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[House Report 106-802]
[From the U.S. Government Publishing Office]

                                                 Union Calendar No. 463
106th Congress, 2d Session - - - - - - - - - - - - House Report 106-802
_______________________________________________________________________ 

 MAKING THE FEDERAL GOVERNMENT ACCOUNTABLE: ENFORCING THE MANDATE FOR 
                    EFFECTIVE FINANCIAL MANAGEMENT

                               __________

                              FIFTH REPORT

                                 by the

                     COMMITTEE ON GOVERNMENT REFORM

                             together with

                             MINORITY VIEWS

                                     

                                     

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

 July 27, 2000.--Committed to the Committee of the Whole House on the 
              State of the Union and ordered to be printed

                               __________

                    U.S. GOVERNMENT PRINTING OFFICE
65-301 CC                  WASHINGTON : 2000

                     COMMITTEE ON GOVERNMENT REFORM

                     DAN BURTON, Indiana, Chairman
BENJAMIN A. GILMAN, New York         HENRY A. WAXMAN, California
CONSTANCE A. MORELLA, Maryland       TOM LANTOS, California
CHRISTOPHER SHAYS, Connecticut       ROBERT E. WISE, Jr., West Virginia
ILEANA ROS-LEHTINEN, Florida         MAJOR R. OWENS, New York
JOHN M. McHUGH, New York             EDOLPHUS TOWNS, New York
STEPHEN HORN, California             PAUL E. KANJORSKI, Pennsylvania
JOHN L. MICA, Florida                PATSY T. MINK, Hawaii
THOMAS M. DAVIS III, Virginia        CAROLYN B. MALONEY, New York
DAVID M. McINTOSH, Indiana           ELEANOR HOLMES NORTON, District of 
MARK E. SOUDER, Indiana                  Columbia
JOE SCARBOROUGH, Florida             CHAKA FATTAH, Pennsylvania
STEVEN C. LaTOURETTE, Ohio           ELIJAH E. CUMMINGS, Maryland
MARSHALL ``MARK'' SANFORD, South     DENNIS J. KUCINICH, Ohio
    Carolina                         ROD R. BLAGOJEVICH, Illinois
BOB BARR, Georgia                    DANNY K. DAVIS, Illinois
DAN MILLER, Florida                  JOHN F. TIERNEY, Massachusetts
ASA HUTCHINSON, Arkansas             JIM TURNER, Texas
LEE TERRY, Nebraska                  THOMAS H. ALLEN, Maine
JUDY BIGGERT, Illinois               HAROLD E. FORD, Jr., Tennessee
GREG WALDEN, Oregon                  JANICE D. SCHAKOWSKY, Illinois
DOUG OSE, California                             ------
PAUL RYAN, Wisconsin                 BERNARD SANDERS, Vermont 
HELEN CHENOWETH-HAGE, Idaho              (Independent)
DAVID VITTER, Louisiana

                      Kevin Binger, Staff Director
                 Daniel R. Moll, Deputy Staff Director
           David A. Kass, Deputy Counsel and Parliamentarian
                  Robert A. Briggs, Deputy Chief Clerk
                 Phil Schiliro, Minority Staff Director

   Subcommittee on Government Management, Information, and Technology

                   STEPHEN HORN, California, Chairman
JUDY BIGGERT, Illinois               JIM TURNER, Texas
THOMAS M. DAVIS III, Virginia        PAUL E. KANJORSKI, Pennsylvania
GREG WALDEN, Oregon                  MAJOR R. OWENS, New York
DOUG OSE, California                 PATSY T. MINK, Hawaii
PAUL RYAN, Wisconsin                 CAROLYN B. MALONEY, New York

                               Ex Officio

DAN BURTON, Indiana                  HENRY A. WAXMAN, California
          J. Russell George, Staff Director and Chief Counsel
   Bonnie Heald, Director of Communications/Professional Staff Member
             Louise DiBenedetto, Professional Staff Member
                           Bryan Sisk, Clerk
                    Trey Henderson, Minority Counsel
?

                         LETTER OF TRANSMITTAL

                                  House of Representatives,
                                     Washington, DC, July 27, 2000.
Hon. J. Dennis Hastert,
Speaker of the House of Representatives,
Washington, DC.
    Dear Mr. Speaker: By direction of the Committee on 
Government Reform, I submit herewith the committee's fifth 
report to the 106th Congress. The committee's report is based 
on a study conducted by its Subcommittee on Government 
Management, Information, and Technology.
                                                Dan Burton,
                                                          Chairman.

                                 (iii)

                                     
?

                         C O N T E N T S

_________________________________________________________________
                                                                   Page
  I. Summary of oversight findings and recommendations................1
        A. Introduction..........................................     1
        B. Findings..............................................     3
              1. Agencies continue to miss statutory reporting        3
                  deadline for audited financial statements.
              2. Progress is being made, but obtaining ``clean''      3
                  audit opinions is not the end game.
              3. Material deficiencies in Federal Government's        4
                  financial information continue.
              4. Inconsistent reporting of certain Social             4
                  Security and Medicare (Part A) projections.
              5. Material Control Weaknesses Continue to Exist...     5
              6. Noncompliance with laws and regulations continue     5
                  to exist.
        C. Recommendations.......................................     6
              1. Continuation of regular congressional and            6
                  Presidential oversight.
              2. Require top management attention to agencies'        6
                  financial management systems remediation plans.
              3. Provide incentives for implementing effective        7
                  financial management.
              4. Ensuring that the Federal Government's financial     7
                  report contains current information related to 
                  Social Security and Medicare (Part A) trust 
                  funds.
              5. Strengthen the ability of Inspectors General to      7
                  carry out their financial management oversight 
                  responsibilities.
              6. Strengthen the President's role as Chief             8
                  Executive Officer of the executive branch by 
                  establishing an Office of Management.
 II. Report on the committee's oversight review.......................8
        A. Background............................................     8
              1. The need for effective Federal financial             9
                  management.
              2. Federal financial management legislation........     9
              3. The importance of effective internal control....    10
        B. Results of the fiscal year 1999 governmentwide            11
            financial statements audit and related agency audits.
              1. Oversight hearings held by the subcommittee.....    11
              2. Federal department and agency financial             18
                  management grades.
III. Conclusions.....................................................21

                               APPENDIXES

Appendix A.--Major Federal financial management legislation......    23
Appendix B.--Federal accounting concepts and standards...........    28
Appendix C.--Basis for agency financial management grades........    29
Appendix D.--Public Law 104-208, Title VIII Federal Financial        31
  Management Improvement Act.
Appendix E.--List of witnesses...................................    37

                                 VIEWS

Minority views of Hon. Henry A. Waxman, Hon. Jim Turner, Hon. Tom    40
  Lantos, Hon. Major R. Owens, Hon. Edolphus Towns, Hon. Paul E. 
  Kanjorski, Hon. Patsy T. Mink, Hon. Carolyn B. Maloney, Hon. 
  Eleanor Holmes Norton, Hon. Elijah E. Cummings, Hon. Dennis J. 
  Kucinich, Hon. Rod R. Blagojevich, Hon. Danny K. Davis, Hon. 
  John F. Tierney, Hon. Thomas H. Allen, Hon. Harold E. Ford, 
  Jr., and Hon. Janice D. Schakowsky.

