent CFO organization.

Take HUD for a moment. HUD actually split out the CFO function. They left their assistant secretary for management and budget in place. Budget formulation was at the ASMB level. Finance

and accounting went with the CFO. Over time, HUD evolved and

took away from the individual who had the budget formulation responsibility, that responsibility, and gave it to the CFO.

What I see here in the various departments is the remnants of

history. I won’t go department by department, but I have some

knowledge of some of the major ones. Agriculture is still a problem.

Go talk to the Appropriations Committee about that one. I can’t

help you on that one.

Justice has a tradition of a strong management operation in certain areas. In State, for example, personnel isn’t in that, but the

other functions are because there was a separate director general

for personnel within State. So I think you almost have to go agency

by agency and have this committee ask, does this make sense? Is

there a sensible accommodation of the finance function or not of

budget formulation?

The other function I would add to this is asset management. The

more I work with Federal agencies, the more I realize that in addition to the functions across the top, for many of them, especially

51

the credit granting agencies—that is, Education, HUD, VA, Agriculture—the stewardship over financial assets, especially loan programs, SBA, is an enormously important function, and if the CFO

isn’t playing that function in credit granting agencies, then you’ve

got a significant disconnect.

The programs also want to make more loans. They always want

to serve a greater population. But the risk factor needs to be accommodated as well. There has to be a balancing, whether it’s

under credit reform or other standards of those two things.

So I would add that function, asset management, and indicate

that not every agency has it. But where it exists, is the CFO actively involved in designing those programs. We have a $100 million portfolio. That doesn’t sound like much in Federal parlance,

but $100 million portfolio of loans. Thirty-three percent of the loans

made to students are made through the direct loan program. We’d

better have good consonance, and we do in the Department of Education between the CFO’s office and the portfolio, as it exists.

Mr. PLATTS. Thank you.

Ms. MCMURTRY. I think another issue here that might be combined with looking at what the CFOs have done, and another thing

really that makes a case for combining the budget formulation and

budget execution is another one of the initiatives in the President’s

management agenda, that being the budget and performance integration. Especially with that, aside from all the concerns about financial management, I don’t see how that’s going to ultimately be

as effective as possible; that is to say, efforts of performance budgeting, unless you have, somewhere, someone overseeing all pieces

of the budget cycle as well as the performance measurement.

Mr. PLATTS. OK. Thank you.

Mr. Towns.

Mr. TOWNS. Yes, thank you, Mr. Chairman.

Dr. McMurtry, is it any way we could—anything that we might

be able to take a look at to see, you know—let me be specific.

NASA has gone through three financial management systems to

the tune of about $180 million. Is there anything, any guidelines

to be used to sort of see or determine or to avoid that kind of

waste?

Ms. MCMURTRY. In terms of trying to consolidate financial system and make improvements in them?

Mr. TOWNS. Yes, yes, right.

Ms. MCMURTRY. Quite frankly, I don’t have too much technical

expertise in the systems aspect of it. Ordinarily, I think the case

would be made that if you can combine and simplify your systems,

down the road there should be some savings because things will be

more efficient and you will be able to get the information you need

for your program people and so on faster if you have a system that

works.

But in terms of having a—putting a lot of money to develop a

system and then have it not work, I can’t offer you any guidance

there, except I guess you need to look at the designers of the system, whether it be contractors or whatever, and try to get the most

capable people on it.

Can anyone else comment on that?

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Mr. TOWNS. Yeah. Anybody else want to add anything to that because, you know, to me——

Mr. DESEVE. You have two of the world’s great experts in financial systems in Mr. Kinghorn and myself. I don’t know Linda’s

background, so we can’t duck the question. He can, maybe; I can’t.

I was involved heavily with NASA’s financial system when I was

at OMB. And my view of the world is as follows: NASA needs to

fully involve and fully integrate its program and mission support

areas, including its contractors—by ‘‘contractors,’’ I mean the people who run the NASA program——

Mr. TOWNS. Right.

