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95–197 PDF 2004

MAKING FINANCIAL MANAGEMENT A PRIORITY

AT THE DEPARTMENT OF HOMELAND SECURITY

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

MARCH 10, 2004

Serial No. 108–174

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

JO ANN DAVIS, Virginia

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

——— ———

———

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

——— ———

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

SARA D’ORSIE, Clerk

ADAM BORDES, Minority Professional Staff Member

(III)

C O N T E N T S

Page

Hearing held on March 10, 2004 ............................................................................ 1

Statement of:

Ervin, Clark Kent, Inspector General, Department of Homeland Security;

and Andrew Maner, Chief Financial Officer, Department of Homeland

Security .......................................................................................................... 4

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

Ervin, Clark Kent, Inspector General, Department of Homeland Security,

prepared statement of ................................................................................... 7

Maner, Andrew, Chief Financial Officer, Department of Homeland Security, prepared statement of .......................................................................... 24

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

of Pennsylvania, prepared statement of ...................................................... 2

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

of New York, prepared statement of ........................................................... 30

(1)

MAKING FINANCIAL MANAGEMENT A PRIORITY AT THE DEPARTMENT OF HOMELAND

SECURITY

WEDNESDAY, MARCH 10, 2004

HOUSE OF REPRESENTATIVES, SUBCOMMITTEE ON GOVERNMENT EFFICIENCY AND

FINANCIAL MANAGEMENT, COMMITTEE ON GOVERNMENT REFORM, Washington, DC.

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

2247, Rayburn House Office Building, Hon. Todd R. Platts (chairman of the subcommittee) presiding.

Present: Representatives Platts and Towns.

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

Larry Brady and Tabetha Mueller, professional staff members;

Amy Laudeman, legislative assistant; Sarah D’Orsie, clerk; Adam

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

Mr. PLATTS. This hearing of the Subcommittee on Government

Efficiency and Financial Management will come to order.

In the interest of time management, we are going to skip formally presenting opening statements, my own and the ranking

member, Mr. Towns, who will be here shortly. We will submit those

for the record.

I would quickly say that having just marked the 1-year anniversary of the Department of Homeland Security, we appreciate both

of our witnesses being here and the important roles you play in the

Department, on behalf of the Department personnel and certainly

all American citizens. Having just concluded the audit of your first

year financial statements, we also appreciate your participation in

this timely hearing.

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

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Mr. PLATTS. I think we will swear both of you in, and if any of

your staff who may be guiding you or giving advice as part of the

testimony will stand and take the oath as well, then we will get

into your opening statements.

[Witnesses sworn.]

Mr. PLATTS. We are pleased to have the Inspector General of the

Department with us. We appreciate your participation and your

service to our fellow citizens at the Department. We appreciate as

well having our Chief Financial Officer for the Department. Andy,

thank you for being here also.

I am going to dispense with a brief bio on each of you in the interest of time if that is all right. I think we will go right into your

testimony, Mr. Ervin, and then proceed to yours, Mr. Maner.

STATEMENT OF CLARK KENT ERVIN, INSPECTOR GENERAL,

DEPARTMENT OF HOMELAND SECURITY; AND ANDREW

MANER, CHIEF FINANCIAL OFFICER, DEPARTMENT OF

HOMELAND SECURITY

Mr. ERVIN. Thank you very much, Mr. Chairman, and members

of the committee, for the opportunity to be here this afternoon to

discuss the fiscal year 2003 financial statement audit at the Department of Homeland Security and to provide an update on how

DHS is addressing the inherent challenges involved in realigning

its financial operations and addressing its financial system weaknesses. In that regard, we include financial accounting, contract

management, grants management and information technology

issues.

With regard to the 2003 financial statement audit, when we provided testimony to this subcommittee some 6 months ago on September 10, 2003, we discussed the financial management challenges then facing DHS. One of the larger challenges of course preparing the auditable financial statements for the Department. At

that time, the fiscal year 2003 financial statement audit was already underway but the outcome was unclear. The good news

under the circumstances is that the Department received a qualified opinion on its consolidated balance sheet and statement of custodial activity as you know. I say good news because with just a

few very specific exceptions, we can be reasonably assured that

DHS has fairly presented its assets and liabilities as of September

30, 2003 and the custodial revenues it collected over the first 7

months of operation. Those are key pieces of information needed for

good stewardship and they provide an essential financial baseline

for the new organization going forward.

Regarding the other statements which we call collectively activity

statements, the auditors were unable to complete their procedures

and thus unable to provide an opinion for reasons that I explain

in my prepared statement for the record.

DHS is to be congratulated on producing its first set of financial

statements for audit and for accepting the challenge last April

when the Department was just establishing itself. Not only do we

have a baseline for the Department’s assets and liabilities but the

process itself has been invaluable by providing focus on good financial management practices going forward.

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With regard to audit challenges for 2004, OMB has accelerated

the reporting deadline for audited financial statements and the

performance and accountability report to November 15. Two major

keys to success are the commitment to do so starting at the top of

the organization and a detailed plan to get there. Mr. Maner has

assured us that this commitment has been made and in the next

week we understand that his office, Bureau financial staff, and the

auditors will be holding a 2-day strategy session to plan for this.

DHS also will have to deal with problems it was unable to overcome this past year. For example, as you know, weaknesses in inventory and valuation procedures at the Coast Guard for OM&S,

operating materials and supplies, must be corrected and the Office

of the Chief Financial Officer must address gaps in its staffing, create standard operating procedures that will guide the bureaus and

support timely and accurate reporting, and establish clear organizational roles and responsibilities.

With regard to contracts management, a major challenge for

DHS is the identification and management of its procurements. Although the Department inherited procurement responsibility for 22

incoming organizations, only 7 procurement shops came into the

Department. The remaining 15 components are receiving procurement services from organizations outside the Department, limiting

the Department’s ability to apply effective and consistent oversight

to its procurements.

Under these circumstances, the Department has struggled even

to prepare a detailed and accurate listing of its procurements. DHS

needs to begin integrating the procurement functions of its component organizations to ensure that good management controls are

consistently applied.

Also, some bureaus have large, complex and high cost procurements underway that need to be closely managed. By that, I mean

the $5 billion ACE project and CBP, Coast Guard’s Deepwater

Project, $17 billion, taking two to three decades to complete and

the U.S. visit system providing electronic entry and exit system at

land, sea and airports of entry will too be a multibillion dollar program over the next 10 years. We will be reviewing all of these

projects very actively.

With regard to grants management, DHS inherited a variety of

grant programs that provide money for disaster preparedness and

response and prevention. Significant shortcomings have been identified in many of these programs in the past and the potential for

overlap and duplicate funding has grown as the number of grant

programs has grown.

Furthermore, DHS program managers need to develop meaningful performance measures to determine whether the grant programs have actually enhanced State and local capabilities to respond to terrorist attacks and natural disasters. DHS has made

significant strides in this area particularly in consolidating the preparedness grant programs. However, problems remain and means

must be found to ensure that the first responder funds are being

used effectively and getting to those who need them in a timely

fashion.

IG believes that progress has been slow because DHS may have

underestimated the problem of consolidating the grant manageVerDate 11-MAY-2000 12:07 Aug 10, 2004 Jkt 000000 PO 00000 Frm 00009 Fmt 6633 Sfmt 6633 D:\DOCS\95197.TXT HGOVREF1 PsN: HGOVREF1
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ment systems. About 63 fiscal year 2002 grants and more than 83

fiscal year 2003 grants were integrated into DHS and yet the

Grants Policy and Oversight Office was staffed by only one fulltime person for much of the past year. The problem is receiving attention in fiscal year 2004 and we will continue to monitor the Department’s progress.

