STATUS OF FINANCIAL MANAGEMENT AT THE 

U.S. DEPARTMENT OF EDUCATION 

HEARING

BEFORE THE 

SUBCOMMITTEE ON SELECT EDUCATION 

OF THE 

COMMITTEE ON EDUCATION AND 

THE WORKFORCE 

HOUSE OF REPRESENTATIVES

ONE HUNDRED SEVENTH CONGRESS

SECOND SESSION

HEARING HELD IN WASHINGTON, DC, APRIL 10, 2002 

Serial No. 107-56 

Printed for the use of the Committee on Education 

and the Workforce

82-131 pdf 

For sale by the Superintendent of Documents, U.S. Government Printing Office 

Internet: bookstore.gpo.gov Phone: toll free (866) 512-1800; DC area (202) 512-1800 

 FAX: (202) 512-2250 Mail: Stop SSOP, Washington, DC 20402-0001
ii

COMMITTEE ON EDUCATION AND THE WORKFORCE 

JOHN A. BOEHNER, Ohio, Chairman 

THOMAS E. PETRI, Wisconsin GEORGE MILLER, California 

MARGE ROUKEMA, New Jersey DALE E. KILDEE, Michigan 

CASS BALLENGER, North Carolina MAJOR R. OWENS, New York 

PETER HOEKSTRA, Michigan DONALD M. PAYNE, New Jersey 

HOWARD P. “BUCK” McKEON, California PATSY MINK, Hawaii 

MICHAEL N. CASTLE, Delaware ROBERT E. ANDREWS, New Jersey 

SAM JOHNSON, Texas TIM ROEMER, Indiana 

JAMES C. GREENWOOD, Pennsylvania ROBERT C. “BOBBY” SCOTT, Virginia 

LINDSEY O. GRAHAM, South Carolina LYNN C. WOOLSEY, California 

MARK E. SOUDER, Indiana LYNN N. RIVERS, Michigan 

CHARLIE W. NORWOOD, JR., Georgia RUBEN HINOJOSA, Texas 

BOB SCHAFFER, Colorado CAROLYN McCARTHY, New York 

FRED UPTON, Michigan JOHN F. TIERNEY, Massachusetts 

VAN HILLEARY, Tennessee RON KIND, Wisconsin 

VERNON J. EHLERS, Michigan LORETTA SANCHEZ, California 

THOMAS G. TANCREDO, Colorado HAROLD E. FORD, JR., Tennessee 

JIM DeMINT, South Carolina DENNIS KUCINICH, Ohio 

JOHNNY ISAKSON, Georgia DAVID WU, Oregon 

BOB GOODLATTE, Virginia RUSH D. HOLT, New Jersey 

JUDY BIGGERT, Illinois HILDA L. SOLIS, California 

TODD RUSSELL PLATTS, Pennsylvania SUSAN DAVIS, California 

PATRICK J. TIBERI, Ohio BETTY McCOLLUM, Minnesota 

RIC KELLER, Florida 

 TOM OSBORNE, Nebraska 

 JOHN ABNEY CULBERSON, Texas 

 VACANCY 

Paula Nowakowski, Chief of Staff 

 John Lawrence, Minority Staff Director

__________ 

 SUBCOMMITTEE ON SELECT EDUCATION

 PETER HOEKSTRA, Michigan, Chairman

PATRICK TIBERI, Vice Chairman TIM ROEMER, Indiana

THOMAS E. PETRI, Wisconsin ROBERT C. SCOTT, Virginia 

JAMES C. GREENWOOD, Pennsylvania RUSH D. HOLT, New Jersey 

CHARLIE W. NORWOOD, JR., Georgia SUSAN DAVIS, California 

BOB SCHAFFER, Colorado BETTY McCOLLUM, Minnesota 

VAN HILLEARY, Tennessee LORETTA SANCHEZ, California 

TODD RUSSELL PLATTS, Pennsylvania 
iii

TABLE OF CONTENTS 

TABLE OF CONTENTS................................................................................................................. i 

OPENING STATEMENT OF CHAIRMAN PETER HOEKSTRA, SUBCOMMITTEE ON 

SELECT EDUCATION, COMMITTEE ON EDUCATION AND THE WORKFORCE, U.S. 

HOUSE OF REPRESENTATIVES, WASHINGTON, D.C.......................................................... 1 

OPENING STATEMENT OF RANKING MINORITY MEMBER TIM ROEMER, 

SUBCOMMITTEE ON SELECT EDUCATION, COMMITTEE ON EDUCATION AND THE 

WORKFORCE, U.S. HOUSE OF REPRESENTATIVES, WASHINGTON, D.C. ..................... 3 

STATEMENT OF WILLIAM D. HANSEN, DEPUTY SECRETARY, U.S. DEPARTMENT 

OF EDUCATION, WASHINGTON, D.C. .................................................................................... 5 

STATEMENT OF LINDA CALBOM, DIRECTOR, FINANCIAL MANAGEMENT AND 

ASSURANCE, GENERAL ACCOUNTING OFFICE, WASHINGTON, D.C. ......................... 10 

STATEMENT OF LORRAINE LEWIS, INSPECTOR GENERAL, U.S. DEPARTMENT OF 

EDUCATION, WASHINGTON, D.C. ........................................................................................ 12 

APPENDIX A -- OPENING STATEMENT OF CHAIRMAN PETER HOEKSTRA, 

SUBCOMMITTEE ON SELECT EDUCATION, COMMITTEE ON EDUCATION AND THE 

WORKFORCE, U.S. HOUSE OF REPRESENTATIVES, WASHINGTON, D.C. ................... 29 

APPENDIX B -- OPENING STATEMENT OF RANKING MINORITY MEMBER TIM 

ROEMER, SUBCOMMITTEE ON SELECT EDUCATION, COMMITTEE ON EDUCATION 

AND THE WORKFORCE, U.S. HOUSE OF REPRESENTATIVES, WASHINGTON, D.C. . 37 

APPENDIX C -- STATEMENT OF WILLIAM D. HANSEN, DEPUTY SECRETARY, U.S. 

DEPARTMENT OF EDUCATION, WASHINGTON, D.C. ...................................................... 41 

APPENDIX D -- STATEMENT OF LINDA CALBOM, DIRECTOR, FINANCIAL 

MANAGEMENT AND ASSURANCE, GENERAL ACCOUNTING OFFICE, 

WASHINGTON, D.C................................................................................................................... 59 

APPENDIX E -- STATEMENT OF LORRAINE LEWIS, INSPECTOR GENERAL, U.S. 

DEPARTMENT OF EDUCATION, WASHINGTON, D.C. ...................................................... 73 

TABLE OF INDEXES ................................................................................................................. 84 
iv
1

HEARING ON

THE STATUS OF FINANCIAL MANAGEMENT AT 

THE U.S. DEPARTMENT OF EDUCATION 

________________________________________________

WEDNESDAY, APRIL 10, 2002 

U.S. HOUSE OF REPRESENTATIVES, 

SUBCOMMITTEE ON SELECT EDUCATION, 

COMMITTEE ON EDUCATION AND THE WORKFORCE, 

WASHINGTON, D.C. 

 The subcommittee met, pursuant to notice, at 2:03 p.m. in Room 2175, Rayburn House 

Office Building, Hon. Peter Hoekstra [chairman of the subcommittee], presiding. 

 Present: Representatives Hoekstra, Tiberi, Schaffer, Roemer, Holt, and Davis. 