                                  (v)

                             ABBREVIATIONS

                               __________

CFO                                 Chief Financial Officer
DOD                                 Department of Defense
FASAB                               Federal Accounting Standards
                                     Advisory Board
FFMIA                               Federal Financial Management
                                     Improvement Act of 1996
FMFIA                               Federal Managers' Financial
                                     Integrity Act of 1982
GAGAS                               Generally Accepted Government
                                     Auditing Standards
GAO                                 General Accounting Office
GMRA                                Government Management Reform Act of
                                     1994
GPRA                                Government Performance and Results
                                     Act of 1993
HCFA                                Health Care Financing Administration
HHS                                 Department of Health and Human
                                     Services
HUD                                 Department of Housing and Urban
                                     Development
IG                                  Inspector General
IRS                                 Internal Revenue Service
OMB                                 Office of Management and Budget
USDA                                Department of Agriculture

                                 (vii)

  
                                                 Union Calendar No. 463
106th Congress                                                   Report
                        HOUSE OF REPRESENTATIVES
 2d Session                                                     106-802

======================================================================

 
 MAKING THE FEDERAL GOVERNMENT ACCOUNTABLE: ENFORCING THE MANDATE FOR 
                     EFFECTIVE FINANCIAL MANAGEMENT

                                _______
                                

 July 27, 2000.--Committed to the Committee of the Whole House on the 
              State of the Union and ordered to be printed

                                _______
                                

   Mr. Burton, from the Committee on Government Reform submitted the 
                               following

                              FIFTH REPORT

    On June 29, 2000, the Committee on Government Reform 
approved and adopted a report entitled, ``Making the Federal 
Government Accountable: Enforcing the Mandate for Effective 
Financial Management.'' The chairman was directed to transmit a 
copy to the Speaker of the House.

          I. Summary of Oversight Findings and Recommendations

                            A. Introduction

    The Committee on Government Reform (the ``committee'') has 
primary legislative and oversight jurisdiction with respect to 
``Government management and accounting measures generally,'' as 
well as ``overall economy, efficiency, and management of 
Government operations and activities, including Federal 
procurement.'' \1\ The committee also has the responsibility:
---------------------------------------------------------------------------
    \1\ Clause 1(h) (4) and (6) rule X of the Rules of the House of 
Repesentatives, 106th Congress.

        [T]o determine whether laws and programs addressing 
        subjects within the jurisdiction of [the] committee are 
        being implemented and carried out in accordance with 
        the intent of Congress and whether they should be 
        continued, curtailed, or eliminated, each standing 
        committee (other than the Committee on Appropriations) 
        shall review and study on a continuing basis the 
        application, administration, execution, and 
        effectiveness of laws and programs addressing subjects 
        within its jurisdiction. [The committee shall review 
        and study] any conditions or circumstances that may 
        indicate the necessity or desirability of enacting new 
        or additional legislation addressing subjects within 
        its jurisdiction.\2\
---------------------------------------------------------------------------
    \2\ Ibid., Clause 2(b)(1) (A) and (C).

Pursuant to this authority, the Committee on Government 
Reform's Subcommittee on Government Management, Information, 
and Technology (the ``subcommittee'') convened eight oversight 
hearings to explore:
         the implementation of laws related to Federal 
        financial management in executive departments and 
        agencies and, in particular, the third year of full 
        implementation of the Chief Financial Officers Act of 
        1990 [CFO Act], as expanded by the Government 
        Management Reform Act of 1994 [GMRA] and as amended by 
        the Federal Financial Management Improvement Act of 
        1996 [FFMIA];
         the extent to which Federal executive 
        departments and agencies have successfully complied 
        with the requirements of these laws;
         the need for congressional action to improve 
        financial management in the Federal Government; and
         options for congressional actions that would 
        effectively bring about such improvement.
    Billions of taxpayer-provided dollars are being lost each 
year to fraud, waste, misuse, and mismanagement in hundreds of 
programs within the Federal Government. Audits continue to show 
that most agencies have significant weaknesses in controls and 
systems. As a result of these weaknesses, Federal 
decisionmakers do not have reliable and timely performance and 
financial information to ensure adequate accountability, manage 
for results, and make timely and well-informed decisions.
    In the late 1980's, Congress recognized that one of the 
root causes of this loss was the Federal Government's disarray 
of financial management policies, systems, and practices and 
lack of leadership. Financial systems and practices were 
obsolete and ineffective. They failed to provide complete, 
consistent, reliable, and timely information to congressional 
decisionmakers or agency management.
    In response, Congress passed a series of laws designed to 
improve financial management practices and to ensure that tax 
dollars would be spent for the purposes that Congress intended. 
These laws included the Chief Financial Officers Act of 1990, 
Public Law 101-576, the Government Management Reform Act of 
1994, Public Law 103-356, and the Federal Financial Management 
Improvement Act of 1996, Public Law 104-208. Each executive 
agency covered by the Chief Financial Officers Act--or 
specified by the Office of Management and Budget [OMB]--is 
required to prepare and have audited a financial statement 
covering all accounts and associated activities of each office, 
bureau, and activity within the agency.\3\ Furthermore, 
consolidated governmentwide financial statements must be 
prepared and audited annually. In addition, Federal agencies 
are required to conform to promulgated Federal Government 
accounting and systems standards, and to use the Federal 
standard general ledger.
---------------------------------------------------------------------------
    \3\ The 24 Federal agencies covered by the requirements of the CFO 
Act are the following 14 Cabinet Departments: Agriculture, Commerce, 
Defense, Education, Energy, Health and Human Services, Housing and 
Urban Development, Interior, Justice, Labor, State, Transportation, 
Treasury, and Veterans Affairs; and the following 10 independent 
agencies: Environmental Protection, National Aeronautics and Space, 
International Development, Federal Emergency Management, General 
Services, National Science, Nuclear Regulatory Commission, Personnel 
Management, Small Business, and Social Security.
---------------------------------------------------------------------------
    Implementation of the financial management reforms 
established by these laws is still underway. It is imperative 
that these reforms are successfully achieved. Agencies must 
produce reliable, useful and timely financial information. This 
information is essential for financial management purposes as 
well as measuring program performance under the Government 
Performance and Results Act of 1993 [GPRA], Public Law 103-62. 
Thus at a minimum, strong congressional oversight is needed to 
achieve the primary goal of all these laws: a Federal 
Government that is accountable to the American taxpayers.