Finally, in the area of systems integration, DHS organizational

elements have over 100 disparate, redundant and non-integrated

systems used to support a range of administrative functions such

as accounting, acquisition, budgeting and procurement. Because of

the lack of standardization and systems interoperability in the current environment, many of these activities are tedious, manual and

burdensome. To address these issues, DHS has established the

eMerge2 program and we are actively monitoring that process. We

understand it is scheduled for implementation by September 2006

and our understanding is the Department is on schedule for that.

We will monitor it closely with regard to both cost, timeliness and

most importantly, effectiveness.

Mr. Chairman, that concludes my prepared statement and I

would be delighted to take questions when the time for that comes.

[The prepared statement of Mr. Ervin follows:]

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Mr. PLATTS. Mr. Ervin, thank you for your oral testimony here

today as well as the extensive written testimony you shared with

us. That was very helpful as we prepared for today’s hearing.

Mr. Maner, I will turn to you next and thank you for your service. As we shared notes as dads of young children who are putting

in a lot of hours, you and me and not our young children, I appreciate your service to our Nation as well.

Mr. MANER. Thank you, Mr. Chairman and members of the subcommittee, for the opportunity to be here and discuss the progress

of DHS in the area of financial management. Let me also say

thank you to the Congress and specifically this subcommittee for

its continued interest, commitment and assistance to us in this

area. I think we all agree that this area is critical to our overall

future mission success of DHS.

While I was only appointed as CFO in January, I have been part

of DHS since its inception serving at U.S. Customs and later at

CBP as its Chief of Staff as well as its Director of Transition Management, managing the largest reorganization within DHS. Adding

this to my business education and experience in the private sector,

I think has given me the benefit of seeing the DHS successes and

many challenges it faces from different angles.

I am keenly aware of the importance of sound financial management practices to the overall successful management and the importance and impact decisions made at the Department level have

on Bureau operations and vice versa. I am personally driven daily

by the need to provide a base for financial management goals, practices and systems that will aid the Department for decades to come

and am energized by the opportunity to help lead DHS in this endeavor.

Last week, as you mentioned, we celebrated our 1 year anniversary. I think all of us at the Department are very proud of the

progress that we have made in the past 12 months. Specifically in

my office, I am very encouraged by the accomplishments of last

year but more so the goals we have created for ourselves this year.

We have made tremendous headway in unifying and strengthening

the Department’s financial management, accounting, budgeting,

strategic planning, performance measurement processes and systems, all the while dealing with the enormous challenges involved

in standing up the third largest department in Government.

In September of last year, my predecessor, Bruce Carnes, testified before you on a similar subject and I am pleased to report that

in many of the areas you spoke, much progress has been made, either projects have been completed or are well underway in implementation.

In the past year, we streamlined the number of financial management service providers in the Department from 19 to 10. We are

implementing a consolidated bank card program that is reducing

the significant number of bank card programs for purchase, travel

and fleet throughout the Department down to about three. We developed and delivered to Congress on time our President’s 2005

budget and accompanying CJ’s. We instituted and recently collected preliminary data for the Department’s 5 year budget and

planning process which is known as the FYHSP which will be coming to the Hill at a later date. We subjected ourselves to and comVerDate 11-MAY-2000 12:07 Aug 10, 2004 Jkt 000000 PO 00000 Frm 00025 Fmt 6633 Sfmt 6633 D:\DOCS\95197.TXT HGOVREF1 PsN: HGOVREF1
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pleted an audit of our consolidated fiscal year 2003 financial statements. We submitted our first strategic plan to Congress and continued the work in perfecting a robust investment review and joint

requirements process.

We have made great strides in our attempt to build one resource

management system known as eMerge2 which will link all these

initiatives and processes in the future. Most importantly, all this

has been accomplished with little or no negative impact mission operations.

While we have much to be proud of, much remains to be done

and we have big goals in 2004. We will continue to focus on the

people, processes and systems in the areas of financial management systems and programs analysis and evaluation. The year

2003 was the year for the vision and design of our processes; 2004

is the year to operationalize and improve them.

In 2003, one of our greatest accomplishments was that only 2

months after our creation, DHS took on the challenge of subjecting

ourselves to the rigors of a consolidated financial statement audit.

More noteworthy was the ability to pass the scrutiny of an audit

to the extent necessary to support a qualified opinion on our September 30 balance sheet. The 2003 audit was paramount for the

Department to have a basis for improvement in 2004. Although the

audit identified 7 material weaknesses, this was a substantial improvement over the 18 material weaknesses that were inherited

from our component agencies. This means that nine material weaknesses were either corrected or partially corrected. The rest were

consolidated into seven. Nevertheless, we are committed to resolving these remaining weaknesses in 2004 and have set forth an aggressive plan to do so. Within 30 days, corrective actions will be developed by each bureau and submitted to my office. We will also

implement a DHS-wide tracking system to monitor the corrective

action status. Starting next month, we will closely monitor the status of corrective actions through quarterly clean action plan meetings with each bureau or entity that has substantial or outstanding

weaknesses.

Additionally, we have taken steps early in the year, as my counterpart said, including an all hands offsite meeting next week with

all the components to get ready for our November 15 close.

Good financial management is not just about accounting though.

Essential to sound financial management is a robust financial management system. When DHS was created, we inherited over 100 resource management systems, few of which were integrated and

many of which had limited functionality. To address this problem,

the Department has undertaken a resource transformation initiative entitled eMerge2 that will consolidate and integrate our budgeting, accounting, reporting, cost management, asset management

and acquisitions and grants functions. As eMerge2 is implemented

over the next few years, it will greatly enhance our visibility oversight and accountability. The year 2004 will be a watershed year

for eMerge2 as we move to assess requirements, prioritize and

schedule the rollout and procure and pilot a solution.

In closing, I would like to thank the committee again for the opportunity to appear before you today and assure you the Department and I are committed to achieving the goals we have estabVerDate 11-MAY-2000 12:07 Aug 10, 2004 Jkt 000000 PO 00000 Frm 00026 Fmt 6633 Sfmt 6633 D:\DOCS\95197.TXT HGOVREF1 PsN: HGOVREF1
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lished. We have already made good progress under challenging circumstances and I commend the experience and dedicated staff with

whom I work. Now with a strong, growing and motivated staff, coupled with the continued support of DHS, OMB and Congress, I am

confident we will realize even greater progress this our second

year.

That concludes my statement and I would be happy to answer

questions.

[The prepared statement of Mr. Maner follows:]

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Mr. PLATTS. Thank you, Mr. Maner.

I would like to recognize we have been joined by our ranking

member, Mr. Towns, from New York. Thanks for being with us.

I submitted opening statements for the record, if you would like

to do the same?

Mr. TOWNS. Yes.

[The prepared statement of Hon. Edolphus Towns follows:]

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Mr. PLATTS. We will get right into questions and hopefully will

have 25 to 30 minutes and see where we are if the bells go off at

that point for votes and play it by ear as that happens.

I would like to start Mr. Maner with you. We have talked previously and this committee has been working with your predecessor, Bruce Carnes, and others at the Department on the issue

of the structure of DHS as it relates to the Chief Financial Officers

Act and how financial management is being prioritized at the Department.

Congress in various ways in the 1980’s and into the 1990’s, said

that the executive branch agencies were not making good financial

management practices a priority in the Congress’ eyes, so put a

structure in statute to ensure better focus on these important

issues on the expenditure of tax dollars.

When we created the Department in the final version the Department was not brought under the CFO Act. I appreciate your

statement in your testimony that today DHS complies with the provisions of the Chief Financial Officers Act of 1990 and will continue

to do so. Mr. Carnes said the same when he testified before us 6

months ago but as I pursued with him, you actually are not following the CFO Act in all the requirements of it and that relates to

the structure of it. I would like to explore some aspects of that.