 Staff Present: Cindy Herrle, Senior Budget Analyst; Patrick Lyden, Professional Staff 

Member; Stephanie Milburn, Professional Staff Member; Deborah Samantar, Committee 

Clerk/Intern Coordinator; Holli Traud, Legislative Assistant; Heather Valentine, Press Secretary; 

James Kvaal, Minority Legislative Associate/Education; Maggie McDow, Minority 

 Legislative Associate/Education; and Joe Novotny, Minority Staff Assistant/Labor. 

OPENING STATEMENT OF CHAIRMAN PETER HOEKSTRA, 

SUBCOMMITTEE ON SELECT EDUCATION, COMMITTEE ON 

EDUCATION AND THE WORKFORCE, U.S. HOUSE OF 

REPRESENTATIVES, WASHINGTON, D.C. 

Chairman Hoekstra. A quorum being present, the Subcommittee on Select Education will come 

to order. 

 We are meeting today to hear testimony on the status of the financial management of the 

Department of Education. Under Rule 12(b), opening statements are limited to the chairman and 

the ranking minority member of the subcommittee. Therefore, if other members have statements, 

they may be included in the hearing record. 
2

 With that, I also ask unanimous consent for the hearing record to remain open 14 days to 

allow members' statements and other extraneous material reference during the hearing to be 

submitted in the official record. 

 Without objection, so ordered. 

 Welcome back. I think you have all been here before. I was going to say, Bill, it might be 

your first time in this capacity. It's your second time. This is the sixth in what has become a series 

of hearings that we have held to examine the department's financial management practices. 

 We must be making progress, shown by the interest of our colleagues here today. It is not 

quite as an exciting hearing or content as what we would have thought in the past, but I think that is 

one of the reasons we have made some progress. 

 I believe we are going to have encouraging testimony from each of our witnesses which 

will highlight some of the problems and the issues that we have had in the past, but that, in many of 

those areas, we have either addressed the issues or we have made significant progress which is 

leading us to the hope and the expectation that within the near future, we will be able to move 

forward and, in tandem, be working on policy changes and have the basic foundation in place for a 

solid financial and management control systems within the Department of Education. 

 I thank each of you for the contributions that you have made in enabling us to make that 

progress and to get to those steps. 

 I am especially encouraged by the commitment made by the Secretary of Education, 

Secretary Paige, in making this a priority and making it one of his key measurements as he goes 

about implementing an agenda at the Department of Education. 

 I think that the focus, commitment and recognition that if he didn't, he would be up here on 

a regular basis, with us asking the question why. However, he realized that that needed to be one 

of his commitments, and I think it comes from his past professional experience heading up a large 

urban school district, where accountability and financial management were an essential part. 

 So I he came there and we are thankful for that type of leadership and the team that he has 

put in place. We are especially appreciative of the help of GAO in helping establish some 

guidelines and some benchmarks and those types of things to kind of lead us and identify what the 

problems, what the issues were, and some of the things that might need to be done to correct those. 

Ms. Lewis, we are especially appreciative of the Inspector General's office. You have had a 

lot of work over the last few years. Your staff this morning gave us, I think the good news is, that a 

number of cases have been closed. 

 There have been a number of convictions, and the bad news is that we had to go through 

that process, but it appears that in working with the Justice Department, the message has been 

received that the Justice Department and the Inspector General's office are going to hold the people 

within the Education Department accountable for their performance and the resources that are 
3

entrusted to them by the American people. 

 So I think the combination of the leadership within the department, the IG's office, and then 

the contributions by GAO has enabled us to make the progress that we have made to date. 

 So thanks to each of you and I will be looking forward to hearing the progress reports from 

each of you. 

 With that, I will yield to my ranking member, Mr. Roemer. 

OPENING STATEMENT OF CHAIRMAN PETER HOEKSTRA, SUBCOMMITTEE ON 

SELECT EDUCATION, COMMITTEE ON EDUCATION AND THE WORKFORCE, U.S. 

HOUSE OF REPRESENTATIVES, WASHINGTON, D.C. – SEE APPENDIX A 

OPENING STATEMENT OF RANKING MINORITY MEMBER TIM 

ROEMER, SUBCOMMITTEE ON SELECT EDUCATION, COMMITTEE ON 

EDUCATION AND THE WORKFORCE, U.S. HOUSE OF 

REPRESENTATIVES, WASHINGTON, D.C.

Mr. Roemer. Thank you, Mr. Chairman. I ask unanimous consent that my entire statement be 

entered in the record. 

Chairman Hoekstra. Without objection, so ordered. 

Mr. Roemer. Thank you, Mr. Chairman. Mr. Chairman, I will be brief in reading the statement. I 

do want to welcome our witnesses before us, some which have testified two times, some probably a 

half-dozen times. 

Mr. Chairman, like you, I am very interested in ensuring that our tax dollars are being used wisely 

and that the Department of Education's financial management practices are sound. 

 This is the sixth hearing that we have had on this in the last two years and I look forward to 

the day when these hearings are no longer necessary. 

 I want to congratulate the department for working towards obtaining a clean audit and I 

hope that next year it will indeed be a reality. 

 This was started by the Bush administration, the first Bush administration, almost 14 years 

ago. Then Richard Riley and the Clinton administration took over and Deputy Secretary David 

Kearns was in the early stages of making more needed changes. Secretary Riley made improving 

financial management a high priority during his time as Secretary, and I am glad to see that 

Secretary Paige shares this same level of commitment, and I am glad to see that President Bush 
4

makes this a priority. 

 The Clinton administration was committed to working towards a clean audit and ridding the 

Department of Education of fraud and abuse. I am pleased with some of the positive steps that 

have been taken. 

 The cohort default rate on student loans has declined for seven consecutive years and was at 

a record low 6.9 percent at the beginning of this year. Collections on defaulted loans have more 

than doubled from one billion in Fiscal Year 1993 to over $3 billion in Fiscal Year 1999. 

 Data improvement in the national student loan data system has prevented the disbursement 

of as much as one billion in grants to ineligible students. But still more problems remain. 

Mr. Hansen, I look forward to hearing about the improvements that you and Secretary Paige 

have made so far. I hope that soon these financial management problems will be behind you, too, 

so that you are freed up to work on important education policy areas, such as the Individuals with 

Disabilities Act. 

Mr. Chairman, thank you again for holding another hearing on this topic, and I look forward 

to the day when, no offense intended, we don't see you before us six times in two years. 

 Thank you very much. 

OPENING STATEMENT OF RANKING MINORITY MEMBER TIM ROEMER, 

SUBCOMMITTEE ON SELECT EDUCATION, COMMITTEE ON EDUCATION AND THE 

WORKFORCE, U.S. HOUSE OF REPRESENTATIVES, WASHINGTON, D.C. – SEE 

APPENDIX B 

Chairman Hoekstra. Thank you, Mr. Roemer. Again, we have done this in a bipartisan way, in 

trying to move and help the department move forward. 

 Let me introduce the witnesses, and then we have to go vote. But there is only one vote, so 

we will be back relatively quickly. 

 We have with us again today Deputy Secretary Bill Hansen, the Chief Operating Officer 

and the Principal Advisor to Secretary Paige on Programs, Policies, Management, and Budget 

Matters.

 There is a whole series of other things that Mr. Hansen has done prior to joining the 

Education Department, which I will omit, that I am impressed by, but, Bill, it's good to have you 

back.

 We have Ms. Linda Calbom. She is the Director of the Division of Financial Management 

and Assurance at the General Accounting Office. Linda, you have been here frequently. We are 
5

glad to have you back. 

 She is responsible for GAO's financial management work at many Federal agencies, 

including HHS, SSA, Education, DOE, USDA, HUD, Transportation, Interior, and SBA, a certified 

public accountant and certified government financial manager. Welcome back. 