                              B. FINDINGS

    The fiscal year 1999 annual audit reports for the 24 
Federal departments and agencies (``agencies''), required under 
the CFO Act as expanded by GMRA, were due to be filed with the 
Office of Management and Budget on March 1, 2000. On March 31, 
2000, the U.S. General Accounting Office [GAO] issued its third 
annual audit report on the financial statements of the Federal 
Government. Based on the investigation and oversight hearings 
conducted by the subcommittee, and the results of agency and 
governmentwide fiscal year 1999 financial statements audits, 
the committee finds as follows:
1. Agencies continue to miss the statutory reporting deadline for 
        audited financial statements
    The Government Management Reform Act of 1994 required that 
the head of each of the 24 CFO Act agencies submit audited 
financial statements to the Director of the OMB by March 1st of 
each year. The OMB reported that the timeliness of financial 
reports improved this year, increasing from 6 agencies that met 
the statutory deadline in 1997 to 19 agencies in 2000. Of the 
five agencies that failed to meet this deadline, the Department 
of the Interior failed to file its report until May--nearly 8 
months after the end of the fiscal year. The Department of 
State had not produced its audited financial statements by the 
time of this report's publication. Failure to meet a statutory 
deadline is of serious concern to the committee. The Congress 
mandates deadlines with the intent that such deadlines will be 
met.
2. Progress is being made, but obtaining ``clean'' audit opinions is 
        not the ``end game''
    The OMB reported that the quality of agency financial 
statements has improved and that agencies continue to make 
steady progress in this area. For fiscal year 1996, only 6, or 
25 percent, of the agencies received unqualified or ``clean'' 
audit opinions on their fiscal year 1996 financial statements 
compared to 14, or 58 percent, for fiscal year 1999, according 
to the OMB. The GAO also noted that the number of agencies 
receiving ``clean'' audit opinions has steadily increased.
    ``Clean'' audit opinions are an important milestone. 
However, the Comptroller General again emphasized that 
obtaining a ``clean'' audit opinion is not the ``end game.'' 
Such an opinion does not guarantee that agencies have systems 
in place that produce reliable, useful, and timely financial 
information to support ongoing management and accountability. 
The Comptroller General further noted that some agencies had 
obtained ``clean'' audit opinions only through ``heroic 
efforts,'' which included using consultants, statistical 
sampling, and other ad hoc procedures to obtain reliable 
numbers for one particular date--the end of the fiscal year.
    Also emphasizing the need for greater focus on improving 
day-to-day financial management practices, the Inspector 
General for the Department of Housing and Urban Development 
stated, ``Virtually any entity, given enough time and 
resources, can get an unqualified opinion on its financial 
statements.''
3. Material deficiencies in the Federal Government's financial 
        information continue
    Similar to the previous 2 years, the GAO was unable to 
render an opinion on the reliability of the fiscal year 1999 
financial statements of the Federal Government. The GAO report 
\4\ identified the broad array of financial management problems 
faced by the Federal Government, which impair its ability to 
adequately safeguard assets, properly record transactions, and 
comply with selected provisions of laws and regulations related 
to financial reporting. According to the GAO, these problems 
affect the reliability of the financial statements of the U.S. 
Government as well as the related underlying financial 
information. More important, GAO noted that these problems ``. 
. . also affect the Government's ability to accurately measure 
the full cost and financial performance of certain programs and 
effectively manage related operations.''
---------------------------------------------------------------------------
    \4\ ``Financial Audit: 1999 Financial Report of the United States 
Government,'' GAO AIMD-00-131, Mar. 31, 2000.
---------------------------------------------------------------------------
4. Inconsistent reporting of certain Social Security and Medicare (Part 
        A) projections
    For the second year, the Comptroller General reported that 
certain information concerning the Social Security and Medicare 
(Part A) trust funds reported in the Federal Government's 
financial report was immediately outdated and, therefore, 
inconsistent with the information reported by the Social 
Security and Medicare Boards of Trustees. This information 
included projected contributions and expenditures, dates when 
expenditures were expected to exceed contributions, and dates 
when such funds were expected to be exhausted.
    The Comptroller General stated that the Social Security and 
Medicare Boards of Trustees issue their annual report on the 
status of the Social Security and Medicare Programs, which 
includes updated information on these Federal programs, one day 
after the Government issues its financial report. As a result, 
the two documents, issued within one day of each other, have 
reported significantly different projections for the last 2 
years, and may cause confusion for Congress and the public.
    The Comptroller General stated that given the importance of 
this information, ``steps should be taken in future years to 
assure that the Government's financial report contains up-to-
date information as of no earlier than the end of the most 
recent fiscal year in these important Federal programs.'' The 
Comptroller General noted that while the Social Security and 
Medicare Boards of Trustees have a statutory responsibility to 
report by April 1st, theoretically they could provide this 
information earlier so that it could be included in the 
Government's financial report. Further, he suggested that 
serious consideration should be given to auditing this 
information.
5. Material control weaknesses continue to exist
    Auditors continued to identify material weaknesses in 
internal controls throughout the CFO Act agencies. As of the 
date of publication, only 5 of the 23 CFO Act agencies that 
filed audit reports for fiscal year 1999 were found to have no 
material weaknesses.\5\ Material weaknesses contribute to an 
agency's inability to ensure that (1) transactions are properly 
recorded, processed, and summarized to permit the preparation 
of financial statements in accordance with generally accepted 
accounting principles; (2) assets are safeguarded against loss 
from unauthorized acquisition, use, or disposition; and (3) 
transactions are executed in accordance with the laws governing 
the use of budget authority and with other laws and regulations 
that could have a direct and material affect on the financial 
statements.
---------------------------------------------------------------------------
    \5\ A material weakness, as defined by the American Institute of 
Certified Public Accountants in its Statements of Auditing Standards 
and in the Comptroller General's Government Auditing Standards, is a 
condition in which the design or operation of one or more of the 
internal control components does not reduce to a relatively low level 
the risk that errors or irregularities in amounts that would be 
material to the financial statements may occur and not be detected 
promptly by employees in the normal course of performing their duties.
---------------------------------------------------------------------------
    In addition, the GAO noted that deficiencies related to the 
major problems affecting the reliability of the Federal 
Government's financial statements identified above, also 
constitute material weaknesses in internal controls. Other 
related problems reported as a result of inadequate internal 
controls, include the Federal Government's inability to develop 
strategies to reduce billions of dollars in improper payments 
and to efficiently and effectively collect and account for tax 
revenues. Of additional alarm, virtually every agency was 
reported as having computer security weaknesses. As a result, 
the Federal Government's financial and other sensitive 
information is susceptible to inappropriate disclosure, 
destruction, modification, and fraud.
6. Noncompliance with laws and regulations continue to exist
    Noncompliance with selected provisions of laws and 
regulations related to financial reporting continues to be a 
pervasive problem among the 24 CFO Act agencies. Based on the 
fiscal year 1999 audit reports of 23 agencies that had filed 
reports as of publication of this report, only 3 were reported 
as having no instances of material noncompliance. Specifically, 
20 of the agencies were not compliant with the requirements of 
the Federal Financial Management Improvement Act of 1996--a key 
financial management law enacted to ensure that agencies' 
financial management systems produce timely and accurate 
financial information.
    The GAO stated, ``. . . continuing widespread noncompliance 
with FFMIA is indicative of the overall long-standing poor 
condition of agency financial systems.'' And for many agencies, 
``. . . the preparation of financial statements requires 
considerable reliance on ad hoc programming and analysis of 
data produced by inadequate financial systems that are not 
integrated, reconciled, and often require significant 
adjustments.'' \6\
---------------------------------------------------------------------------
    \6\ ``Auditing the Nation's Finances: Fiscal Year 1999 Results 
Continue to Highlight Major Issues Needing Resolution.'' GAO/T-AIMD-00-
137, Mar. 31, 2000.
---------------------------------------------------------------------------