Mr. DESEVE [continuing]. In developing the stewardship and financial systems. It can’t be something that’s imposed by the chief

financial officer’s office upon the field.

NASA is an agency with a field culture. If you go to the jet propulsion lab, or if you go to Huntsville, Alabama, or if you go to any

of the other parts of NASA, that’s where NASA really works, really

does its work.

The Kennedy Space Center is where they really do their work.

Anything that seems to come from central office and limit their

flexibility or impose upon them additional requirements has to be

carefully integrated with the way they do their operations. And I

think NASA’s culture has resisted almost as I might resist penicillin perhaps. I might be either allergic or resistant to penicillin.

NASA’s culture has resisted financial systems over time. Now, I

haven’t looked at it for some time, but I saw the failures that occurred, and I believe that it is the engagement of the program entities with NASA’s central management that can provide a successful

system. But till now it has not. And I’ll probably be sorry I just

said what I said.

Mr. Kinghorn actually installed more than I installed, so I can

ask him to comment.

Mr. KINGHORN. These are incredibly difficult to pull off. Forget

the technologies, which I think are pretty substantial. They are difficult for cultural reasons, and NASA does have a field structure

culture just like IRS did. They had six regional financial systems,

IRS, controlled by the regional administrators; whereas when I

went, I wanted to find out what the big picture was, I had to go

to them and ask and beg.

NASA’s centers and their field structure were the power bases,

so you’ve got a real cultural change there. And I think Ed was exactly right; to make it successful, and I believe, albeit with some

recent GAO reports on their implementation, they’re going about it

the right way.

They really have begun to change the culture. The CFO and controllers at the centers who run NASA day to day don’t report directly to headquarters nor should they. But they report to their

center director, and then when the center directors historically

said, to heck with this central management stuff, that’s who they

listen to.

That’s changing. When I went to IRS, the Commissioner asked

me in the interview, if you come here, what’s the most important

thing I can do for you? And I said, do not blink. I’ll give you 5

years. It’ll take that long to do this. If you blink, I’m dead.

53

And people tend to blink. Three commissioners didn’t for me.

People tend to blink just when it gets tough. And I really think

NASA has begun to turn the corner in terms of getting the system

up, getting the way that helps the program operations and trying

to pull together enormous financial data that no one has ever really

wanted to look at.

So I did a study for NASA just before I left consulting that really

looked at the impacts of the budget process on any of the shuttle

disasters. And what was striking to me was that they never looked

at the full cost because, really, the centers and NASA as a whole

did not want to look at the full cost. So you’ve got a dificult culture

there.

That has changed under the current administrator.

So these are very complex issues. I think some previous NASA

failures as other agencies had with technology that perhaps wasn’t

ready, but getting the program operations involved early and making sure the reporting mechanisms—if you ask people and the

agency what doesn’t work, it’s really the latter.

Accounting processes often do work. They may be more cumbersome appearing because people didn’t have to do a lot more. You

have to do a lot more information inputting now than you did in

the old days. That’s why you want a system, so you have better financial data.

But the real issue is reporting, and reporting is difficult. You can

get reporting for accounting. You may not have it for the program

operations. Both sides can complain on that. But it’s an extraordinarily difficult thing to do in a place as big and as field oriented

as NASA and some of these compliance agencies.

Mr. TOWNS. Right. That raises another issue, the issue of tenure.

I mean, how do we handle that problem?

Mr. KINGHORN. Of tenure?

Mr. TOWNS. Tenure, yeah. Because I understand that the average CFO stays about 22, 23 months and sort of moves on.

Mr. DESEVE. Yeah, I’d like to see that data. Because if you look

at my career within the Federal Government, I started in 1993 and

left in 1999, you would say that I only stayed 2 years in the Federal Government because I actually moved, I changed jobs. So it is

a good thing in some cases when you see CFOs move.

Often a CFO will move from one agency to another or into a different program slot. Some day I would like maybe NAPA to go

down and look at that.