The reason I am focusing on it today and will continue to focus

on it really goes to your second paragraph, and I commend your approach, where your daily efforts are about ensuring a base of financial management goals, practices and systems that will aid the Department for decades to come. To me that is what Congress sought

to do through statute, that for decades to come all departments and

agencies of this magnitude had a structure in place. That is what

my bill which would bring the Department under the CFO Act

seeks to do.

As an example, start with the structure of your office and how

it relates to the Secretary. One of the things Congress said they

thought was important was direct communications from the CFO

to the Secretary so there is no opportunity for miscommunication,

lack of information, that the ultimate decisionmaker, the Secretary,

has everything they need to ensure good financial practices.

I don’t believe you report directly to the Secretary. You report to

Under Secretary Hale, I believe?

Mr. MANER. That is right.

Mr. PLATTS. Why do you feel comfortable saying that you are

complying with the CFO Act if you really aren’t reporting directly

to the Secretary as the act requires?

Mr. MANER. Again, I guess there is reporting on an org chart and

then there is reporting in reality and I guess like my predecessor,

I have only been in the job about 60 days but I have really unfettered access to the Secretary. Using a number of things in my office

that we have done to date, first the 2005 budget, then the audit,

now the FYHSP, I enjoy unfettered access to the Secretary and

that is something he and I have discussed. So in terms of access

and his commitment to financial management, I feel we are in compliance, but you are right, by definition of the CFO Act, we are not

there directly. I do report through Under Secretary Hale. This was

a structure that was laid out as you said in the legislation that creVerDate 11-MAY-2000 12:07 Aug 10, 2004 Jkt 000000 PO 00000 Frm 00036 Fmt 6633 Sfmt 6633 D:\DOCS\95197.TXT HGOVREF1 PsN: HGOVREF1
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ated the Department. It is a structure that is working. It is a structure that allows me to work with Under Secretary Hale and she

has all of the chiefs reporting to her, the Chief Procurement Officer

and some of the other Chiefs. That makes for a tight grouping as

well to be with my peers, the Chief Procurement Officer and others. So that has worked well.

Mr. PLATTS. I will say up front, having had the privilege of serving with Secretary Ridge in his position as Governor, I have absolute great respect. His record of public service both in uniform as

a decorated veteran and in State and Federal Government, a prior

Member of Congress, Governor and back here as Secretary, is remarkable. He and his family have sacrificed tremendously for the

good of all American citizens. I don’t doubt, and I think much of

what he and you and others at the Department are doing are good

faith efforts at good financial accountability, but there is a difference between unfettered access and reporting day in and day out

or week in and week out directly to him. Saying I can go to him

if I need to versus my daily or weekly, my periodic updates are directly to him, I believe from your answer I am taking that your

regular updates are to the Under Secretary as far as updates on

where things stand with the audit. You are not giving that same

regular, periodic update to the Secretary but to the Under Secretary. Is that right?

Mr. MANER. That is correct.

Mr. PLATTS. That is contrary I believe to what the Congress intended. They wanted the Secretary to regularly hear directly from

the CFO. That is the intent of the CFO Act. When they passed the

Integrity Act in 1982 and tried to reform the management practices, Congress decided we didn’t get it right and came back 8 years

later and said, we are going to get it right and for every Cabinet

level department but the Department of Homeland Security, we require it. That is but one example. The fact that you are not required and not fulfilling the requirements of the Federal Financial

Management Improvement Act. You are not doing that and that is

a requirement of the CFO Act, so again it seems inappropriate to

say that you are complying with the CFO Act if that is an important part of it.

Can you give an explanation of why you feel comfortable saying

you are in full compliance?

Mr. MANER. Again, I agree with your point and while I meet

daily, many times daily with the Under Secretary, like any Secretary, he has demands on his time and when we have an issue

we believe he needs to hear, know about and be updated on, we go

and see him about that and enjoy that access.

Mr. PLATTS. My hope is with passage of the bill that as Congress

sought to ensure that level of interaction between you and the Secretary as opposed to you and the Under Secretary, it becomes the

norm. I think it also diminishes the perceived focus on financial

management because of the position you hold not being a Senateconfirmed position. In the hierarchy of Washington, it is viewed as

the level of authority you are given. I appreciate your vast private

sector experience and the public experience you brought from Customs, but it is seen from a different level than a Senate-confirmed

34

appointee as far as the hierarchy and the weight we are giving to

your role.

I raise that to start because I think for us to have a frank discussion I am very comfortable with you and anyone from the Department saying we believe we fulfilling the intent of the CFO Act. But

when Mr. Carnes testified 6 months ago and you today, I am not

comfortable with saying we are complying with the act when in fact

you are not. We should acknowledge that and move forward and

have a more frank discussion.

I have more specifics but I want to give Mr. Towns a chance to

jump and we will go from there.

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

This question I would like to ask both of you to respond. Can you

tell us what specific actions you have taken to address the inadequate controls over security screener contracts at the Transportation Security Agency in the past year? Apparently inadequate

monitoring of contracts allowed contractors to charge TSA up to 97

percent more than the contractors charged air carriers prior to Federalization. Do you know how much money was lost through this

overcharging and whether the Department has made an attempt to

recover the funds?

Mr. ERVIN. I would be happy to start, sir. We are very much involved, the Office of Inspector General, in looking at the NCS Pearson contract. At this point we don’t have an exact dollar figure with

regard to what the potential overcharge might be but we do know

that based on the audit work that has been done, both by the Office of Inspector General and by DCAA, the Defense Contracting

Auditing Agency with which we are working very closely, the range

started at $100 million and now we are up to around $700 million

or so.

The problem there is the contract was not definitized, which is

to say that the terms of the contract were not set before it was let.

There wasn’t due oversight on TSA’s part with regard to that contract and so in partnership with DCAA or working with DCAA, we

are trying right now to sort out all this and figure out what the

terms were, and figure out what the costs were.

Mr. MANER. Congressman Towns, I have not much more to add

on that. We are very aware of the issue and we have met with TSA

from my angle which is the financial angle about various weaknesses, both material and management controls, this being one of

those that was identified. We spoke of it as recently as 2 days ago

but I can’t provide you any further update on that. From a procurement standpoint, I would want to have procurement expertise in

the room as well.

Mr. TOWNS. So you don’t have any idea in terms of how much

money we are talking about?

Mr. MANER. We don’t have any idea at this time.

Mr. TOWNS. Mr. Maner, one of the challenges identified in creating a coherent financial management system for the Department of

Homeland Security is developing a centralized blueprint of financial management for all of the component agencies under DHS.

Can you update us on the progress being made in integrating the

22 agency components into the cohesive and operational financial

35

management system? What are the major financial management

issues that remain from the integration of DHS?

Mr. MANER. First of all, in order to stand up a cohesive financial

management structure, we have to develop and implement and document standard operating procedures for our component parts and

agencies. In our first year, as we developed and went through our

audit and certain aspects of it, we were doing things for the first

time, we were issuing guidance, direction of how we wanted to do

things for the very first time. In the fact we have completed our

audit, we are now moving into the area of documenting a lot of

these policies and procedures. The first thing we want to do is document so that these policies can outlast people that come and are

steadfast. That is probably the first area in which we have tried

to focus.

The second area that we tried to focus is on financial systems.

I think any agency head, any CEO in the private sector realizes

that in order to have true financial management, you need to have

visibility into your financials, your grants data base, your procurements and you need to have one system or one suite of systems

that does not. The second area we have given great focus is systems and eMerge2 is underway to move to a consolidated resource

management system which encompasses all the way from budget

to cost accounting to procurement and grants management and

asset management. That is a medium and long term goal that we

have undertaken.