                           C. RECOMMENDATIONS

    Based on the foregoing findings, the committee recommends 
the following:
1. Continuation of regular congressional and Presidential oversight
    Strong oversight is one of Congress's most effective tools 
in the effort to ensure that executive departments and agencies 
implement necessary reforms. To build upon this, Congress needs 
to mandate formal oversight hearings to review the status of 
agencies' progress toward financial accountability, including 
planned actions to resolve related problems.
    Each department and agency should provide a detailed, 
annual status report on its financial management operations. 
When appropriate, each department or agency should be regularly 
reviewed by its relevant oversight, authorization, and 
appropriations subcommittees regarding its progress in 
reforming its financial management systems and processes. These 
hearings should be held annually, semiannually, or quarterly, 
depending on the severity of the financial problems within the 
department or agency. This would assist Congress in effectively 
monitoring agency actions and taking corrective actions as 
necessary.
2. Require top management attention to agencies' financial management 
        systems remediation plans
    The year 2000 computing problem was successful due to 
various factors, including the priority placed on the issue by 
Congress, the administration, and top management at each of the 
agencies. Such attention facilitated ongoing progress and 
monitoring performance. The establishment of governmentwide and 
agency-level plans, with milestones for addressing major 
weaknesses, was a significant factor in achieving success.
    As previously recommended, agency financial management 
systems remediation plans must provide a detailed description 
of planned actions with clear and reasonable milestones, 
including the names of staff members responsible for resolving 
particular issues. To ensure top management attention, the plan 
should be approved by the agency head and relevant agency 
officials, such as the Chief Financial Officer, Chief 
Information Officer, and Inspector General. A draft of the 
approved plan should be sent to the Comptroller General who 
would coordinate the agency's actions and related milestones in 
the remediation effort. These parties must meet regularly to 
monitor the agency's progress in meeting the objectives of the 
plan.
    A draft of the plan should also be available to relevant 
congressional committees. In addition, the congressional 
oversight hearings recommended above should include a 
discussion of the agency's plan and the progress being made 
toward resolving outstanding financial management systems 
issues. This would assist Congress in effectively monitoring 
agency actions and taking corrective actions as necessary.
3. Provide incentives for implementing effective financial management
    It is clear that congressional oversight alone cannot 
effect the necessary change in financial management practices 
at all departments and agencies. The committee again notes that 
incentives are needed to prompt agencies to resolve their 
outstanding financial management problems. If an agency is 
unable or unwilling to effect these crucial changes, Congress 
has the authority to provide incentives for change. These 
incentives include: (1) redirecting a percentage of the 
agency's appropriated program or administrative funding toward 
correcting financial management problems; (2) restricting a 
percentage of the agency's appropriated funds until the 
problems are corrected; or (3) reducing various amounts of 
appropriated funds until the agency has completed its 
correction efforts. Further, reducing appropriated funds should 
be considered for all agencies failing to comply with the March 
1st statutory reporting deadline.
    These actions are intended to encourage an agency to 
resolve its financial management problems expeditiously while 
meeting the March 1st statutory deadline.
4. Ensuring that the Federal Government's financial report contains 
        current information related to Social Security and Medicare 
        (Part A) trust funds
    In light of the importance of future funding projections 
related to Social Security and Medicare (Part A) trust funds 
and the Comptroller General's recommendation that steps be 
taken to ensure that the Government's annual financial report 
contains up-to-date information, the subcommittee should 
request the GAO to conduct a study on the feasibility of the 
Social Security and Medicare Boards of Trustees releasing 
updated projections in a timeframe that will allow them to be 
included in the Government's annual financial report. Such a 
study should consider whether the Social Security and Medicare 
Boards of Trustees' statutory reporting deadline of April 1st 
should be changed to coordinate with the Government's financial 
report. Further, Congress should consider the need for 
requiring that such information be independently verified. If 
determined to be necessary, such a requirement should be 
legislatively mandated.
5. Strengthen the ability of Inspectors General to carry out their 
        financial management oversight responsibilities
    Inspectors General are responsible for conducting audits of 
agency and department programs and operations. Their audit 
function in the executive branch is crucial. Agency audits 
provide information to executive branch managers and Congress 
that is necessary to uncover and resolve problems that impede 
effective financial management. To ensure that Inspectors 
General can provide quality audit services, it is imperative 
that Congress takes steps to ensure that Inspectors General are 
highly qualified and have the necessary resources to oversee 
agency financial management.
    The Office of the Inspector General must ensure that all 
candidates for Inspector General positions are qualified to 
perform financial statement audits or specific segments of 
audits requiring specific expertise. These qualifications 
should be determined through a review by an external party and 
may be incorporated into the peer-review process.
    As the committee suggested last year, when appointments for 
the Inspector General office are being considered, a board, 
which includes representatives of the President's Council on 
Integrity and Efficiency, should review the qualifications of 
the Inspector General candidate before the nomination is 
forwarded to the Senate for confirmation.
6. Strengthen the President's role as Chief Executive Officer of the 
        executive branch by establishing an Office of Management
    Management of the executive branch of the Federal 
Government should be a Presidential priority. Among the 
President's many roles is the responsibility to serve as Chief 
Executive Officer of the Federal Government. Many broad 
objectives--including effectively managing Federal Government 
finances--are intended to make the Federal Government work 
better, but they depend on the commitment of the President and 
his staff in the Executive Office of the President. By 
approaching the Federal Government almost exclusively from a 
budgetary or policy perspective, Presidents limit their 
capacity to reform management within the Federal Government.
    If the financial management function is to be strengthened, 
the President needs management experts. That is also true of 
various other management functions. In the past, the 
Subcommittee on Government Management, Information, and 
Technology has recommended legislation that would form an 
Office of Management, separate and distinct from the Office of 
the Budget. It continues to recommend such an office. This 
office could help the President and his Cabinet to focus on the 
critical management challenges facing the Federal Government.
    Cabinet officers are not always nominated for their 
managerial skills. They need assistance. Congress has provided 
some of that assistance by mandating the roles of Chief 
Financial Officer and Chief Information Officer. However, in a 
number of departments and agencies, these dual roles have been 
assigned to one person. That is not what Congress intended. The 
financial and information management functions are so complex 
that each position requires the full-time attention of a senior 
management official.