 And we have Ms. Lorraine Lewis, the Inspector General of the U.S. Department of 

Education, has also served as General Counsel at the Office of Personnel Management and with the 

U.S. Senate Governmental Affairs Committee as General Counsel, Counsel, and Assistant Counsel, 

a Bachelor's degree from Yale University and a juris doctorate degree from Harvard. 

 So welcome to you and we will hear your testimony as soon as we get back. That will be 

about five to seven minutes, I would think. Thank you. 

 [Recess.] 

Chairman Hoekstra. I think we're ready, Bill, to get started. 

STATEMENT OF WILLIAM D. HANSEN, DEPUTY SECRETARY, U.S. 

DEPARTMENT OF EDUCATION, WASHINGTON, D.C. 

Mr. Hansen. Thank you, Mr. Chairman and members of the subcommittee. It is a pleasure to be 

here again and also appreciate the comments that you made in introducing the work that we have 

been about, and appreciate the leadership that the subcommittee has provided to us, as well as the 

work of our Inspector General and GAO, in helping us identify the issues that we need to be 

improving upon. 

 When I testified in July of last year, I reported that our immediate task was getting our arms 

around the longstanding management problems. 

 We first had to identify where our weaknesses actually existed, and we did identify 661 

outstanding audit improvement recommendations, and we have worked very aggressively to 

implement corrective actions and to close out each and every one of these recommendations, which 

I am pleased to say is done. 

 Moreover, we have identified an additional 93 audit recommendations since July and have 

either implemented or developed a corrective action plan for each of them, as well. 

 We will continue to work closely with both the Inspector General and GAO to make sure 

that we address any lingering management concerns and any new issues that will be arising as we 

proceed into the future. 

 Our next task was outlined in October, when Secretary Paige and I released our Blueprint 

for Management Excellence, which contained 140 concrete action improvement recommendations 

targeted toward addressing the longer term and structural issues that hinder efficient and effective 
6

performance. 

 Since then, we have added 36 new action recommendations. These additional items are 

aligned with the President's management agenda, which was released last fall and part of the budget 

that was submitted in February, as well as the department's strategic plan, which was just released a 

couple of weeks ago. 

 Since October, we have completed approximately 15 percent of these action items and are 

making significant progress toward completing the others. 

 Our blueprint establishes a road map to realize further improvements and create 

mechanisms for achieving accountability and high performance throughout the department. 

 These positive results were a direct result, also, of the creation of our Executive 

Management Council, which I chair. This council represents pretty much our Board of Directors in 

the Department of Education, with about four or five senior career individuals and four or five 

political leaders that comprise the council. 

 I am also pleased to say that OMB agrees with our aggressive management approach, as it 

is aligned with the President's management agenda. In fact, they recently opined that, and this is a 

quote, ``Ed has developed robust plans to address longstanding problems pertaining to financial 

management, high-risk in student financial aid programs, and IT security.'' 

 The plans, of course, are not, by themselves, sufficient to ensure success. We must 

continually monitor their implementation, make adjustments as needed, and devote the necessary 

resources to ensure that we continue to improve performance and successfully address any 

lingering problems we have not yet overcome. Simply put, we just have to do it. We are also 

working in a public-private partnership. In accordance with the President's management agenda, 

the department plans to publish a five-year human capital, strategic sourcing, and restructuring plan 

in June of this year. 

 Employee teams are formulating plans, working with the advice and assistance of the 

National Academy of Public Administration, the Private Sector Council, and the Council for 

Excellence in Government. 

 The restructuring plan will address issues like maximizing workforce performance, 

improving efficiencies in citizen access to our programs, and finding the right blend of department 

employees and contractors to facilitate financial integrity and appropriate oversight of our 

programs. 

 Our accountability team, I also testified in July that our biggest challenge was developing a 

culture that emphasized individual responsibility and accountability. 

 In December, a team of employees from across the department completed a set of specific 

actions with assigned ownership, clear timetables, and performance measures that will establish a 
7

mature culture of accountability within our agency. 

 These employees developed these actions based upon ideas and feedback obtained from our 

fellow colleagues across the department. 

 We are also implementing a new appraisal process that emphasizes accountability. Every 

senior officer, including myself, will sign a performance contract with Secretary Paige, holding us 

accountable for results. Every manager and employee will also have a performance agreement that 

reflects our goals and objectives and establishes clear individual job performance expectations. 

 On our financial statements, we recently received a qualified opinion from our 2001 

financial statement audit. The results included one material weakness and three reportable 

conditions. These results reflect noticeable improvement and significant process from last year's 

three material weaknesses and two reportable conditions. 

 We are making steady progress toward our stated goal of obtaining our clean audit in fiscal 

year 2002. 

 We did receive this qualified opinion for two primary reasons. First, we provided 

insufficient evidence to support our general ledger balance adjustments, and, secondly, we did not 

provide adequate documentation to support certain amounts in our consolidated balance sheets. 

 We made these adjustments to compensate for continued financial system and reporting 

weaknesses during previous fiscal years. Although we have improved our account analysis and 

reconciliation processes, our auditor did not feel that there was sufficient documentation to support 

the accuracy or completeness of our corrections. 

 We have taken major steps to remedy our last material weakness by implementing a new 

general ledger system, the Oracle Federal Financials, on January 22 of this year. We expect our 

new accounting system to correct many deficiencies that resulted primarily from the lack of a fully 

integrated financial management system. 

 This improves our chances of getting a clean audit in 2002 and will allow our managers to 

obtain timely information they can use to make more productive program decisions. 

 We are currently reviewing our business procedures to ensure the integrity of our internal 

controls, reconciliation processes, and account analysis procedures to take advantage of the new 

system's capabilities. 

 Once the system and accounting processes are stabilized, we can fully address any 

remaining problems with our older underlying data. I believe we will accomplish our goal in 

getting a clean audit, but we still have much work to be done and a clean audit is actually a good 

goal, but we want to make sure that we've got the right systems in place to effectively manage our 

programs. 
8

Mr. Chairman, if I could just take one additional minute to mention our internal control 

issues in responding to some of the issues that GAO has highlighted. 

 On the issue of inventory, we are continuing to re-engineer our asset management process 

to implement proper internal controls. To improve our asset management policies and procedures, 

we are centralizing inventory responsibility within our Office of Management, and documenting 

our detailed property management procedures. 

 We are also incorporating contractor recommendations into our property management 

procedures. We expect to issue these new policies and procedures in June 2002 and will hold our 

employees accountable for following them. 

 We are also addressing specific issues that GAO raised, including recording our inventory 

when initially purchased and appropriately securing and accounting for any items once they are 

received.

 We are increasing security to account for all of our inventory storage areas. We are testing 

purchase orders and our principal office is to ensure that all received items are recorded as 

inventory.

 We are also taking appropriate steps to account for all the items that GAO was unable to 

locate during its review. I would also like to note that after recently completing our own 

reconciliation of physical inventory, we hired a contractor to conduct an independent inventory. 

 The contractor sampled 819 physical inventory items, representing 25 separate locations, a 

broader universe than GAO used for its review. 

 Once completely verified by the contractors and ourselves, we had accounted for 99 percent 

or all but five of the items. 

 We agree on an improper payment side of the equation with GAO that the Pell Grant and 

loan disbursements made to students aged 70 years old and over may indicate potential ineligible 

disbursements, when there is a higher than normal concentration of such disbursements. 

 We have installed several improvements to strengthen the integrity of these payments. For 

example, we began a data matching process with the Social Security Administration's death records 

and implemented our new recipient financial management system to increase our grant payment 

controls.

 Beginning in fiscal year 2002 and 2003, we will implement an edit to identify all applicants 

that are 75 years and older. 