However, in the short term, we also need to find quick wins so

we are not just waiting 2 years from now for this system to roll

out. We have closed down or consolidated a number of accounting

offices, thereby consolidating the number of systems we use. We

are also developing and starting a data warehouse so that before

the system is rolled out we at least have one visual end to all of

our information.

To answer your question, first is to set out standard operating

procedures for our entities. They all came from different levels of

rigor in financial management, different levels of systems, so we

want to level the playing field and second, turn to the systems.

Those are the two primary focuses at this time.

Mr. TOWNS. How long do you think it is going to take, approximately?

Mr. MANER. To get to a standard set of practices and systems?

Mr. TOWNS. Yes.

Mr. MANER. I think on the systems side, it will take us probably

into 2006–2007 to have a really standard system where we have all

of our agencies. However, because we have certain agencies and

components that are already doing a lot of good things, we want

to set the vision for them and start to meet it. Completion, frankly,

I don’t think you are ever complete with financial management but

on the systems side, probably 2006 or 2007.

Mr. TOWNS. Thank you, Mr. Chairman.

Mr. PLATTS. Mr. Maner, as I pointed out in your opening statements and in your statements to Mr. Towns, you actually helped

make the case of what I am trying to do through statute. Your

statement was you are trying to put ‘‘policies that outlast people

as they come and go and replace policies with statutory requireVerDate 11-MAY-2000 12:07 Aug 10, 2004 Jkt 000000 PO 00000 Frm 00039 Fmt 6633 Sfmt 6633 D:\DOCS\95197.TXT HGOVREF1 PsN: HGOVREF1
36

ments.’’ That is exactly what we are trying to do, so it is not based

on who is or is not there but good sound financial management. I

think that is what my predecessors wanted and again, that is what

we are trying to do.

In the Inspector General’s testimony relating to the structure,

and I would ask you about this appreciating you have been in your

role for roughly 60 days but the Department is now a year old. The

Inspector General in talking about the structure said, ‘‘The Office

of Chief Financial Officer has not yet established a hierarchy of financial reporting authority or an entity-wide financial management organization chart that clearly defines roles and responsibilities and assists with identification of critical human resources

needed to ensure that all financial management responsibilities are

assigned. The OCFO has not yet developed standard operating procedures that will result in consolidated financial reports that are

consistent, timely, accurate and in compliance with Federal accounting standards.’’ It goes on to say, ‘‘These conditions were not

unexpected for a newly created organization, especially one as large

and complex as DHS.’’

I agree, not unexpected and challenges that are significant but

given that we are now a year into it, where do we stand. Are we

still without SOPs, without a Department-wide financial management infrastructure and the hierarchy being delineated? Early on

I believe that would be understandable but a year in, because both

of those issues really go to that foundation you start with as you

then build a good financial management system, having that hierarchy delineated and having the SOPs in place. Could you tell us

where we stand today?

Mr. MANER. Mr. Chairman, I think that we are on a journey as

we talked about toward perfecting our financial management practices and we want to continually make steps to get there. One

thing I would point out is that the Department is new, is a year

old and many of the entities within the Department are as old as

214 years, so there are big portions of the Department that are not

new and not in a startup mode as relates to financial accountability

and management.

In terms of a lot of our work, we have some components that are

doing great work and have done great work and are working on

material weaknesses and the only thing we need to ‘‘guide and put

out’’ are our SOPs on how to deal with the new department. Customs knew how to deal with Treasury, the old INS knew how to

deal with Justice, so that is our role. We will be putting that out

this spring on how to deal with us from an audit and financial

management standpoint.

We are not starting from scratch and I think that is important

to note. However, over time and with our use of bodies like the

CFO Council that I chair within Homeland, we are working

through all of our issues which relate to financial management and

accounting, the eMerge2 project and financial systems, so we have

had a great track record of getting together, solving problems, getting together to listen to how our bureaus do things so that we are

not starting from scratch. We have a lot of very good practices

within Homeland Security that I want to make sure we don’t just

throw out. I have asked our managers to be careful and be thorVerDate 11-MAY-2000 12:07 Aug 10, 2004 Jkt 000000 PO 00000 Frm 00040 Fmt 6633 Sfmt 6633 D:\DOCS\95197.TXT HGOVREF1 PsN: HGOVREF1
37

ough but we do need to get our SOPs out, especially if we expect

to do things like an early close for November 15.

Mr. PLATTS. It would seem the fact that you are not starting

from scratch, it is all the more important to have an entity-wide

hierarchy in place because you have all these CFOs and the component entities that are coming from different departments, reporting

to different people in a different way, all the more you would want

to have that up front so that you have uniformity.

As we saw with the Federal Government’s financial statements

in total, because of one particular component, DOD, we can’t get

a clean opinion on the big picture. When you bring that down to

the department level, unless all your entities are working on the

same page and understand who has the responsibility and authority within the Department across the board, it is going to be that

much harder to get to the goal line of a good reporting process in

place.

To me the things you said are all the more reason why up front

and not 12 months later we are still talking about trying to get

there. We should have gotten there first and then moved forward.

Some of that goes to your predecessor and Mr. Carnes isn’t here

to answer why he didn’t prioritize that and you would have inherited that already in place.

Mr. MANER. Mr. Chairman, I don’t want to lead on that we are

not considering that a priority. Again, we inherited a lot of agencies at different places in their financial management. What I

mean by that is we have startup organizations, IAIP, SNT, who are

going up a learning curve. We have some agencies that pieces of

them came over from Justice and we have others that came over

in total. So we have different people at different phases of the spectrum.

We have had to give our attention to those at different levels, so

I think we have done a good job of bringing them together. The Department is still considering more rigorous capitalization plans

where maybe there needs to be a more formalized reporting chain

for various financial management people through the Office of the

CFO and we are looking at that but that hasn’t hampered me. I

can’t speak for my predecessor. These are attentive bureaus who

want to solve problems, who judge themselves on how they are

doing financial management, Coast Guard, Customs take it very

seriously. So I don’t want to lead on that structure is not important.

Mr. PLATTS. Let me ask you specifically how it is working for

you. The CFOs and the component entities, are they reporting directly to you and through you to the Under Secretary, are they also

able to report directly to the Under Secretary regarding issues you

are trying to implement?

Mr. MANER. The financial people within the bureaus?

Mr. PLATTS. Yes.

Mr. MANER. We have had a relationship to date where I chaired

and my predecessor chaired the CFO Council which would be usually the CFO of an agency.

Mr. PLATTS. Was it also to the Under Secretary? It is a delineated authority down to you, you to Under Secretary Hale?

38

Mr. MANER. There is no organization chart at present that lays

out the reporting structure. Right now a CFO of a bureau reports

to their bureau head or their assigned person and we consider it

to be a dotted line to me but it is not formalized.

Mr. PLATTS. Mr. Ervin, that is where maybe I bring you in. That

seems to be one of the concerns you raised, that it is not formalized, that there is uncertainty about the reporting line of authority

and who has what authority regarding the financial hierarchy as

well as the SOPs. If you could expand on your written testimony

in those two specific concerns you raised and whether you believe

that getting the standard SOPs and hierarchy in place, the sooner

the better, how critical that is or isn’t to the big picture?

Mr. ERVIN. Absolutely, Mr. Chairman. I would be happy to expand on that. There are a number of things to be said, so let me

start.

I think it is absolutely critical that the organization chart be formalized to make it clear who does what and who reports to whom.

With regard to the Office of the Chief Financial Officer, the staffing

of that office so as to oversee the overall financial services enterprise, for want of a better term, is also very important.