             II. Report on the Committee's Oversight Review

                             A. BACKGROUND

        I think it an object of great importance . . . to 
        simplify our system of finance, and bring it within the 
        comprehension of every member of Congress . . . the 
        whole system [has been] involved in an impenetrable 
        fog. There is a point . . . on which I should wish to 
        keep my eye . . . a simplification of the form of 
        accounts . . . so as to bring everything to a single 
        centre[;] we might hope to see the finances of the 
        Union as clear and intelligible as a merchant's books, 
        so that every member of Congress, and every man of any 
        mind in the Union, should be able to comprehend them to 
        investigate abuses, and consequently to control 
        them.\7\ --Thomas Jefferson, April 1, 1802.
---------------------------------------------------------------------------
    \7\ Thomas Jefferson, in a letter to Secretary of the Treasury 
Albert Gallatin, Apr. 1, 1802, The Writings of Thomas Jefferson, edited 
by Andrew A. Lipscomb (Washington, DC, 1905) vol. 10, pps. 306-309.
---------------------------------------------------------------------------
1. The need for effective Federal financial management
    Nearly 200 years ago, President Thomas Jefferson recognized 
the need for effective financial management in the Federal 
Government. President Jefferson's insight on this subject is 
equally relevant today.
    Federal financial management continues in a state of 
disarray. Billions of taxpayers' dollars are being lost each 
year to fraud, waste, abuse, and mismanagement in hundreds of 
Federal programs. Financial systems and practices are obsolete 
and ineffective, and do not provide complete, consistent, 
reliable, and timely information to congressional 
decisionmakers and agency management. The source of these 
losses could be identified and significantly reduced by 
improved financial management practices.
2. Federal financial management legislation
    In response to this problem, Congress passed a series of 
laws designed to ensure that agency management problems would 
be fixed. The Chief Financial Officers Act, as expanded by the 
Government Management Reform Act of 1994 and amended by the 
Federal Financial Management Improvement Act of 1996, 
represents the most comprehensive financial management reform 
legislation in the last 40 years. Other significant legislation 
affecting Federal financial management includes: the Budget and 
Accounting Procedures Act of 1950; the Inspector General Act of 
1978, as amended by the Inspector General Act Amendments of 
1988; the Federal Managers' Financial Integrity Act of 1982; 
the Debt Collection Act of 1982, as amended, and the Debt 
Collection Improvement Act of 1996. The key financial 
management provisions of each of these laws are described in 
detail in Appendix A of this report.
            Audited financial statements
    The Chief Financial Officers Act as amended by the 
Government Management Reform Act, is intended to provide a more 
effective, efficient, and responsive Government. To that end, 
it specifically requires that each executive department and 
agency prepare and have audited a financial statement covering 
all accounts and associated activities of each office, bureau, 
and activity within the agency. These audited statements are to 
be sent to the Director of the OMB no later than March 1st of 
the year following the fiscal year for which the statements are 
prepared. In addition, GMRA also required that a set of 
consolidated governmentwide financial statements be prepared by 
the Secretary of the Treasury in coordination with the Director 
of the OMB. These financial statements of the Federal 
Government are to be audited by the Comptroller General of the 
United States and forwarded to Congress by March 31st of each 
year.
            Federal accounting standards
    The passage of the CFO Act in 1990 and its requirement for 
audited financial statements focused attention on the 
accounting standards to which Federal agencies were to be held. 
The Comptroller General of the United States, along with the 
Director of the Office of Management and Budget and the 
Secretary of the Treasury, agreed to establish an independent 
board that would recommend accounting principles. This board, 
known as the Federal Accounting Standards Advisory Board, was 
established in October 1990 as a deliberative body to consider 
and recommend accounting standards and principles, referred to 
as Statements of Federal Financial Accounting Standards for the 
Federal Government.
    The approved standards, as adopted by the board's 
principals, are then issued by the Comptroller General and the 
Director of OMB as Statements of Federal Financial Accounting 
Standards. These statements comprise the body of standards that 
constitutes generally accepted accounting principles for the 
Federal Government. In October 1999, the American Institute of 
Certified Public Accountants recognized Federal accounting 
standards as a generally accepted basis of accounting. This 
recognition was deemed a major milestone in improving public 
confidence in the reliability and credibility of Federal 
financial information. Appendix B lists the Statements of 
Federal Financial Accounting Standards and the Statements of 
Federal Financial Accounting Concepts issued to date.
    The Director of the Office of Management and Budget is 
responsible for setting the form and content of the financial 
statements against which the auditor must measure an agency's 
financial statements. The guidance provided by the OMB 
incorporates the standards recommended by the Federal 
Accounting Standards Advisory Board.
3. The importance of effective internal control
    Federal financial management legislation--the Federal 
Managers' Financial Integrity and Federal Financial Management 
Improvement Acts, in particular--placed great emphasis on the 
importance of effective internal controls. Their importance 
cannot be overstated, especially in the large, complex 
operating environment of the executive branch of the Federal 
Government. Effective internal controls are the first line of 
defense against fraud, waste, misuse, and mismanagement of 
agency budgets, and help ensure that an entity's mission is 
achieved in the most effective and efficient manner. The 
subject of internal controls generally surfaces--as has been 
the case in subcommittee hearings--after improprieties or 
inefficiencies are found. However, good managers continually 
seek new ways to improve their operations through effective 
internal controls.
    Internal controls can be simply defined as the methods by 
which an organization governs its activities to accomplish its 
mission effectively and efficiently. More specifically, 
internal controls are concerned with stewardship and 
accountability for the resources consumed in the process of 
accomplishing an entity's mission with effective results.
    Internal controls should not be looked upon as separate, 
specialized systems within an agency. Rather, they should be 
recognized as an integral part of each system that management 
uses to regulate and guide its operations. Internal controls 
are synonymous with management controls in that their broad 
objectives cover all aspects of agency operations. Although 
ultimate responsibility for good internal controls rests with 
management, all employees have a role in the effective 
operation of internal controls set by management.
    The committee again stresses that it is important to 
recognize that internal controls can be designed to provide 
reasonable, not absolute, assurance that an organization's 
activities are being accomplished in accordance with its 
objectives. The full cost of fraud, waste, misuse, and 
mismanagement cannot always be known or measured. If improper 
activities are allowed to continue, public confidence is eroded 
in the Government's ability to manage its programs effectively 
or honestly. Such erosion cannot be measured in terms of 
dollars. The trust of the citizenry in its Government is a 
priceless relationship.