 In just December, a few months ago, we implemented a new process to identify and review 

schools with abnormal concentrations of students with unique characteristics, such as age. 
9

 On the purchase card issue, I also noted in my July testimony that we had taken several 

important steps including significantly reducing spending limits and cutting up dozens of cards to 

address insufficient internal controls on our purchase card program. 

 Since then, we have enacted important improvement measures. These include our new 

electronic reconciliation and payment approval process and our recently updated directive that 

strengthens policies and procedures by detailing cardholder and approving official responsibilities. 

 We have undertaken some very significant steps involving training, administering the span 

of control, and developing sample methodologies and control systems to rectify this problem. 

 We, very frankly, must hold employees accountable for good government and for their 

credit card misuse, and managers for enforcing our controls, and we recently conducted an internal 

review of employee purchase card usage and we are going to review the actions of employees and 

managers who do not follow appropriate policies and procedures. 

 Finally, on the student financial assistance programs, which Mr. Roemer mentioned, as 

well, removing the student financial aid programs from off of GAO's list by fiscal year 2003 is a 

top management priority of the secretary's. 

 Consequently, Secretary Paige met with the Comptroller General and we discussed the 

major actions we need to complete and accomplish this goal. 

 GAO has outlined very specifically for us what we need to do. It includes strengthening

financial management, internal controls, implementing integrated information systems to 

efficiently manage and control our programs, while administering high quality services, and 

maintaining a balanced management approach that seeks to minimize default rates and noncompliance, while promoting widespread program use. 

 Our new strategic plan also outlines our systems integration milestones in the student aid 

office. The issues regarding improving customer service while maintaining accountability, 

demonstrating a balanced school monitoring approach, providing a systematic income data match 

with the IRS to improve student eligibility, partnering with guaranty agencies, lenders and schools 

to improve default prevention, and improving default collections. 

 I would like to close by saying that the management improvements I have discussed today 

will enable us to move toward our goal of becoming a model agency and have performance, 

management, and program excellence. 

Secretary Paige does want to do a good job. He wants to be the best in the entire 

government, and that is the goal that we are working towards. 

Mr. Chairman, that is my testimony, and I'd be open to answer any questions you may have. 

STATEMENT OF WILLIAM D. HANSEN, DEPUTY SECRETARY, U.S. DEPARTMENT OF 

EDUCATION, WASHINGTON, D.C. – SEE APPENDIX C 
10

Chairman Hoekstra. Thank you. Without objection, I would like to submit your entire written 

testimony for the record. Without objection, so ordered. 

There are a number of things that you didn't go into in detail in your oral testimony. You 

went over the part where, and maybe Ms. Lewis will get into these, you talked about the fraud 

cases that were out there, with the indictments and the convictions that you have received. 

 So if that does not come up, we will cover that in the questioning, but I think significant 

progress has been made in those areas, as well. 

 Linda? 

STATEMENT OF LINDA CALBOM, DIRECTOR, FINANCIAL 

MANAGEMENT AND ASSURANCE, GENERAL ACCOUNTING OFFICE, 

WASHINGTON, D.C. 

Ms. Calbom. Mr. Chairman and members of the subcommittee, I am pleased to be here today to 

discuss the final results of our review of the Department of Education's disbursement processes. 

 My testimony summarizes our report that is being released today, and this report discusses 

the internal control problems we found at the Department of Education, the resultant improper 

payments, and we have made some recommendations for strengthening the department's internal 

controls over disbursements. 

 As you well know, the department has a history of financial management problems. It 

includes some very serious internal control weaknesses. The Inspector General and we have 

reported on this over the last several years. 

 Given this history, you asked that we assess the adequacy of internal controls over their 

disbursement processes. We looked at these processes between May 1998 and September 2000. 

 We focused on three areas, the grant and loan area, third-party drafts, and then, of course, 

government purchase cards, and then we also took a look at the physical controls over the computer 

equipment that was purchased with the third-party drafts, as well as the purchase cards. 

 I want to just briefly touch on our findings in each of those three areas, and, of course, 

Deputy Secretary Hansen has talked about a lot of the actions that the department has taken to 

address some of the issues that we found. 

 In the grant and loan area, we found that education lacked a key edit check and a follow-up 

process that would help identify the schools that were disbursing Pell Grants to ineligible students. 
11

 In our investigation, we found three schools that fraudulently disbursed about $2 million in 

Pell Grants and another school that improperly disbursed about $1.4 million. There were 31 other 

schools we identified that had similar types of characteristics. These disbursed about $1.6 million, 

and, therefore, they warrant further investigation. 

 We were unable to determine the validity of other potentially fraudulent or otherwise 

improper grant and loan payments that totaled $12 million, because the Department of Education 

did not provide adequate supporting documentation. 

 We recognize these amounts are relatively small when you compare them to the total grants 

that get disbursed on an annual basis, but they do represent an identified risk that could be easily 

exploited. So we feel that it is important to follow up in this area, and I am happy to hear some of 

the things that you are doing of late in response. 

 Our analysis of Education's third-party draft payment process disclosed significant internal 

control weaknesses that increase the department's vulnerability to improper payments. When we 

tested the third-party payment process, we found that Education employees circumvented a key 

computer system application control that was designed to prevent duplicate payments. 

 And although segregation of duties is one of the most fundamental internal control 

concepts, we identified some individuals at the department who could control the entire payment 

process for third-party drafts.

 And I'm sure as you recall, in a response to a letter from the subcommittee following the 

April 3 hearing last year, the department took action to eliminate the use of these third-party drafts. 

 In our review of purchase cards, we found that the department’s inconsistent and inadequate 

authorization and review processes, combined with a lack of monitoring, to create an environment 

where improper purchases could be made with little risk of detection. 

 Inadequate controls in this area resulted in fraudulent, improper, and questionable 

purchases, totaling about $686,000. 

 For example, one employee made improper charges totaling $11,700 for herself and a coworker to attend college classes that were unrelated to their jobs at the department. 

 In another example, we identified almost $287,000 in questionable purchases for new 

furniture and renovation costs related to office space that was soon to be vacated. 

 Further, the department could not provide any support for $152,000 of additional purchases 

and did not know what was acquired with these funds. 

 The department also lacked adequate internal controls over computers acquired with 

purchase cards and third-party drafts, which contributed to the loss of a 179 pieces of computer 

equipment, valued at almost $212,000. 
12

 Again, we found there was little or no segregation of duties in the office where most of the 

missing equipment was purchased. 

 In addition, the department had not taken a comprehensive physical inventory of equipment 

for at least two years and had not recorded almost $400,000 of computer purchases in its property 

records.

 These weaknesses created an environment in which computer equipment could be easily 

lost or stolen without detection. The IG is investigating the disappearance of this equipment and as 

Mr. Hansen indicated, again, I know there are some additional procedures that have been put in 

place to enhance the physical controls over this equipment. 

Mr. Chairman, I do want to give credit to the department for making a number of significant 

changes to their policies and procedures in response to our findings and earlier recommendations 

that we made to you, and, also, I know the letter that we provided regarding the high risk list. 

 There's obviously a move affront to change the culture at the department and this starts with 

the tone at the top, and we are encouraged by what we see there. 

 While these changes are very positive, there are still some cases where the new policies and 

procedures have not been effectively implemented and, therefore, there is some vulnerability that 

remain. 

 The report we are issuing today makes recommendations that will help the department 

further improve its controls to reduce its susceptibility to future improper payments. 

 That concludes my statement, Mr. Chairman. 

STATEMENT OF LINDA CALBOM, DIRECTOR, FINANCIAL MANAGEMENT AND 

ASSURANCE, GENERAL ACCOUNTING OFFICE, WASHINGTON, D.C.–SEE APPENDIX D 

Chairman Hoekstra. Thank you. Lorraine? 