There are relatively few, fewer than 10 as we understand it, accountants in the Office of the Chief Financial Officer to oversee the

process of consolidating this financial information from 10 different

accounting service providers, 4 of which are outside the Department. That leaves little if any time for the people in the office of

Chief Financial Officer to oversee the data that comes in, to develop analytical procedures, to test for data integrity. Also to develop the expertise in-house, it is necessary to oversee the reporting complexities in an entity as large and as complex as DHS. That

is one thing in addition to the organization chart. The standard operating procedures which both you and Mr. Maner mentioned, it is

absolutely critical that those be formalized as quickly as possible,

particularly given the accelerated reporting schedule. We understand the Department is considering whether contractors should be

brought in either to do that or to help supplement the process of

doing it. It doesn’t matter to us whether it is contractors or fulltime personnel, those standard operating procedures absolutely

must be formalized.

Further, the whole issue of control. Mr. Maner, to be fair to him

as he said and as you know, has been on board only for 2 months

or so and he is in the process, as he tells us, of developing relationships with the various component CFOs and obviously relationships are very important. I don’t doubt for a second that there is

cooperation from those component CFOs but ultimately as he acknowledged, they report to the head of their respective bureaus

and not to him.

We think that direct organizational chart reporting where he has

the power to hire and fire, he writes the performance evaluations,

he determines budget, all of that is very, very important in order

to ensure and to institutionalize making sure the CFO at the organizational level, at the top level has what he needs.

By the way, I would say this whole control issue, this organizational control issue, the information technology issues are very important on their own and also with regard to financial integrity,

39

the CIO of the Department is not in control of the various component CIOs, that is likewise the case and that is also true in the

procurement area. The Chief Procurement Officer is not in charge

in all of the component procurement offices. There are 22 different

procurement systems, 15 of those remain outside the Department,

only 7 of them are within the Department. The 7 within the Department are managed at the component level, so the Department’s

Chief Procurement Officer does not have the power to reallocate resources among those 7 units to deploy them where he thinks it is

necessary for the good of the organization.

This brief, those are the concerns we have about all of those

issues, all of which are interconnected, needless to say.

Mr. PLATTS. Based on your knowledge of other departments and

agencies, what would be the norm as far as having that authority

over the component entity CFOs? Is this more the exception that

currently there is not a delineation, that the Department CFO has

that authority to hire and fire and they report directly to him versus through their entity? That may be something out of the scope

of your knowledge.

Mr. ERVIN. I would like to get back to you on that if I may. I

have only limited experience outside HHS. I was the Inspector

General at the State Department. My understanding is that at the

State Department, the CFO did have much more control over the

various component parts than was the case at DHS. As to the rest

of government, I would like to get back to you on that.

Mr. PLATTS. If you could followup with the committee, that would

be great.

Your assessment in reading between the lines of just 10 accountants in the Office of Chief Financial Officers led me to believe that

your assessment is that there is not the number of financial expertise to both oversee, evaluate and actually critique what is received

versus simply compile what is received?

Mr. ERVIN. Precisely.

Mr. PLATTS. Is that your concern? They have the people to put

it together but are unable to really assess it in form and fashion?

Mr. ERVIN. That is exactly right. To be precise, I really mean

fewer than 10, somewhere between 1 and 10 and there is disagreement about exactly how many people can be characterized as accountants but certainly fewer than 10.

Mr. PLATTS. Mr. Maner, your comments on that and the ability

of your office from the staffing you have been given and the type

of staffing, the expertise of the staffing, to truly have the knowledge base to look at what you are receiving and really try to ensure

the integrity of what is compiled as opposed to just putting it together to pass on?

Mr. MANER. Staffing is always a big question at DHS. I don’t

think anyone contemplated creating a department with thousands

of people in the 500 series because we have accountants in the bureaus. In terms of my own staff, I feel very good with what they

were able to do this year in sort of taking us through the consolidated audit coaching, the bureaus that needed coaching, working

and training people on the new systems they would be using. I am

confident in how we did last year. I always worry about burning

40

out staff and making sure we have enough staff to make sure we

are coaching and being strategic about action plans.

That said, the only thing I would add is this year we are very

excited because we are going to have to do a lot less of that, we

don’t have to train people on tiers and all these other things, so we

can always use more people but I feel pretty good about where we

are.

Mr. PLATTS. I appreciate the efforts of everyone at the Department given the largest transformation in 50 years. I don’t want to

demean the good faith efforts of all staff there, including those in

your office. Again, do they have the knowledge base and expertise

to be able to do what we are asking them to do? It sounds like you

basically are saying that although you may not have that financial

expertise, because that expertise exists at the component level, you

are trusting of what you have been given as opposed to have that

same level of expertise in your office.

Given that you are now overseeing entities that brought 18 material weaknesses almost overwhelmingly related to internal controls,

if I were you I would want my own people there verifying what

those entities that had those 18 material deficiencies sending to me

as opposed to relying on them to put my reputation on the line. At

this point it sounds like you really are relying on those component

entities to give you credible information and not really assess it. Is

that an accurate statement?

Mr. MANER. First of all, you get data from the components, you

work with your auditor and you are getting information. It is what

you do with that information. We are getting information about

how we are doing from plenty of sources. It is now how do we

spend that into SOPs moving forward.

Mr. PLATTS. But it is not just getting the information but being

able to assess the integrity of the information and not just what

you do with it but how credible it is.

Mr, MANER. The only thing I would add is that my comfort level

varies within the Department. Within the startups, they need more

attention.

Mr. PLATTS. Depending on what component is sending you the

information?

Mr. MANER. Sure. Some components have been through standalone audits for a long time and very comfortable with the process,

are very comfortable with their integrity. You are absolutely right,

this is all on my watch and it is my integrity at stake.

Mr. PLATTS. Are you considering taking the Inspector General’s

recommendation that you have direct authority over hiring and firing those component entity CFOs and requiring them to report directly to you instead of to their entity heads? Is that something

currently being reviewed within the Department?

Mr. MANER. It is currently being contemplated at all parts of

DHS, so in procurement, IT, CFO and all these things. I have

inputted my beliefs on that process. While I and the Department

want to do that at once, doesn’t want to do it one way for CFO and

wants to be very comprehensive when it does it. The only part that

I have been mindful of, and I feel extremely gratified and granted

I have only been here 2 months, I did see it from the other side

when I was at the Bureau, at the support I get from the bureau

41

level CFOs. I get all information in a timely manner that allows

me to make great use of it.

I also am mindful that I want the Bureau CFO to have an intimate relationship with his or her bureau head and don’t want to

take them away from the intimacy of knowing the insides of that

part. It is a very fine balance.

Mr. PLATTS. I would agree but I think it also would be helpful

if that component head knows their financial books are going to go

right to the CFO of the Department and eventually to the Secretary through the Under Secretary, that they are going to focus

on that report, that aspect of the entity a little more than if it

comes to them and what they pass on is up to him or her. The advantage of having that for certain oversight is something I hope

you weigh.

If I could ask you to followup with the committee on two aspects

of this discussion. One, is that you share with us once that determination is made of what changes are going to be made specifically

relating to your authority over component CFOs and whether you

have authority over hiring and firing and them reporting directly

to you as well as to their component heads.

Also on the SOPs, give an estimated timeframe for when you will

have those SOPs in place and once they are in place, that they be

shared with us.

I would turn to the ranking member. I hope you didn’t mind my

kidding about our long tenure. As a new chairman, I hope to hold

on to it for at least a little while.

Mr. Towns.

Mr. TOWNS. Thank you.

Mr. Ervin, the independent auditor’s report describes several discrepancies in documentation of certain property plans, equipment

and operating materials and other material weaknesses in the financial reporting mechanism of the U.S. Coast Guard. Can you

bring us up to date as to what is going on with that?

Mr. ERVIN. Yes, I would be happy to.