One of the things that we did, and Linda has continued this, is,

we made sure that the deputy CFOs, who are often the operational

day-to-day administrators of the CFO office, were very much part

of the decisionmaking process in the CFO council and in the department itself, so that the tenure, the institutional knowledge,

was guaranteed more at the career level than it was at what we

will call the political level along the way.

But I even think, at the political level, that the continuity may

be greater than we think it is because sometimes a CFO actually

really does well and becomes a deputy secretary. I’ve seen that

happen twice. So we may see that the tenure is really longer within the organization, within the institution, than we think it is when

we have the deputies there to continue to bring it forward.

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So I think we’re doing the right thing at this point.

Ms. SPRINGER. In addition to that, which is actually correct about

the deputy being a critical position—we have some CFOs that if

you look at the official date from when they’re sworn in until the

date of their departure, it doesn’t reflect the time that they’re with

the agency, in some restricted capacity appropriately, prior to their

official swearing in and approval.

So, for example, if you looked at me, you’d think that I was controller since April 2003. But in fact, I was at OMB from September

2002, and I wasn’t just sitting around on the sidelines. I didn’t set

policy or didn’t cross the line, but there were ways to contribute as

a consultant, in effect. And many of our CFOs have earlier dates

of arrival on the scene, if you will.

Mr. TOWNS. All right. Thank you very much.

Thank you.

Mr. PLATTS. Thank you, Mr. Towns. Following up on some of the

dialog on the NASA example, we have had various discussions with

NASA, hearing and focusing on their challenges when they have

about one-eighth of their entire budget unaccounted for at the end

of the year and they just do an accounting correction without any

ability to really say where the money went. That tells us that there

are some significant problems.

Our memory of the exact number of corrections was something

like $560 billion in corrections where they recorded it wrong, and

then moved it over here, and then reported it wrong back and

forth. Mr. Kinghorn, you kind of touched on their center or field

mentality. It really seems to be one of the challenges there. In our

hearing with the CFO, one of our focuses was what’s her authority

over the center CFOs as far as giving direction to and, ultimately

the ability to hire and fire those?

It seems that those center CFOs look at the agency-wide CFO

and say, ‘‘I don’t answer to you; you don’t have authority to fire me,

so I’m not going to prioritize what you need versus what my center

director does.’’

Do you think, using NASA as the example—and it won’t be the

only agency out there—should that agency-wide CFO have a specific authority ensuring the ability to hire and fire, or at least have

a synergy with the center director, in the case of NASA, to provide

more connection?

Mr. KINGHORN. I had that same issue when I was at EPA and

IRS, and the way I came out in both places there was that they’re

really more soft dotted lines. Because my life was, and still is, that

if you’ve got a strong field operation, which both those agencies do,

unless the controller and CFO at the local level really has the eye,

ear and the trust of the center director, or EPA regional office,

whatever, it’s not going to ultimately work either.

In the study that we did—and I’m sure NASA could provide it

to you, I think we—I’m trying to remember. It’s been about a year

and a half, 2 years. I think we recommended, if not direct reporting, a very strong-line direct reporting to the centers because there

really was divided loyalties. You know, if you’re a center director,

controller, CFO, and you know there is not a lot of support or

power base at the national office, who are you going to work for

day to day?

55

So I think in NASA’s case I would probably make that dotted

line pretty close to solid with, certainly, coevaluations. Not to defend NASA, but they are really trying to do some extraordinary

things. And it’s similar to what I tried to do at EPA.

EPA—when we brought up the new system, we also had to implement the Superfund Act which required full cost accounting, and

everyone went absolutely nuts. We were successful in doing it. It

was very painful. Unfortunately, I left after it was implemented,

but they had a lot of blood on the table for 2 or 3 more years. But

to this day that system works reasonably well and probably has the

best accounting data in the U.S. Government for management purposes, Superfund.