STATEMENT OF LORRAINE LEWIS, INSPECTOR GENERAL, U.S. 

DEPARTMENT OF EDUCATION, WASHINGTON, D.C. 

Ms. Lewis. Mr. Chairman and members of the subcommittee, thank you for the opportunity to 

discuss the Office of Inspector General perspective on financial management at the Department of 

Education. I will also update you on our internal controls work and some of our investigations. 

 While much work remains to be done, the department has made progress in financial 

management. Examples of these improvements were noted in Ernst & Young's report on internal 
13

controls for the 2001 financial statement audit. 

 Secretary Paige's Blueprint for Management Excellence, in particular, represents a very 

sound plan for action. 

 The report on internal controls contained one material weakness and three reportable 

conditions. In 2000, there were three material weaknesses and two reportable conditions. 

 The department received a qualified opinion on all five of its financial statements this year, 

as it did in 2000. 

 The department faces significant new challenges for next year's financial statement audit. 

The audit will be due by February 1, one month earlier than in the past. 

 OMB will also require interim financial statements. In addition, the department will be 

using a new system, Oracle Federal Financials, to prepare its 2002 financial statements. Our audits 

of the implementation of Oracle did find some problems in testing, training, security, and certain 

aspects of the development. 

 The department did not agree with all of our findings, but it has planned steps to address 

shortcomings in the system. 

 We are particularly pleased that the department engaged an independent verification and 

validation contractor contract, which is working side by side with the department now, to identify 

any problems and recommend fixes. 

 Also, it is important for the department to focus on its interface between the department's 

Oracle system and the systems that contain the critical financial statement from the Office of 

Federal Student Aid. 

 We continue to examine the department's internal controls, a key factor in improving 

financial management. The department needs to continue to establish and maintain strong internal 

controls to safeguard its assets and to protect its programs and operations from waste, fraud, and 

abuse.

 GAO has performed valuable oversight work of the department's programs and operations 

and has provided findings and recommendations, when implemented, should assist the department's 

management improvement efforts. 

 The secretary has made a system of strong internal controls a top priority. He convened a 

department-wide group to promote a culture of accountability and established an executive 

management team to lead this effort. He has also continued in place the management improvement 

team he established last year. 

 He has required all staff to complete on-line internal controls training by the end of this 

month, and the Office of Inspector General has provided guidance to the department as it planned 
14

and prepared to provide internal controls training for its managers and supervisors, and that training 

has already begun. 

 We are supporting this top-level effort to improve management by identifying any 

inadequate internal controls that we have found based on our work in the department's operations 

and programs. 

 We have appreciated the receptivity of the secretary, the deputy secretary, the executive 

management team, and the management improvement team to our work. For example, we just 

recently issued an audit of the department's travel card program and this audit took place while the 

department itself was reviewing the travel card program, and many of the findings we made were 

consistent with the findings the department made based on its own review. 

 In that audit, we found that employees using the travel card issued to them individually 

made inappropriate purchases with this type of card. The billing for the card is made to the 

individual who was responsible for paying back Bank of America. 

 It is not the department's responsibility to pay this bill for these individually issued cards. 

We found cardholders had also made excessive withdrawals from the ATM machines. 

 For the individual transactions we reviewed, as I said, the department did not pay for the 

inappropriate purchases or for the excessive ATM withdrawals. However, there were internal 

control deficiencies we found in the travel card program, and the department has agreed with all of 

our recommendations to improve internal controls and is planning corrective actions. 

 We also recently completed an audit of the purchase card program and we found some areas 

needing attention. We recommended that the department reassess the number of cardholders 

assigned to an approving official and conduct on-site reviews at locations where the purchase card 

activity and approval are performed. 

 The department, again, agreed with our recommendations and is planning corrective action. 

 Our next audit will include transaction testing in principal offices to test adherence to the 

department's new purchase card directive. 

 We have also developed a guide to assist other Inspectors General across the government in 

reviewing purchase card use at their agencies. 

 Our investigations further assist the management improvement effort. These investigations 

have led to arrests, guilty pleas, a conviction, and return of government funds to the department. 

Since 1999, we have been conducting an investigation of a major fraud scheme involving a total of 

19 people. Eight of these individuals worked for the department. 

 One employee, who oversaw a telecommunications contract, ordered computers, 

televisions, other items for herself, family members, and friends. The scheme, as our statement 

notes, led to more than $300,000 in property fraud and more than $700,000 in false overtime to the 
15

department. 

 Fifteen defendants have pled guilty in this case, including seven department employees. 

One person went to trial and was found guilty on three charges. The remaining three defendants 

are scheduled to go on trial later this year. 

 Our investigation of the diversion of impact aid funds led to approximately $1.7 million 

being returned to the department. Since we last testified, two individuals in this case have been 

arrested and we are working with the FBI to locate and arrest the third person. Three persons were 

indicted in January. 

 This next matter is a new matter that we recently briefed you on, Mr. Chairman. Our 

investigation of the Puerto Rico Department of Education led to indictments and arrests of 17 

people, including the former Secretary of Education for Puerto Rico. 

 None of those indicted are U.S. Department of Education employees. The former secretary 

and associate secretary of education from Puerto Rico have pled guilty already in this case. 

 Our work has led to 2.9 million in cash and property being returned to the U.S. 

Government. 

 We look forward to continuing our work with Congress and the secretary and the deputy 

secretary to ensure that the department's programs and operations serve the nation's students and 

taxpayers with efficiency, effectiveness, and integrity, and I would be happy to answer any 

questions.

STATEMENT OF LORRAINE LEWIS, INSPECTOR GENERAL, U.S. DEPARTMENT OF 

EDUCATION, WASHINGTON, D.C. –SEE APPENDIX E 

Chairman Hoekstra. Thank you very much. I appreciate that update, as well as the update that we 

received today about the additional investigations that you can't talk about in public, and we will 

obviously respect that confidentiality. 

 The cooperation and the effective working relationship it appears that you have developed 

with Justice to get those kinds of not only indictments, but also the convictions. So congratulations 

on that. 

 I'm trying to think of when we did the first hearings on this. We've done six in the last two 

years, but we've had them before that, and I think that each time Mr. Roemer and I have started off 

at just about the same position, saying we hope we're just about to the end of these hearings. 

 I think, Linda, in your testimony, you talk about, on page seven, the second complete 

paragraph down, further, in July 2001, while we found evidence in the department's system that all 

87 statistically sampled monthly statements had been reviewed by the cardholders' approving 

official, 20 of the statements had inadequate or no support for items purchased, totaling $23,151. 
16

 Based on our work, we estimate the most likely amount of unsupported or inadequately 

supported purchases during these three months is $65,000. 

 The effectiveness of the department's new approval process has been minimized because 

approving officials are not ensuring that adequate supporting documentation exists for all 

purchases.

 How comfortable are we or how comfortable are the three of you that we are reaching the 

end of this process that we are really getting to the heart of the issues? 

 Because I think maybe before Mr. Holt joined the subcommittee, Mr. Roemer and I had 

heard the rosy scenario a number of times and if I read this, it's kind of like, oh, man, you know, we 

don't quite have it yet in this area, and if we don't quite have it, we're just setting ourselves up for 

some more work by Ms. Lewis, which is we'd actually kind of like to put her out of work or lessen 

her workload. 

 Who wants to start? 

Ms. Calbom. I'll go ahead and start. I guess we feel that the department just has to do that last 

little push. The things that are in place, I think, are good. It's just a matter of making sure that that 

final follow-through occurs. 