B. RESULTS OF THE FISCAL YEAR 1999 GOVERNMENTWIDE FINANCIAL STATEMENTS 
                    AUDIT AND RELATED AGENCY AUDITS

1. Oversight hearings held by the subcommittee
            U.S. Governmentwide audit
    At the subcommittee's hearing on March 31, 2000, the 
Comptroller General of the United States released the results 
of the fiscal year 1999 audit of the financial statements of 
the Federal Government. For the third consecutive year, the 
Comptroller General reported that ``. . . because of serious 
deficiencies in the Government's systems, record-keeping, 
documentation, financial reporting, and controls, amounts 
reported in the U.S. Government's financial statements and 
related notes may not provide a reliable source of information 
for decisionmaking by the Government or the public.'' \8\
---------------------------------------------------------------------------
    \8\ ``Auditing the Nation's Finances: Fiscal Year 1999 Results 
Continue to Highlight Major Issues Needing Resolution,'' GAO/T-AIMD-00-
137, Mar. 31, 2000.
---------------------------------------------------------------------------
    Specifically, the GAO was unable to form an opinion on the 
reliability of the governmentwide financial statements because 
of the Federal Government's inability to:
         properly account for and report on billions of 
        dollars worth of property, equipment, materials, 
        supplies and certain stewardship assets, primarily at 
        the Department of Defense;
         properly estimate the cost of certain major 
        Federal credit programs and related loans receivable, 
        and loan guarantee liabilities, primarily at the 
        Department of Agriculture;
         estimate and reliably report material amounts 
        of environmental and disposal liabilities, and their 
        related costs, primarily at the Department of Defense;
         determine the proper amount of various 
        reported liabilities, including post-retirement health 
        benefits for military employees, and accounts payable 
        and other liabilities for certain agencies;
         accurately report major portions of the net 
        costs of Government operations;
         ensure that all disbursements are properly 
        recorded; and
         properly prepare the Federal Government's 
        financial statements, including balancing statements, 
        accounting for substantial amounts of transactions 
        between governmental entities, properly and 
        consistently compiling the information in the financial 
        statements, and reconciling the results of operations 
        to budget results.
    The Comptroller General further noted that as of March 31, 
2000, 19 of 22 major agencies' financial systems did not comply 
with the requirements of the Federal Financial Management 
Improvement Act of 1996 \9\ and that agency financial systems 
overall are in poor condition and cannot provide reliable 
financial information necessary for managing day-to-day 
Government operations.
---------------------------------------------------------------------------
    \9\ The Department of the Interior and the Department of State had 
not yet issued audited financial statements.
---------------------------------------------------------------------------
    The Office of Management and Budget recognized that 
necessary financial management improvements are difficult and 
require a great effort. That modernizing financial management 
and reporting throughout the Federal Government is a long-term 
process that will take years not months to correct. However, 
the OMB reported that steady progress is being made--that the 
timeliness of financial reports has improved and the number of 
agencies receiving ``clean'' audit opinions has risen. 
Nonetheless, the Comptroller General cautioned that although 
clean audit opinions are essential to providing an annual 
public scorecard, the audits do not guarantee that agencies 
have the financial systems needed to produce reliable financial 
information. Modern financial management systems and good 
controls are essential to reaching the goal of providing 
reliable financial information necessary for managing 
Government operations on a day-to-day basis.
    For the second year, the Comptroller General brought to the 
subcommittee's attention the fact that certain information in 
the Federal Government's financial report concerning the Social 
Security and Medicare (Part A) trust funds is outdated. This 
information includes projected contributions and expenditures, 
dates when expenditures are expected to exceed contributions, 
and dates when such funds are expected to be exhausted.
    The Comptroller General noted that the day after the 
Federal Government's financial report is issued, the Social 
Security and Medicare Boards of Trustees report more current 
information. ``The Government's issuance of dated information 
in this financial report at about the same time that it issues 
more current information may cause confusion to the Congress 
and the public. . . . This can serve to reduce confidence in 
and the credibility of the Government's annual financial 
report.'' The Comptroller General further said, ``I think, 
frankly, it makes Government look foolish.'' Given the 
importance and magnitude of these numbers, he said that serious 
consideration should be given to whether the information 
published by the Boards of Trustees should be audited.
            Internal Revenue Service [IRS]
    The subcommittee held two hearings on the IRS. The first 
hearing on February 29, 2000, focused on the financial 
management challenges facing the IRS. This hearing highlighted 
the need for continued involvement and commitment by IRS senior 
management to ensure that the IRS successfully addresses its 
serious financial management problems.
    The IRS is responsible for collecting taxes, processing tax 
returns, pursuing collection of amounts owed, and enforcing tax 
laws. In fiscal year 1999, the IRS collected $1.9 trillion in 
Federal tax revenues, disbursed $185 billion in tax refunds, 
and reported $21 billion in net taxes owed to the Federal 
Government.
    The IRS prepares financial statements on its custodial 
operations--revenues collected, refunds paid, and related taxes 
receivable and payable--and its administrative activities 
associated with over $8 billion of appropriated funds. During 
the fiscal year 1999 audit, the GAO found that ``the agency 
continues to experience pervasive material weaknesses in the 
design and operation of its automated financial management and 
related operational systems, accounting procedures, 
documentation, record-keeping, and internal controls, including 
computer security controls.'' \10\
---------------------------------------------------------------------------
    \10\ ``Internal Revenue Service: Results of Fiscal Year 1999 
Financial Statement Audit,'' GAO/T-AIMD-00-104, Feb. 29, 2000.
---------------------------------------------------------------------------
    Such problems prevented the IRS from reliably reporting on 
the results of its fiscal year 1999 administrative activities. 
However, for the third consecutive year, the IRS was able to 
reliably report on its financial activity covering the 
collection and refunds of taxes for fiscal year 1999. As in 
previous years, this achievement was accomplished through 
extensive, costly, and time-consuming ad hoc procedures needed 
to overcome pervasive internal control and systems weaknesses. 
Major problems identified during the hearing included 
deficiencies in controls over unpaid tax assessments and tax 
refunds. Such a lack of controls could result in both an 
increased burden on taxpayers and the potential loss of 
billions of dollars in revenue and improper refunds.
    The second hearing held on April 10, 2000, focused on the 
progress and challenges the IRS faces in re-engineering its 
business practices and technology to meet the requirements of 
the IRS Restructuring and Reform Act of 1998. As noted by the 
GAO, the ``IRS has taken important steps over the last year; 