NASA’s trying to do the same thing. They’re bringing up a very

complex system, trying to change the culture; and also bringing up

full cost accounting, which I can assure you—not with any direct

knowledge, but I can assure you that people in the field do not

want that.

So it’s not to explain they don’t have problems. I had tremendous

numbers unreconciled at IRS for years. I tried to explain that

wasn’t real money. You know, it never worked either, and it

shouldn’t have been there. But I would suggest what they’re trying

to do is extraordinarily difficult, and I think they’re further along

than they’ve ever been before, and I think you need to keep on top

of them.

Mr. PLATTS. Yes. I would agree with your assessment, with the

NASA administrator and the CFO and their commitment to staying on top of it.

Are there things that this committee should look at trying to

make happen to give that agency-wide CFO the ability to do what

they’re trying to do? If she can’t answer the questions because she’s

not getting the information from the center CFOs, this committee

will have no choice but to bring the center CFOs in here and start

putting them on the hot seat, defending their actions and not having the cover of the agency-wide CFO whom they don’t want to respond to.

Mr. KINGHORN. That would be a good idea, actually. I recommend you do that.

Mr. PLATTS. Well, it’s something that—the thought’s out there,

and I think it’s known within NASA. I do agree that they have a

challenge and there is a committed team of leadership there trying

to overcome those challenges of the past and get accountability.

We’ll continue to hold their feet to the fire. I also am a big supporter of the space program and believe the better we do on the financial management, the better the space program will advance

and succeed because it will have the resources it needs.

Mr. DeSeve, did you want to add something on the NASA issue?

OK.

I had maybe one or two other areas. Mr. DeSeve, you touched on

it in your statement. You compared the public sector to SarbanesOxley. In Sarbanes-Oxley, we’re more specific in delineating responsibilities of executive officers. Should we be more specific in a

similar fashion with public officials? You addressed that you think

we actually do more of that now than we actually appreciate.

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Mr. DESEVE. Yeah. We might ask CRS to do a study for us. I

think if you took the log of, starting with the Inspector Generals

Act—where the Secretary has to read and respond and affirm to

the inspectors general’s finding semiannually, the head of the agency has to make a response to that—and then went down into the

internal control aspects of the Federal Financial Management Improvement Act and looked at those, and looked at responding to the

material weaknesses in the audit, in the CFO Act, and the accountability under GISRA, as another example, where the systems aspects, the plans, have to be affirmed by the CIO and then go to the

agency head, I think we find the agency head performing a series

of functions that effectively mirror Sarbanes-Oxley.

I think that’s true again in the procurement arena.

So if we took Sarbanes-Oxley on one axis and the various Federal

statutes on the other axis and mapped, kind of in a three-dimensional way, the responsibilities of the chief management offices, I

think the consonance would be very high. I think there would be

a very high level of overlap in those areas. Other than external reporting to the SEC and places like that, I honestly don’t think that

there are holes.

Now, I’m not an expert in Sarbanes-Oxley. So I just took a quick

look at it, and from my own experience and with corporate structure. But I think that’s where I come out.

Mr. Kinghorn, who was in a public accounting firm, may have a

better view than I do.

Mr. KINGHORN. Well, I’m not an accountant so—I think the only

significant change might be on implications that once you sign and

something goes south. And I was saying with you, when I went up

to the administrator, the Commissioner on Internal Control Signoff, they took it very seriously.

But, you know, chances were they were going to be gone in 18

months, and other than direct fraud or a violation of that efficiency

act, I don’t think there was implications, as there are in SarbanesOxley. So I think that would have to be given some thought.

Mr. DESEVE. Well, you know, again, Judge Alvin Adams, who sat

in Philadelphia and looked at the HUD scandals and put a number

of people in the Federal prisons, focused the attention of the HUD

Secretary following that activity. I mean, Secretary Cisneros was

very careful when he reviewed it. So there are consequences out

there.

And I’d love to someday see someone go to jail for a violation of

the Anti-Deficiency Act. One of my fond wishes is that we would

some day do that.