 In this situation, we were glad to see that at least all the statements were approved, which is 

much, much better than what we found before, and what they have now is a line-by-line approval.

Each transaction has to be approved. 

 But the problem is we received, in about 20 percent of the statements we looked at, there 

was documentation missing. So that the person approving it, while they could see which vendor 

the purchase was made from and what the dollar amount was, they wouldn't necessarily know what 

was actually purchased. 

 So that's, again, much improvement, but that is really a key step in this whole process, 

because as you know, with these purchase cards, that approval before payment is really the last and 

final and almost kind of the only control. So it really needs to be airtight. 

Chairman Hoekstra. Bill? 

Mr. Hansen. Mr. Chairman, I would like to add that I think while we absolutely have the process 

and the controls in place, as I said in my testimony, it's going to be execution and making sure that 

the managers are reviewing each transaction appropriately, of course, follow-up. 

 I do believe that the system that we put into place is going to get us to the point where we 

will be very, very secure about the integrity of the program. 

 We physically have to train people. We have to get this push down into each of the 

managers and employees, anybody that holds a card, into their performance agreements. So that 
17

they understand if there is any misuse, it can have a dramatic impact upon their performance 

evaluation, which could have an impact on their financial rewards or other things. 

 So it's going to be the execution. I think we've got the tools and the processes in place. I 

am very pleased with the implementation to date, but we still have got to drive it down further and 

make it effective across the board. 

 I failed to do this in my opening statement, but we do have two individuals with me today 

that I have mentioned in passing to the subcommittee before, but two of the key members of our 

senior team who, hopefully, if you ever have any more hearings, they might have the benefit of 

being here. 

 Bill Leidinger is our new Assistant Secretary for Management, and Jack Martin, a Michigan 

native, who is our new Chief Financial Officer. These two gentlemen bring collectively about 80 

years, not to date their ages or anything. 

Chairman Hoekstra. They started young. 

Mr. Hansen. They bring private sector experience in dealing with very complex organizations and 

also a lot of contracting work to the department, and we just are very pleased. 

 When we talk about forcing this down into the department, these gentlemen are going to be 

responsible for making that happen, and they are both relatively new and have already had a huge 

impact on making it happen. 

Chairman Hoekstra. This is really kind of like your last opportunity to throw up your hands and 

say we walked into such a mess, we can't get it done, and we couldn't get it done in a year and a 

half.

 Just take a look at the information that Lorraine has provided. You've have the 

telecommunications fraud, you've have the impact aid fraud, you've have the purchase card fraud, 

you've have the problem with the fraud in Puerto Rico, and each of those cases or at least, I guess, 

in three of those cases, we've had people, a number of people pleading guilty, all of which of those 

things are symptoms of the underlying problems that the department has to correct. 

 I don't know. Maybe Jack or Bill wants to say. I won't ask you. 

Mr. Hansen. You are absolutely right. Most of these issues that we are talking about, with the 

indictments and the court issues, all occurred previously with different systems, different control 

mechanisms in place, and Secretary Paige will also be the first one to acknowledge that we own 

this now and we are going to take responsibility for it, and that's also the reason we, frankly, are 

about fixing it and making sure we don't have these problems going forward. 

 I will say, on some of these instances, like Puerto Rico, we can, I think, probably put just 

about every internal control system into place that there is, but evil people are going to do evil 
18

things occasionally, and the important thing is to catch them when we can. 

 But there are a couple of these instances that I don't think any control system would have 

prevented that type of activity from occurring. 

Chairman Hoekstra. And I think we recognize that there is a distinct difference between evil 

people doing evil things versus creating an environment where you foster or create the opportunity 

for people to take advantage of a system. 

 Lorraine, did you want to add anything? 

Ms. Lewis. One of the excellent parts of the new program is that there will be on-site monitoring.

The CFO office will be going to the principal offices and doing monitoring on-site of purchase card 

transactions and as GAO's work has clearly indicated, whenever you have a monitor coming on-site 

to test your transactions, that gets people's attention. 

 So that is a very key aspect of the part of the new directive that has come out of the 

department, and I think that sends a very powerful signal to all the principal offices, all the 

cardholders, and all the approving officials. 

Chairman Hoekstra. The GAO also identified, either in this or a previous study, that the purchase 

cards were used inappropriately to buy significant amounts of computer equipment. 

Ms. Calbom. Yes. What we found there, we decided that we would start at the vendor and we got 

serial numbers from the major vendor that the department uses, and then we went and we tried to 

see if we could find those pieces of computer in the department's property records. 

Chairman Hoekstra. These were purchases that were made by the purchase cards. 

Ms. Calbom. Right. 

Chairman Hoekstra. Which were not supposed to be allowed to buy computer equipment. Right? 

Ms. Calbom. Exactly. See, we weren't even supposed to be using them in the first place; that is 

correct. Right. 

Chairman Hoekstra. Yes. And then there is the other question as to how much of that stuff is still 

on-site, correct? Or how much you actually could find within the department. 

Ms. Calbom. Yes. There are about, I think, a 179 pieces of equipment that we still weren't able to 

find. From what we initially couldn't find, we found quite a bit of it. 

 Then when the department made their move, they had the contractor inventory the 

equipment and they found some additional computers, but net-net, it ended up about a 179 pieces 

of equipment that we still were unable to find that the department had actually paid for. 
19

Chairman Hoekstra. I've had one last question. If you take a look at it, you know who purchased 

the stuff with a purchase card, right? Under the old process, if they made an inappropriate purchase 

of computer or electronic equipment, that is documented that this person made that purchase, which 

was against the regulations within the department. 

 Did your study take a look at what happened to the people who made the inappropriate 

purchase? Was there a reprimand put into their file? Then, Bill, you could maybe answer, what 

will happen to an employee who uses a card inappropriately in the future under the controls that 

you have put it. 

 We'll begin with you, Linda. 

Ms. Calbom. Those purchases actually are, I understand, under investigation right now. But in 

some other cases, we did see some reprimands occur in some cases. In some cases, we didn't. 

 For instance, with the split purchases that we talk about, where people go over the 2,500-

dollar micro purchase limit, circumventing some of the competitive bidding requirements and 

whatnot, in some cases, we found letters sent to the employees saying you shouldn't do this. In 

other cases, we didn't. 

 So it was kind of inconsistent, and that is one of the key things that we feel needs to be 

done, is that people do need to be held accountable. It sounds like the department is planning to 

put some of those accountability type things in place. 

Mr. Hansen. That is exactly right. The important way to put this into place is to drive it into our 

performance agreements with each of our managers, as well as the employees. In particular, the 

training that each of these individuals receives, they are made very much aware of the 

repercussions that they will potentially face. 

 It obviously will depend on what the violation is, if it's a minor misstep or if it's really 

trying to bypass the system. But the secretary just has an absolute zero tolerance for wrongdoing 

and when people understand clearly what the standards are and what the thresholds are and it's in 

their agreement and if they make a misstep. 

 We now are down to a very limited number of people that have purchase card capability, 

and this will be a critical element, and every one of these individuals' plans, as well as their 

supervisors, so they will all be held accountable through the performance evaluation, but also 

through direct reprimand or whatever action is appropriate for any instance that might occur. 

Chairman Hoekstra. Thank you. We appreciate the progress; appreciate the decisions and the 

actions that you took on eliminating third-party drafts and those types of things. 

 With that, I will yield to my colleague, Mr. Holt. 

Mr. Holt. Thank you, Mr. Chairman. I thank the witnesses for good testimony, but more 

important, thank you for your efforts to make sure that the hard-earned taxpayer dollars from 
20

Michigan and from New Jersey are not wasted. 