however, some of its most important and difficult work lies 
ahead.'' \11\
---------------------------------------------------------------------------
    \11\ ``IRS Modernization: Business Practice, Performance 
Management, and Information Technology Challenges,'' GAO/T-GGD/AIMD-00-
144, Apr. 10, 2000.
---------------------------------------------------------------------------
    The IRS has been the subject of many studies and much 
criticism. The studies have identified a long list of problems, 
including inadequate technology and the failure of technology 
modernization programs, poor service to taxpayers, and 
violations of taxpayer rights. On July 22, 1998, the IRS 
Restructuring and Reform Act of 1998 was signed into law.\12\
---------------------------------------------------------------------------
    \12\ Public Law 105-206, July 22, 1998.
---------------------------------------------------------------------------
    This law included many provisions to enhance taxpayer 
rights and to deal with specific organizational aspects of the 
IRS. The Commissioner of the IRS noted that as a result of the 
act, ``the IRS continues to plan and implement the most 
significant changes to its organization, technology, and the 
way it serves taxpayers in almost a half-century.'' \13\ 
According to the Commissioner, progress is being made on both 
the agency's short- and long-term goals and mandates set forth 
by the Restructuring and Reform Act. And with Congress's 
continued support, the IRS will be able to make the changes the 
American taxpayers expect and deserve.
---------------------------------------------------------------------------
    \13\ Testimony of Commissioner of Internal Revenue Charles O. 
Rossotti before the House Committee on Government Reform's Subcommittee 
on Government Management, Information, and Technology hearing on ``IRS 
Filing Season, IRS Restructuring Act and Budget,'' Apr. 10, 2000.
---------------------------------------------------------------------------
    The GAO warned, however, ``. . . the magnitude of this 
modernization effort makes it a high-risk venture that will 
take years to fully implement.'' \14\
---------------------------------------------------------------------------
    \14\ ``IRS Modernization: Business Practice, Performance 
Management, and Information Technology Challenges,'' GAO/T-GGD/AIMD-00-
144, Apr. 10, 2000.
---------------------------------------------------------------------------
    At both IRS hearings, witnesses testified that the ability 
of the IRS to collect taxes in an effective and efficient 
manner continues to be hindered by significant long-standing 
financial management and operational problems. These problems 
will take years to correct and will require continuous 
commitment from senior management.
            Health Care Financing Administration [HCFA]
    The Health Care Financing Administration accounts for 
nearly 18 percent of all Federal outlays and pays for one-third 
of the health care costs throughout the United States. It is 
the largest single purchaser of health care in the world.
    The subcommittee's hearing on March 15, 2000, focused on 
actions HCFA is taking to resolve its financial management 
problems as well as the financial management challenges 
associated with administering the Medicare program. The 
Inspector General reported that she was ``. . . encouraged by 
HCFA's sustained success in reducing Medicare payment errors 
and by the important progress made in resolving prior years' 
financial reporting problems.'' However, the Inspector General 
said, ``We remain concerned . . . that inadequate internal 
controls over accounts receivable leave the Medicare program 
vulnerable to potential loss or misstatement. As HCFA begins a 
lengthy process to integrate its accounting system with the 
Medicare contractor systems, internal controls must be 
strengthened to ensure that debt is accurately recorded, an 
adequate debt-collection process is in place, and information 
is properly reflected on the financial statements.'' \15\ The 
GAO further noted that ``shortcomings in HCFA's financial 
operations mean that it could not adequately ensure the 
reliability of data that the agency and Congress use to track 
the cost of the Medicare program and to help make informed 
decisions about future funding.'' \16\
---------------------------------------------------------------------------
    \15\ HCFA: Fiscal Year 1999 Financial Statement Audit, testimony of 
June Gibbs Brown, Inspector General, U.S. Department of Health and 
Human Services before the House Committee on Government Reform's 
Subcommittee on Government Management, Information, and Technology, 
Mar. 15, 2000.
    \16\ ``Medicare Financial Management: Further Improvements Needed 
to Establish Adequate Financial Control and Accountability,'' GAO/T-
AIMD-00-118, Mar. 15, 2000.
---------------------------------------------------------------------------
    In fiscal year 1999, $200 billion in Medicare benefit 
claims were administered by more than 50 Medicare contractors, 
and $110 billion in Medicaid benefit payments were administered 
by 57 States and territories. HCFA finances more than 860 
million Medicare benefits claims annually to nearly 40 million 
seniors and disabled Americans and provides States with 
matching funds for Medicaid health care services for 
approximately 33 million low-income individuals.
    For fiscal year 1999, the Department of Health and Human 
Services Inspector General issued the first unqualified audit 
opinion on HCFA's financial statements. However, HCFA continues 
to have internal control weaknesses that hamper its ability to 
safeguard the fiscal integrity of the Medicare and Medicaid 
programs. As of September 30, 1999, HCFA estimated that its 
improper payments in Medicare fee-for-service claims totaled 
approximately $13.5 billion, or 8 percent, of the $169.5 
billion fee-for-service program. Auditors reported that no 
methodology exists for estimating the range of improper 
Medicaid payments on a national level and that since Medicaid 
is a grant program, any estimating methodology would need to be 
done in conjunction with the States.
    HCFA is currently working with the States to apply a common 
methodology of calculating error rates in the Medicaid program.
    HCFA reported that several initiatives are underway to 
bring the Medicare claims payment error rate down, and that it 
is aggressively addressing financial management issues. Top 
management's continued support of these initiatives and 
sustained actions will be key to HCFA's success in resolving 
its financial management problems.
            Department of Agriculture [USDA]
    The Department of Agriculture's mission has evolved beyond 
agricultural programs to include programs in such diverse areas 
as economic development; food assistance; food safety; 
international trade and marketing; and land management. Today 
the Department of Agriculture is responsible for major programs 
that boost farm production and exports; promote small community 
and rural development; ensure a safe food supply for the 
Nation; manage natural resources; and improve the nutrition of 
families and individuals with low incomes. Its vast resources 
include more than $118 billion in assets.
    At the subcommittee's hearing on March 21, 2000, the 
Inspector General reported that ``Financial information in USDA 
is, on the whole, not reliable.'' And because of serious 
internal control weaknesses, ``. . . managers of the programs 
and operations may be relying on highly questionable 
information.''\17\ USDA's Chief Financial Officer acknowledged 
the problems facing the department, its progress made to date, 
and the various initiatives underway to resolve them. However, 
the GAO concluded that many of the department's problems are 
deeply rooted and will take time, substantial resources, and 
sustained commitment from top management to correct.
---------------------------------------------------------------------------
    \17\ Testimony of Roger C. Viadero, Inspector General, U.S. 
Department of Agriculture, Mar. 21, 2000.