Ms. MCMURTRY. Just to mention another source of information,

the chief financial officer at the Library of Congress actually just

brought this to my attention, and I haven’t had a chance to read

it thoroughly. But it’s a study by KPMG on Federal agencies—will

Sarbanes-Oxley fit—and then the discussion of Federal internal

controls.

And they say at the outset that if the requirements from Sarbanes-Oxley were adopted by Federal agencies, it would mark a

major shift in current procedures and policies. It could strengthen

the confidence of the American taxpayer in the government, imVerDate 11-MAY-2000 10:59 Mar 03, 2005 Jkt 000000 PO 00000 Frm 00060 Fmt 6633 Sfmt 6633 D:\DOCS\98352.TXT HGOVREF1 PsN: HGOVREF1
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prove the effective use of Federal resources and provide more accountability.

So, I guess that’s a little bit different take than you have on it.

As I say, I haven’t read the whole document. But that might be

something of interest to the committee if it hasn’t come to your attention already.

Ms. SPRINGER. Mr. Chairman, if I could complete the cycle of the

panel on this question, we’re well aware of that study and just

about every study that’s come down the pike on Sarbanes-Oxley for

the Federal Government.

As you know, at this committee’s recommendation, in that DHS

bill we have convened a working group task force of IGs and CFOs

from our Committee on Financial Management Policies and Practices. Essentially, it’s one of those committee responsibilities, working with the IGs to do exactly what was mentioned earlier—compare the private sector practice to the existing guidance and legal

requirements in the Federal Government with respect to internal

control over financial management and financial reporting.

We’ve done that. We’ve assessed the risk environments in the

private sector versus in the Federal Government, which are different. We’ve done that. We are reviewing the existing OMB guidance for management of our agencies, the CFOs, the Secretary—

A–123, which you should be familiar with—on assertions with respect to internal control.

I received a draft of that last night, so as I mentioned before the

hearing to some of the staff, we are getting very close to the point

where we would like to come up and visit with you about our recommendation for strengthening this.

So I have decided not to be silent here. I don’t want to preempt

what we are doing, but we are very close, and I would say, before

the end of this calendar year, we’ll have a strengthened procedure

in place for management that addresses Sarbanes-Oxley.

Mr. PLATTS. Dr. McMurtry and Mr. Springer, internal controls is,

the next item I had written here in my notes to bring up. With that

specific focus, and I’m pleased with how OMB is moving forward

in a very active way and working with the CFO Council and inspector generals to come out with a department- or a governmentwide recommendation and process.

I am going to use you two as bookends here to our two middle

witnesses. Mr. Deseve and Mr. Kinghorn please provide your

thoughts from having been in HUD, having been in IRS, EPA, on

the issue of auditing internal controls and the role they play and

how, if any, we should be more specific in demanding the internal

control approach.

Mr. DESEVE. I think the nature of internal control has to start

with things at the program official level. It doesn’t start from the,

you know, the IG or the chief financial officer. It starts with looking at the processes of asset management, transaction processing

and so on that go on almost at the lowest level of the organization,

and then builds from that a pyramid. And it needs to deal with

what is sensible.

I haven’t read the KPMG report, and I used to work for KPMG

once upon a time, so I really can’t comment on it, although I would

like to. But I can’t.

58

Taking the legal framework that exists now and asserting to

each of the individual managers that there were sensible and common-sense things that they needed to do to get control of their assets, their contracts, their transaction processing in such a way

that it just didn’t involve checking a box and passing a form on is

the essence of internal control. And I worry that we almost have

an enormous framework of Federal States beyond OMB Circular

A–123, beyond the GAO green book, that people—there’s an old expression, ‘‘Bad money drives good money off the market.’’ I think

it’s Gresham’s Law.

Too much reporting and too much checking boxes and form-filling-out makes people not spend the time, the appropriate time,

looking at problems.