 It is encouraging to hear, to the extent that you have put these things in perspective, the 

scale of what you are talking about. Any dollar wasted, any hundreds of thousands of dollars 

wasted are painful to people who have paid taxes that they have worked hard to earn that money. 

 But it is important, I think, to make sure that we keep this in the scale that there are tens of 

billions of dollars of grants and loans and third-party drafts and so forth each year there. 

 And when the chairman says we may almost be at an end or previously we've said we may 

almost be at an end, I don't doubt that, in a department of that scale, we will continue to find 

problems, and if we want to be diligent in oversight here, this will not be at an end. 

 There will be ongoing oversight for decades to come, as long as we have programs of the 

scale that we have and as long as there are some miscreants out there. 

 But I do want to make sure that this doesn't turn into partisan point making. It is easy to, 

and well we shouldn't be too quick to condemn our predecessors, and I'm not saying that you have 

been, or to pin medals on ourselves for accomplishment, and I'm not saying that you've done that, 

either. But I just want to make sure that we don't, in the process, cast aspersions on the 

hardworking, conscientious people in the Department of Education who were there in the 1980s 

and 1990s and are there now in the 00s, no do I want us to cast aspersions on the programs of the 

Department of Education. 

 What we are trying to do is make sure that they are run efficiently and that there is a culture 

of accountability for every dollar that department spends. 

 Now, as I look at the auditor's report, which has not been discussed much here today, I find 

that the qualified, so-called qualified opinion that the department received on the financial 

statements, well, was about the same as what was received a couple of years ago. 

 So that it doesn't look like it is noticeably better in the period that I think the chairman was 

criticizing. So we want to make sure that there is progress made. 

 As I look at the report, there are several specific questions. On page ten, Ernst & Young 

notices a discrepancy of $300 million in how much the government is owed on guarantying student 

loans.

 They say, ``We also noted differences between the amount of the FFEL loans receivable 

reported in the general ledger and the amounts reported by guaranty agencies. While much of the 

difference may be appropriately accounted for in the allowance for a loss, a new unexplained 

difference of approximately $300 million remained.'' 

 What accounts for the missing $300 million and why, and this would be for you, Secretary 

Hansen, why could the department not explain this difference to the satisfaction of the auditors? 
21

Mr. Hansen. Let me just also answer your first observation about history. One of the first things 

Secretary Paige did when we came in, in fact, it was almost exactly a year ago this week, was 

institute this management improvement team, and this management improvement team was a 

network of about 12 of the top career individuals in the Department of Education. 

 We had nobody confirmed by the Senate this time last year, with the exception of the 

secretary, and he very much did want to go in and find the best and the brightest managers in the 

department and bring them together full-time to get our arms around the issues. 

 So we very much appreciate your comments about the quality team at the department, and I 

think that is, frankly, the challenge of any administration. 

 One of my previous secretary bosses called us Christmas help, we're here for a season and 

we're gone, and it is important for the career managers to make sure that they are part of the process 

and developing the solutions to the problems. 

 On the audits, the guaranty agency issue, we are very much working. A lot of this is a 

systems problem in terms of the way the data comes in from the guaranty agencies and how it's 

reported and how it's accounted for. 

 I think it is very much agreed to that there are missing dollars here. It is an accounting 

function and trying to align the reports up and how things were accounted for, and that is what we 

are working on to get that corrected. 

 We have similarly had about a five billion dollar problem in the direct loan program of prior 

year estimates that were over-estimated by about a billion dollars a year in each of the five previous 

years, and had to work to come to an agreement with the auditors that that was not actual dollars. 

 It was an estimation issue that we had to work through, and that's the types of issues that we 

are working through with the auditors. 

Mr. Holt. Mr. Chairman, I do have another question. Should I proceed with that now? 

Chairman Hoekstra. As long as it doesn't take too long. 

Mr. Holt. I think the answer, the setup for the question will take a minute or so, but the answer, I 

think, will be brief. 

 Deputy Secretary Hansen, back in 1998, Congress established a new type of government 

entity to improve student aid management, this so-called Performance Based Organization, the 

PBO.

 The idea was to provide greater flexibility and independence in exchange for greater 

accountability. The head of the PBO reports directly to the secretary and Congress explicitly gave 

the PBO independent control of its budget, personnel, procurement, and administrative functions. 
22

 Now, under your administration, it appears that the decisions of the PBO are being secondguessed by a committee of education officials and the secretary's Management Blueprint appears to 

offer what might be called micro management of the PBO, prescribing, as we count here, 70 

specific actions mandated that the PBO take. 

 So this is moving away from this increased flexibility. 

 I guess the question that I have is a fairly specific one that could be answered fairly quickly, 

I think. Are you repudiating the idea of a PBO? 

Mr. Hansen. Actually, it's going to be a longer answer, absolutely not. When Congress created the 

PBO in 1998, it was really done so because there were some major issues that were going on at the 

time with some major shortcomings in the way in which the programs were being managed. 

 There were shutdowns of the consolidation loan program. There were major problems 

getting the Federal application account. There are also contracts that account for about 750 million 

a year that were to be integrated and to not have 12 different systems out there running, creating 

duplication work for campuses, more complications for parents, and efficiency for taxpayers. 

 There is a stovepipe for Perkins loans, a stovepipe for Pell Grants, a stovepipe for National 

Student Loan Data System, a stovepipe for direct loans, et cetera, and there was never one place 

where you could go and find out which students have, if you put a social security number in, what 

type of a loan or what type of a grant. 

 So that was the genesis for the PBO. Congress did two things when they created the PBO. 

They gave the department broad authority to implement it. There was not a lot of mandate on how 

to implement it. There was broad authority. 

 They gave it some independence in its contracting and hiring authority, but they did not 

create an independent operation outside of the scope of the Department of Education. 

 The secretary of education was still accountable for the day-to-day activities, all the 

program operations, all the Pell Grant issues we've been talking about today, the default issues 

we've been talking about today. 

 The secretary of education is responsible and accountable for those activities. So this 

notion that the PBO is somehow an island off on itself, not to be governed or under the 

management of the Department of Education, is not what the statute intended. 

 It is very clear about statutory intent and the way in which it is implemented was done by 

memorandum of understanding. It is an internal administrative decision on which authorities to put 

over or under the umbrella of the PBO. 

 The previous administration made a decision, through five memorandums of understanding, 

to give quite a bit of authority over to the PBO. 
23

 This is a major piece of the operation of the Department of Education. I will just pull out 

one example, and that's the financial management activities. 

 I don't think it's an efficient operation to necessarily have two different financial 

management systems in the department when we are trying to get a clean audit. Frankly, we walked 

into the office last year, both the CFO for the rest of the department, a separate CFO over at SFA, 

was creating their own Oracle financial management systems. 

 They weren't talking to each other. This is not acceptable and this is, if anything, I think 

you can talk to anybody in the department about how the coordination and cooperation is now 

occurring and we are making much, much progress because we have people communicating in the 

department now about the management improvement activities of the department, about the issues 

that we are responsible for. 

Mr. Holt. Thank you. Thank you, Mr. Chairman. 

Chairman Hoekstra. Thank you. We didn't talk much about the audit for 2001. From my 

perspective, it is one of the things I have given Bill the opportunity to do a number of times and he 

refuses to take advantage of the opportunity. 

 But the audit for 2001, from my perspective, is really still the last statement of the financial 

performance of the last Administration. 

 These individuals that are going to help Bill have just recently or relatively recently been 

approved by the Senate, put on, brought in 2000. The audit for 2001 represents a good portion of 

the work that was done before the new Administration ever came into office. 

 If any of the auditors will tell you anything, to get a clean audit, and this is why I still worry 

about getting one for 2002, is garbage in, garbage out; that if you begin the year with poor data, it 

is very difficult for an auditor, at the end of that year, to give you a clean audit, because they just 

don't know what you started with. 