With regard to PP&E, property, plant and equipment at the

Coast Guard, there weren’t procedures in place to ensure that documentation was received in time before the audit had to be completed to support $2.9 billion in PP&E at the Coast Guard. I want

to be clear about that. That is not to say that $2.9 billion of property was missing; the property was there and indeed the documentation was ultimately produced. It just wasn’t produced in a

timely enough fashion such that it could be factored into the financial statement audit. We understand that the documentation has

been submitted and that should not be a problem going forward.

With regard to OM&S, operating materials and supplies at the

Coast Guard, the figure there was $497 million, almost $1 billion.

There the problem was the procedure calls for two things, a review

of the record as to exactly what the inventory is and also an observation of what the inventory is. With regard to observing the inventory, that was difficult because sometimes the ships were out to

sea, for example, and in those instances where there was inventory

to observe and check against the documentation, there were discrepancies and those discrepancies couldn’t be reconciled or at least

they couldn’t be reconciled in a timely fashion. Go forward, that

42

issue likewise needs to be taken care of if these problems are not

to recur in 2004. That is it in a nutshell.

Mr. TOWNS. Mr. Maner, I sort of regret asking this question because you have only been around 60 days but do you really feel you

have the material and staff to really make what we are asking you

to do a reality?

Mr. MANER. I believe that in Homeland there is the staff and the

expertise to do and put forth, manage and perfect financial management practices and systems. Yes, I believe that expertise exists

within the Department. That said, as we have discussed with the

chairman, we have to put out SOPs that say how we want to do

these things. Yes, I do believe the expertise exists.

Mr. TOWNS. Is there anything on this side you think we need to

do? Let us reverse our roles. You are the member.

Mr. MANER. That is quite a role reversal.

Mr. PLATTS. Besides shelving 2886.

Mr. TOWNS. I think that is it, that is very important. [Laughter.]

Mr. MANER. I have had conversations with a lot of people who

have asked my opinion as I have moved from bureau to the Department and I think people should look at what Homeland has done

in the past year, not just on the mission side, I think those are well

documented but I think we should look at what we have done on

what I will call the mission support side in our office. We have in

place now and are utilizing a very robust investment review process, yes, modeled after DOD. We have done our audit, we are making progress. I take very seriously dollars that are misspent or anything that comes into my purview but we need some patience in

terms of what we are trying to do.

We want to put in our SOPs but we want people to remember

at the same time we have very well run, well constructed bureaus

within our department. We are not starting from scratch so we do

ask for patience. We have almost 300 GAO audits going, we have

several hundred issues with the IG now. We are testifying a lot,

we have reports to Congress and we should do all this but we are

working very hard and have the staff to make great progress this

year.

Mr. TOWNS. I grant you it is a huge task, there is no question

about it. We all agree. Yet sometimes I wonder if you really have

the necessary tools to be able to do what we are asking. I wonder

about that.

Mr. Ervin, your testimony mentions the creation of a Grants

Management Council intended to provide advice on issues specifically related to the Departments grants. Can you characterize for

us the efforts that will be made through the Council to improve the

disbursements and stewardship of first responders grants or the

emergency terrorism preparedness and the award process?

Mr. ERVIN. With regard to the Grants Management Council, the

Department is to be commended for establishing the Council. As we

understand, the first meeting of the Council took place last month

in February. We attended that meeting. We are a part of that process as an observer to give our input and recommendations for the

Department to accept or reject as it sees fit. The concept of it is

a good one and that is to provide some department level oversight

over the grants award process to promote efficiency and integrity

43

and economy, and also to develop some metrics by which, as I said

in my prepared testimony, a determination can be made as to how

the money that is being spent is used and whether the country is

more prepared, the recipients are more prepared as a result of

those expenditures. That in a nutshell is the concept behind the

Council and that is a good concept. We will continue to participate

in that process and oversee it.

We ultimately hope there will also be a grants management system, a financial system, that will support the Council and support

the grant process. There are a number of things that such a system

should have as a part of it, namely complete and accurate funds

control and several other things I could elaborate on.

With regard to the State and local grants which you also asked

about, I should tell you that we have completed an audit of this

very newsworthy issue of how well the Department has done in

getting these first responder grants out to States and localities.

That draft report is with the Department for review. Our practice

is to give the Department 30 days for comment. In this instance

because it is such a topic of interest to the Congress and the American people, we are hope we will receive the Department’s comments sooner than that but at the latest we expect to issue that

report in April.

I can tell you that generally the audit finds a good story for the

Department. The Department has done, generally speaking, a good

job of getting the money out to the States and localities. We find

largely the hangup is at the State and local level. The States, in

certain instances, have not disbursed the money quickly, sometimes for good reasons because the States want to ensure that

there is a procedure in place to justify the expenditure of the

money at the local level and to make sure not every locality in a

given State gets the same amount of money or is given an amount

of money for the same purposes. They are rather complex procedures obtaining between the States and localities in certain instances, so there are a number of reasons for that, but on the

whole, the Department has done a good job of getting the money

out.

I would be happy to give you some specifics on that if you have

one more moment.

Mr. TOWNS. Mr. Chairman.

Mr. PLATTS. Sure.

Mr. ERVIN. We have a breakout of what we are finding there. We

looked at these States in particular: California, Texas, New York,

Florida, Illinois, Pennsylvania, Ohio, Michigan, New Jersey, Georgia and Massachusetts. As of November 2003, Pennsylvania had

drawn down relatively little of the awarded funds but it obligated

almost all of the funds. Ohio had drawn down almost half but had

obligated almost all. New York, your State, had drawn down almost nothing but obligated less than half. There are different stories with regard to the various States but again, the Department

has done a pretty good of getting the money out.

Mr. TOWNS. Can I get a copy of that?

Mr. ERVIN. Yes, I would be happy to give you a copy of what I

just gave you. With regard to the draft report itself, as I say, it is

with the Department for comment.

44

Mr. TOWNS. Actually, just that part there.

Mr. ERVIN. Absolutely.

Mr. TOWNS. Because you mentioned New York.

Mr. PLATTS. And Pennsylvania. Probably not by chance.

Did you have others?

Mr. TOWNS. No.

Mr. PLATTS. We are estimating the first vote in about 15 minutes

which will give us about 30 more minutes. We will see where we

are, if we can get through and not have you wait, but time will tell

here.

Mr. Maner, I want to followup on the staffing. You talked about

your confidence that the Department has the personnel and expertise. I wanted to make that more specific with respect to your office. Does the CFO Office have the staffing numbers and expertise

that you need to be able to truly make an informed assessment of

what you are provided by all the component entities when you are

compiling and forwarding it? It may exist elsewhere in the Department but do you have what you need to do what you are charged

with?

Mr. MANER. I do have what I need at present to do what I am

charged with. I think as we evolve, we will probably need to grow

in the Office of the CFO. I feel comfortable about our staffing right

now. We are just starting to get to our authorized level and I think

we have done some pretty good things with that number of people.

Someone in my position always has a greater vision for where

you want to take financial management. I know you asked me not

to focus on that but I will use resources in the components to help

us get there. In DHS, you can’t sit in the ivory tower, so we have

been very good at using what we call details, some short term,

some long term, on our eMerge2 project which is a huge not only

systems project but it is going to be our process. So it is not only

developing our process but our system. We might have 200 or so

people over there. That is a mix of contractors, detailees and fulltime staff. I like that blend. I think you get a lot from that blend.

Your specific question was about my staffing and I feel decent

about where it is right this very minute.

Mr. PLATTS. So currently you are not requesting any additional

staff? You don’t have any pending requests for additional staff?

Mr. MANER. I don’t at this moment.