I eliminated a form called the HUD–1 at HUD. The HUD–1 used

to require agents in the field to add up the summary schedules at

housing closings and figure out whether the math was right. That

was a really stupid idea. And so we eliminated the HUD–1 schedule, but rather we said, no, you need to do other kinds of surveys

and controls.

So my only plea would be for reality at the program level, where

program officers think that the internal control’s a useful extension

of their business, and I fear that accountants run amuck.

I wasn’t an accountant, nor was Mr. Kinghorn. But accountants

running amuck will produce an internal control regime that will

not be useful and will perpetuate the paper work that people are

so fed up with.

There, I’ve said it.

Mr. KINGHORN. One thing that was exciting to me about the CFO

Act and financial statements—and there wasn’t much in the beginning because it was tough to get them—was the fact that it was

a process by which all the different competing requirements around

internal control were going to suddenly be consolidated, I thought,

into the audit process, where all our business process would be examined. And I think that’s probably where the home should be.

The best document now, which is quite old and I think subsequently has been brought up and used by GAO in its guidance, is

something that used to be called the COSO report, the Committee

on Sponsoring Organizations, which really is worth reading because it’s a very understandable document on internal control done

by Coopers & Lybrand, I believe back in the 1990’s. It sets the

framework that Ed just mentioned.

It has to be common sense and oriented toward the program, not

an accounting by itself process.

Mr. PLATTS. I think that the message is, if we’re going to require

additional efforts in reporting, that it truly be something that’s

merit based and going to have an impact. We’ve regularly talked

about it the last year and a half. Our goal isn’t just a clean audit;

it’s to have a financial management system in place that you actually, day to day, can use to make decisions. Just saying that we are

going to audit you and we want you to have a clean audit is not

what we’re after. It’s useful information.

We’ll look forward to OMB’s work in progress and look forward

to those discussions of where we go on that issue.

Mr. Towns, did you have any other——

59

Mr. TOWNS. Just quickly. Is there anything more that we should

do legislatively?

Mr. DESEVE. Morgan and I talked about this at the beginning.

I think it would be worth again asking either CRS or someone else

to go in and look at all the legislation. And, again, I would start

back with the IG Act and come forward.

And if it were possible to pass clarifying legislation that eliminates overlaps, that gets rid of certain things and then imposes

new standards—I’m really, frankly, very surprised at just the conclusion that Dr. McMurtry talked about from KPMG, that there is

in an effective internal control regime. My goodness. There are an

awful lot of pieces of the legislation out there. How can you pass

a unifying act or a generic organic statute in this regard rather

than—leaving out all the pieces that are out there?

I’d love to see a unification across the board of the IG Act, the

CFO Act, GMRA, even looking at things like FFMIA, FMFIA,

FACA, FARA, GISRA and GPRA to create a single unified statute

that people could look to. We called it the unified field theory when

I was at OMB, a single statute that people could look to that has

all the information in one place and makes it easy to do their job.

So if you could engage in rationalization, I think there’d be a lot

of applause out there. Very hard job. Not something that congressional term limits would help with. You may need a couple of more

terms to carry it out.

Mr. TOWNS. Thank you very much.

Mr. PLATTS. It would also help us eliminate the number of acronyms, if we had one, right?

Mr. DESEVE. I sure hope so. I forgot DCIA.

Mr. PLATTS. I’ve got to go check my book to see if I can figure

out what a couple of those were.

I certainly appreciate your testimony and participation, and as I

said at the beginning, the four of you have a wealth of knowledge;

and we appreciate your sharing it with this subcommittee as we

try to stay the course and keep a good focus on the Federal Government’s financial management practices and the important role the

CFO plays in those practices. I’m sure, in the months or years to

come, we’ll come back and ask for your expertise again and be glad

to have it.

We’ll keep the record open for 2 weeks for any additional information that you would like to submit based on the give-and-take

here. Otherwise, this hearing stands adjourned.

[Whereupon, at 2:33 p.m., the subcommittee was adjourned.]

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