 I hope that we've have good information and that you're going to be able to address those, 

but I think getting to a clean audit for 2002 is going to be a significant hurdle, and I'm glad this 

team has taken that on as an objective. 

 But I think it's a tough hurdle to take, because I think they inherited a mess. The audit 

reports speak for themselves. 

Mr. Schaffer. 

Mr. Schaffer. Thank you, Mr. Chairman. I have a number of questions. First, dealing with the 12 

million that GAO could not determine in terms of the validity of grant loans, of loans and loan 

payments and grants. 
24

Ms. Calbom, can you give us some examples of these payments? 

Ms. Calbom. Yes. When we did our data mining and computer matching, we came up with a 

population of potential improper payments. We gave those to the department and we asked them to 

research those for us, get some documentation, and we did clear quite a few of the things that we 

gave to them. 

 But as you said, we did have about $12 million in items we were not able to clear. I will 

just give you a couple examples. 

 One, we've had a little over a million dollars where the social security number of the 

individual was in the Social Security Administration's death records. The department now has a 

death match that they do, but at that time, they didn't, at the time of our review. So that is one 

instance that hasn't been cleared up yet. 

 Also, we had a little over $2 million in Pell Grant payments to individuals that are based, 

again, on their birth dates in their applications indicated that they were younger than 12 years old, 

and, obviously, we thought that was unusual. 

 Now, that being there is an error in the application or something, but, again, it's something 

that needs to be followed up on. 

 We also have about three and a half million in Pell Grants to people that are 70 years old or 

older. Again, there are some new matches to look at those. Of course, that's not to say that can't 

happen, but there were a substantial number that you wouldn't expect. 

 And just one last example, we found about $1.6 million in loan payments to borrowers 

whose Social Security numbers were not in SSA's records at all. 

 So those are the kinds of things we would like to see the department go ahead and continue 

to follow up on, just so we can see where we stand on those things and we know where are risks are 

as we implement our controls going forward. 

Mr. Schaffer. So what happens when you find these cases? Do you trace these individual 

recipients; try to find out what went wrong, what happened? 

Ms. Calbom. What has to be done is you've got to go and go back and figure out, for instance, go 

back to the application, figure out, okay, was there really just an error in this or is this really 

somebody who is a child genius that's 12 years old that's going to college. 

 In some cases, you've got to go to the school to try to get documentation. I know the 

department sent quite a number of requests to schools and didn't get any information back, which, 

to me, is problematic in and of it’s self. If we're giving these schools grants, then it seems to me 

they ought to be receptive to inquiry. 
25

Mr. Schaffer. Your report suggests that there are remaining concerns about an effective system to 

trigger this unusual data. Can you elaborate on that? 

Ms. Calbom. Yes. The department's new system they are going to put in is going to be helpful in 

identifying patterns of unusual payments, such as the kinds of things that we looked at. 

 I know the department is interested in our procedures. We have already been sharing some 

information on that. 

 The issue comes down to how much of this do you follow up on, because it's labor intensive 

to follow up on it. We found, in the cases of discovered fraud, our Office of Special Investigations 

actually went and interviewed the students on the campus, and that is how you determine, in that 

case anyway, that is how we determined there was fraud, because there was actually some 

falsification of records by the schools in the students' files, which made it look as if they were 

eligible for the Pell Grants. 

 So the difficulty is it is time consuming to follow up on these things, and, again, we didn't 

find that much of this type of fraud, considering how many dollars go through the system. 

 But one thing that was disturbing is two of the three schools we had investigated back in 

1993 and it was the same type of a scheme going on, and, again, just the issue is once somebody is 

able to do it, then others may follow. 

 So that is the concern. 

Mr. Schaffer. Can you talk about the missing computer equipment, as well, 241 missing personal 

computers and computer-related equipment, about $261,000? It says 179 pieces of equipment 

remain missing. 

 Let's assume a certain amount of that is just outright stolen, but I guess I am more interested 

in probably the majority of it, which is just misplaced or gone. 

 Can you tell me about those pieces of equipment that are just missing? 

Ms. Calbom. We actually did an unannounced inventory to go try to find this equipment and my 

folks, who are with me, behind me here, covered pretty much every square inch of the department. 

 They were, I guess, not escorted, but they had department people with them, and they really 

did a head-to-toe search. 

 The equipment just doesn't seem to be there. Now, some of it, originally, I think we found, 

initially, it looked there were 384 pieces of equipment that weren't in the inventory system. So we 

went out and we tried to find those. 
26

 We did find about 143 pieces of those. So we found a bunch of equipment that wasn't in the 

department's system that should have been and it was there, physically there. 

 There were still, at that time, 241 pieces of equipment we couldn't find. The department 

then contacted us later and said we found some more of this equipment. 

 They had located, they said, 86 pieces of equipment when they made their move and they 

had a contractor do an inventory. They said would you come back in and look at it. 

 We came back in, but at that time that we came back in, we were only able to find 62 

pieces.

 So there is still something going on there. There was an explanation given, perhaps things 

were surplus, but there were no records of that. So there is still some tightening up that needs to be 

done on that. 

 The other concern that we found when we went back a couple times to look at the computer 

equipment is we found brand new equipment still in the boxes that were in unlocked storage rooms 

that were accessible. So there's still a physical control issue there that needs to be addressed. 

Chairman Hoekstra. I don't think Mr. Tiberi has any questions. 

Mr. Tiberi. No, Mr. Chairman. 

Chairman Hoekstra. Thank you. I'd like to thank you for being here today. There probably will 

be a seventh hearing in the series, but it may not be until there is some kind of intervening event, 

whether Ms. Lewis discovers or the department discovers something else or whether we just come 

and have a review of the audit for 2002. 

 That might be an appropriate time for an update, to give you a good ten, eleven months to 

get the team in place and see where you can take it in eleven months and hopefully build on the 

good work that I think all three of the groups here today are representing that they have done. 

 Just on behalf of this subcommittee, and I'm sure that I speak for Mr. Roemer, as well, your 

willingness to work with us, and I think we can genuinely get to a point where we are on the verge 

of getting a department that we feel good about in terms of the fundamentals. 

 It's not that we have said that there have been a disproportionate amount of fraud or waste 

or theft within the department, but we want the department to be able to do the basics, and the 

basics, one of the basics is providing a clean audit. 

 Most Fortune 500 companies do that on a regular basis. Most Fortune 1000 and other 

companies do that on a very regular basis. There is no reason why that is a high hurdle for a 

Federal agency to meet it. 
27

 I would hope that that would be the minimal standard that a Federal agency would meet, 

and then we can go on beyond that and talk about the actual performance and the impact that the 

agency is having with the dollars that they are spending. 

 But I think all three of the groups and the organizations that you represent have done a lot 

of good work in helping the department get there and have also helped the subcommittee to 

navigate through this process, I think, in a bipartisan and a constructive process. 

 So with that, I thank you very much. The subcommittee will be adjourned. Thank you. 

 [Whereupon, at 3:27 p.m., the subcommittee was adjourned.] 
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TABLE OF INDEXES 

Chairman Hoekstra, 1, 3, 4, 5, 10, 12, 15, 16, 17, 18, 19, 21, 23, 26 

Mr. Hansen, 4, 5, 16, 17, 19, 21, 22 

Mr. Holt, 19, 21, 23 

Mr. Roemer, 3 

Mr. Schaffer, 23, 24, 25 

Mr. Tiberi, 26 

Ms. Calbom, 10, 16, 18, 19, 24, 25 

Ms. Lewis, 2, 12, 18