Mr. PLATTS. I appreciate the economy of scale using resources

that are maybe being under utilized in a component. My concern

is ultimately your office is responsible not just to compile but to attest to the accuracy of what is going to be audited. The importance

of your people responding to you, especially since the component

CFOs don’t answer to you, are not hired and fired by you, that

their independence is more at issue because they answer to somebody else. I appreciate that you are looking at that. In a similar

way the IG is independent within your department, you are independent to attesting to the accuracy of the material the component

entities are submitting to you.

Turning to the issue of internal controls, reading from a statement is what I understand is referred to as the Green Book, the

GAO Standards for Internal Controls, ‘‘A good internal control environment requires that the agency’s organizational structure

45

clearly define key areas of authority and responsibility and establish appropriate lines of reporting. The environment is also affected

by the manner in which the agency delegates authority and responsibility throughout the agency.’’ In the words of the Green Book,

having a delineation of authority is something that is critical to

good financial practice, especially regarding internal controls.

Given that all material deficiencies identified relate to internal

controls, it seems we come back to the issue of delineation of hierarchy and authority be the top priority. We have to get that in

place. I start there in reiterating what we already talked about a

bit but the option of that delineation existing today.

Mr. Maner, if you could give us an update on how your department is trying to comply with the Integrity Act requirements relating to attesting to the internal controls of the Department?

Mr. MANER. I would start by recognizing that internal controls,

as you suggest, are what you can look at more than just in audit

to see how you are doing and where your assets are and how well

you are controlling your assets. For us we have to focus first and

foremost on our SOPs for how we are going to learn about and correct our weaknesses, many of which are as you suggest at internal

controls.

We are going to focus on trying to correct all our material weaknesses and reportable conditions this year. How do you do that?

First, you have to obtain the commitment from the places where

these material weaknesses are at the highest level to correct these.

That we have done. I have already had some meetings as recent

as yesterday about some of these problems to learn how the Bureau

has been briefed, are we working on plans to correct these deficiencies and internal controls. For us, we are very focused on a rigorous approach to solving these problems.

Mr. PLATTS. In complying with the Integrity Act which relates to

the accuracy of your internal controls or appropriateness of those

controls, the auditor found 14 reportable conditions relating to internal controls, 7 of which were considered material weaknesses,

yet your Integrity Act report didn’t identify any of those. There

seems to be an inconsistency for which I would appreciate your explanation.

Mr. MANER. Our report as I understand, as I have read it, was

one of the very first things that I approved, has been signed by the

Secretary and it actually did recognize most of what the auditor

found in terms of our internal controls, if I read it correctly. In

terms of our compliance, I think last year we had a very difficult

situation in doing a mid-year startup, in taking on some of the

challenges we did. That said, we were comfortable in the work my

office did in signing a report that did represent internal controls.

I do want to make the point that as I have read it, I believe

most, maybe two that our auditor found were not in our report.

Mr. PLATTS. In your expressing objection to requiring an audit

opinion on internal controls, you talked about the excessive costs

and staff required. Do you have an estimate of what that cost in

dollars and staffing time would be in saying it would be excessive?

Mr. MANER. I have very limited data, as do a lot of people around

the Government. As best we can tell from working with the IG and

our auditor, it does seem to be about 30 percent above and beyond.

46

That is sort of the average number I have heard above and beyond

the cost of our audit.

Mr. PLATTS. So instead of $10 million, perhaps $13 million?

Mr. MANER. Yes.

Mr. PLATTS. Doesn’t it seem that would be a wise investment?

Mr. Towns gave the example of the TSA contracts and if we were

doing audits of internal controls, we may have more quickly and

better understood those problems before the huge loss of dollars. A

related example, not necessarily dollars paid out to somebody outside the Government but OSHA has reported that the Transportation Security Administration had a 20 percent injury and illness

rate for 2003. I believe that rate is 26 percent for the first quarter

of 2004. The average across the Federal Government is 3.7, 20 percent versus 3.7 for illness and injury of its employees. On lost time,

the Department had 9 percent of the TSA workers actually have

lost time because of being sick or hurt versus a 1.7 percent average

governmentwide. Those numbers tell us that there is a way above

average illness and injury incident at TSA in lost time, way above

average.

In both of those cases, Mr. Towns’ example and the contracts,

lost time at TSA, both would seem to make a pretty strong argument that an audit of internal controls, why do we have that and

how do we fix and would save a lot of dollars as opposed to costing

$3 million. Your thoughts?

Mr. MANER. I don’t mean to imply and hope my statement didn’t

imply that an audit of internal controls is a bad use of dollars. I

don’t mean to imply that. Anyone from the private sector or public

sector knows it is a very useful tool in managing your agency and

knowing your weaknesses. I would never want the record to reflect

that.

That said, there is a lot of work and talk going on in the Government right now about the subject of mandating audits on internal

controls, there are folks at OMB studying this issue, doing cost

benefits that I am learning about. I learn something new about

that each week.

I am saying to have the timing right of doing this audit on internal controls, I read once that the Social Security Administration

does this and this was their cost and I just caution people that is

one agency with one set of internal controls and we are not one set

of internal controls, we are multiple, perhaps seven or eight.

Yes, we need to do this. It is a question of time. Homeland is not

currently in its final structure. The fans are still moving out of

TSA into ICE, CVP and ICE have not fully completed their restructuring. I think there is a time and place for this audit. That is all

I wanted to reflect, that now didn’t seem to be the time for that.

Mr. PLATTS. Paraphrasing, you think an audit of your internal

controls will be a good and worthy investment but it is a question

of when, not if?

Mr. MANER. I would love to have some data from an independent

body or someone that tells me the cost benefit of it within the Government. I know of it more from the private sector and I think people are doing that now, so yes, it is a question of time.

Mr. PLATTS. Kind of which came first, the chicken or the egg, because I am not a CPA, my background is not in this area and I

47

have worked hard in the last 13 months to get myself up to speed

to be able to fulfill my responsibilities as Chair but my understanding is having sound internal controls is one of the most important

foundation items in your financial management system. So every

year that we don’t do them, we are farther along in developing a

system that maybe is not based on a good knowledge base because

of the internal controls not being as good as they need to be and

our understanding of those not being what it needs to be.

In my layman’s understanding of internal controls and auditing,

it would be the sooner the better because that allows us to go forward. I would welcome your opinion on the wisdom of auditing internal controls by an outside entity and would you recommend

doing that now versus waiting for another year or more? When I

say now, I mean the 2005 fiscal year with us already being well

into 2004.

Mr. MANER. I can confirm, based on our understanding, that the

issue of cost benefit is in fact being studied in the Government

now. The PCIE, for example, the President’s Council on Integrity

and Efficiency, the Consortium of US Presidentially appointed Inspectors General are studying that issue and likewise the CFO

Council is consulting with a number of agencies like Social Security

Administration which Mr. Maner mentioned and FDIC and GSA,

so we should know soon what that cost benefit analysis is.

Once the cost is determined, then we will have that data. Clearly

during the course of the financial statement audit obviously certain

material weaknesses were unearthed. The question is what additional ones might be unearthed and at what additional cost. We

will have that information soon.

At a minimum, I think it is fair to say that having an opinion

at the appropriate time, and I think sooner rather than later, on

internal controls and also with regard to this management assertion, I think that could be helpful if it does nothing other than

focus management’s attention on internal controls, on reviewing

them, on evaluating them, on assessing what the Department is

doing with regard to that and indeed, as I said, during the course

of that process still more internal control weaknesses might be unearthed.

Mr. PLATTS. I am one who certainly believes in holding ourselves

to the same standards we are requiring of the private sector. In

Sarbanes-Oxley, we said to the private companies, you have to do

audits of internal controls and they are working through that to

meet whatever the challenges are in making that happen. It seems

somewhat hypocritical if we are saying to the private sector, you

need to do it but we are resisting it. Making an informed decision

I think is wise and may be that 30 percent will be way off. Maybe

it is 500 percent and it gets more questionable.

In your department specifically, the examples we are seeing with

the TSA contracts with the lost time, there is a lot of money that

relates to the internal control issue that seems could likely be

saved and diminish those losses if we are more informed with our

internal control process.

Mr. Ervin mentioned the CFO Council. Do you participate in the

CFO Council?

Mr. MANER. I do, yes.

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Mr. PLATTS. I am glad to hear that. I wasn’t sure. That being

statutorily created by the CFO Act, I am glad to know that you are

an active participant.

Mr. MANER. In fact, it has come into play very quickly in my tenure in that they have done under Ms. Springer’s guidance a lot recently on the early close, helping to educate, using people who have

done it in the past to help educate those of us who have not.

Mr. PLATTS. For the November 15th deadline?

Mr. MANER. Exactly. It has been very helpful.

Mr. PLATTS. Finally on the internal controls, it seems in complying with the Integrity Act, you should be a long way toward having

your internal controls in place for a good audit. As you are looking

at that cost benefit, it seems that is something you want to weigh

by what you are required to do under that act, you are a long way

there. I hope that is being factored into that assessment of cost

benefit.

Mr. MANER. I agree with you.

Mr. PLATTS. Mr. Towns.

Mr. TOWNS. One question. I can’t leave without asking this. I feel

that excluding the CFO of a department with so many operational

components really would be short-sighted on our part if we did. If

all the other CFOs in the executive branch are confirmed, can you

explain or convince me why you shouldn’t be?

Mr. MANER. I believe that confirmation and some of the other

items are very important processes within government. I just don’t

want you, the Congress or the American people to think that we

need that legislation to make us uphold to the portions of the CFO

Act that are very important or to consider financial management

as an important and critical piece of running a department.

Whether or not Senate confirmation is a good or a bad thing, I

won’t debate. It is certainly a lengthy process.

Mr. TOWNS. I agree with that.

Mr. MANER. We certainly just want to make sure that someone

like myself or someone who follows me is at work and not waiting

for confirmation which in Homeland has taken some time. I would

leave it at that. I don’t think anything more needs to be said but

I just don’t want people to think that would lead to us caring more,

paying more attention to financial management. It is one of the

driving goals of the Department to excel in this arena already.

Mr. TOWNS. I think the chairman said it well already, it is not

really about you, it is in terms of the future. I served in the Congress with Secretary Ridge and have great respect for him. I think

he is a very capable person. I think the issue here is that putting

a structure in place that we know in moving forward would be

there to do the kind of things that need to be done. That is my concern. I say it without reservation because I feel pretty strongly

about it and knowing the Secretary as I do, him and I played basketball together, so we know each other, and I think he is a very

competent and capable person. It is nothing to do with any of that

or you. I just think it is important to put this in place so years and

years to come, we will know it is working and working properly.

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

Mr. PLATTS. Thank you.

49

Given his size, I assume the Secretary was a good inside player.

[Laughter.]

I am a guy who stays out on the perimeter and tries to shoot

over the big guys.

Mr. Maner, Mr. Towns gave a good summary. It is not about you

or the Secretary but about the process. Unfortunately, history told

Congress that when left to their own decisions, previous departments and agency administrators didn’t prioritize financial management as high as needed and that is why the Integrity Act, that

is why the CFO Act and the Management Improvement Act were

all adopted.

I appreciate your ability to be with us today and your sitting

here to testify and say you want to stand by and make a commitment on your successors or 5 years from now, their successors efforts, whoever it may be. That is what it is really about. It is about

institutionalizing good management practices, having a commitment from the individual that the process requires good management as opposed to the people requiring it as well. We want both.

The benefit I think is to have both.

A specific question on one of the component entities is INS,

BCIS, CIS, I am not sure, there are a number of acronyms, but one

of the serious material weaknesses inherited regarded INS and

their processing applications and recording revenue and the fact

they had to shut down for 2 weeks at the end of the previous fiscal

year mainly to count where they were. The 2003 audit listed this

as a reportable condition. If both of you could address where you

believe we are on that specific aspect of the audit report?

Mr. ERVIN. Our recommendation, Mr. Chairman, has been so as

to avoid this for 2004, that CIS undertake to do what is called cycle

counts which as I am sure you know is simply a process of having

various field locations do the process of comparing the applications

they have in process on their system and the actual number of applications, do that for a few field locations during the course of the

year and see if there are discrepancies. If there are discrepancies

early on, then work out procedures to resolve those discrepancies

as opposed to as you say waiting until the end when the heavy

hand of the financial statement audit is upon us to shut down the

entire system.

We understand that the Department is considering cycle counts.

It may be that cycle counts are underway. If they are not underway, we urge that they get underway because we think that is a

very good system that could be put in place now, at least to lessen

the likelihood that a year of shut down would have to occur again.

Mr. PLATTS. Would an analogy be with the quarterly financial reports, trying throughout the year to stay ahead of the process instead of at the end?

Mr. ERVIN. Precisely because the longer there are these discrepancies between the count and the inventory and the actual physical

applications, the bigger the problem and the harder it is to resolve

at the end, needless to say.

Mr. PLATTS. Mr. Maner, your view on where you are and how

you are trying to address that reportable condition?

Mr. MANER. I have not had my meeting with CIS to know specifically about the corrective action planned that is in place. As I unVerDate 11-MAY-2000 12:07 Aug 10, 2004 Jkt 000000 PO 00000 Frm 00053 Fmt 6633 Sfmt 6633 D:\DOCS\95197.TXT HGOVREF1 PsN: HGOVREF1
50

derstand from briefings with my staff, they have seen some obvious

improvement in the situation, largely due to systems improvements. As it was told to me, I think they have quite a ways to go,

so I would have to get back to you on that.

Mr. PLATTS. If you could followup and give us that assessment.

I raise that specifically because at my office in the district we process a lot of INS work and one of the challenges we find is their inability to manage the volume they are dealing with. It really has

kind of a snowball effect because they are getting further behind

on processing the initial application, then having to issue interim

work authorizations and things related that are temporary which

then takes more staff time and gets worse and worse. It is something we are looking at which maybe relates more to the government efficiency side of our subcommittee more than the financial

management but it certainly is something that is going to impact

the financial management because if you have to again shut down

for 2 weeks, that is having a financial impact as well as an efficiency impact. Your taking a look and followup would be great.

As I read your testimony, I made all sorts of notes and I just

want to followup with you. I think through the questions we

touched on pretty much everything I had. It is probably good timing with the bells going off and the votes. I am glad that worked

out because I always feel bad if we hold you and your staffs here

while we are voting and take up more of your day.

I would conclude with my sincere thanks to both of you for your

participation here today and your testimony and especially for the

work you are doing day in and day out, you and your staffs.

Mr. Maner, some of my questions are maybe more pointed at

where you are and why aren’t you doing this, it is a year gone now,

a year for the Department, 60 days for you but as the chairman

and given the oversight responsibility the committee has, I feel

obliged to pursue the issues that are raised and to stay with them

as we will. I do appreciate the effort and the good faith effort you

are making in a challenging environment.

I hope that within the Department you will give consideration to

and advocate for the administration better embracing what we are

trying to do with the legislation which to me your good actions

make the case of why we want to make it permanent. You will

work with us as partners in achieving the ultimate goal of good financial management and good efficiency in the operation of the Department as we go forward.

I thank you for your efforts and your testimony. We will keep the

record open for 2 weeks for some of the followup materials we

asked for and appreciate your participation as well as all in the audience today being here.

This hearing stands adjourned.

[Whereupon, at 3:30 p.m., the subcommittee was adjourned, to

reconvene at the call of the Chair.]

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