---------------------------------------------------------------------------
    Since fiscal year 1992, the department's financial 
statements have been unauditable, and the department continues 
to have serious financial management problems. One of the more 
significant problems preventing the department from reporting 
reliable information is its inability to reasonably estimate 
its cost of extending or guaranteeing $93 billion of credit. As 
the largest direct lender in the Federal Government, the 
department's inability to account properly for the costs of its 
loan programs continues to impact the reliability of the U.S. 
Government's financial statements. In addition, this lack of 
reliable cost estimates prevents Congress from making decisions 
about whether to scale back or increase the loan programs.
            Department of Housing and Urban Development [HUD]
    The Department of Housing and Urban Development was 
established to promote adequate and affordable housing, 
economic opportunity, and a suitable living environment, free 
from discrimination. Its major functions include insuring 
mortgages for single-family and multifamily dwellings; 
channeling funds from investors into the mortgage industry; 
making direct loans for construction or rehabilitation of 
housing projects for the elderly and handicapped; providing 
Federal housing subsidies for low- and moderate-income 
families; providing grants to States and communities for 
community development activities; and promoting and enforcing 
fair housing and equal housing opportunity.
    At the subcommittee's hearing on March 22, 2000, HUD's 
Inspector General noted that the same material weaknesses and 
reportable conditions that have been reported in previous years 
were essentially unchanged. However, the Inspector General 
stated that the department ``has recognized its areas of 
systemic weakness to a degree that it never did before, and 
that in each of these areas it has plans in place and 
activities underway to address the problems.''
    For fiscal year 1999, the Inspector General was unable to 
express an opinion on HUD's financial statements in time to 
meet the statutory deadline of March 1, 2000, because of 
problems related to HUD's conversion to a new accounting 
system. The Inspector General's report stated ``. . . material 
internal control weaknesses with HUD's core financial 
management system and the U.S. Government Standard General 
Ledger adversely affected HUD's ability to prepare auditable 
financial statements and related disclosures in a timely 
manner.'' \18\
---------------------------------------------------------------------------
    \18\ OIG Report, ``U.S. Department of Housing and Urban Development 
Attempt to Audit the Fiscal Year 1999 Financial Statements,'' 00-FO-
177-0003, Mar. 1, 2000.
---------------------------------------------------------------------------
    In addressing its financial management problems, the Deputy 
Secretary stated that HUD has ``. . . dedicated resources to 
address each and every material weakness and reportable 
condition cited in the audit.'' \19\ He further stated that 
HUD's goal is to obtain unqualified opinions year after year 
and that with the final implementation of HUD's 2020 Management 
Reform Plan, each remaining material concern will be addressed.
---------------------------------------------------------------------------
    \19\ Testimony of Deputy Secretary Saul N. Ramirez, Jr., ``HUD's 
Financial Management Systems,'' Mar. 22, 2000.
---------------------------------------------------------------------------
    Although achieving an unqualified opinion is important, the 
department must continue to strive to achieve the goal of the 
financial management legislation passed by Congress: to ensure 
that agencies maintain financial systems that allow them to 
produce accurate, reliable financial information on a day-to-
day basis.
            Department of Defense [DOD]
    The subcommittee's hearing on May 9, 2000, focused on the 
status of financial management at the Department of Defense and 
the importance of reliable financial information to the Army, 
Air Force, and Navy's logistical operations.
    The Department of Defense is the largest of the 14 Cabinet-
level departments. Fiscal year 1999 represented the fourth year 
that the Department of Defense had prepared audited, agencywide 
financial statements. For fiscal year 1999, the department 
reported total assets of $599 billion and total net cost of 
operations of $378 billion.
    Once again, the Department of Defense Inspector General 
disclaimed an opinion on the department's financial statements, 
citing ongoing internal control weaknesses, compilation 
problems, and financial management system deficiencies. The 
audit report noted that the department's internal controls did 
not ensure that accounting entries impacting financial data 
were fully supported and that assets, liabilities, costs, and 
budget resources were properly accounted for and reported. The 
report also identified noncompliance issues related to the 
Federal Financial Management Improvement Act of 1996, the Chief 
Financial Officers Act of 1990, and the Government Performance 
and Results Act of 1993.
    According to the Assistant Inspector General for Auditing, 
``Despite commendable progress, the DOD remains far from CFO 
Act compliance and aggressive measures will be needed over the 
next few years to achieve success. . . . Sustained involvement 
by senior managers and the Congress are vital ingredients for 
progress.'' \20\
---------------------------------------------------------------------------
    \20\ Statement by Robert J. Lieberman, Assistant Inspector General 
for Auditing, Department of Defense before the Subcommittee on 
Government Management, Information, and Technology, House Committee on 
Government Reform on ``Department of Defense Financial Management,'' 
May 9, 2000.
---------------------------------------------------------------------------
    The GAO also stated, ``DOD continues to make incremental 
improvements to its financial management systems and 
operations. At the same time, the department has a long way to 
go to address the remaining problems. Overhauling DOD's 
financial systems, processes, and controls and ensuring that 
personnel throughout the department share the common goal of 
improving DOD financial management, will require sustained 
commitment from the highest levels of DOD leadership--a 
commitment that must extend to the next administration.'' \21\
---------------------------------------------------------------------------
    \21\ ``Department of Defense: Progress in Financial Management 
Reform,'' GAO/T-AIMD/NSIAD-00-163, May 9, 2000.
---------------------------------------------------------------------------
    One panel of witnesses at this hearing discussed how the 
department's financial management affects military logistics. 
Representing the U.S. Air Force, Army, and Navy, two generals 
and one vice admiral stressed the importance of having reliable 
financial information to assist them in making accurate and 
timely decisions to ensure the military readiness of our 
Nation.
            Federal Financial Management Improvement Act of 1996 
                    [FFMIA]
    Historically, Federal agencies have struggled with 
reporting complete, reliable, and useful financial information. 
The lack of such information has hindered managers from 
efficiently handling their operations on a day-to-day basis. It 
has also prevented Congress from making fully informed 
decisions in allocating limited resources. Recognizing the 
important role that financial management systems play in 
providing timely and reliable financial information, Congress 
passed the Federal Financial Management Improvement Act of 1996 
(Public Law 104-208).
    On June 6, 2000, the subcommittee held its first oversight 
hearing on the status of the 24 CFO Act agencies in 
implementing the FFMIA. The hearing focused on the progress 
agencies have made in complying with the law as well as the 
significant challenges that are preventing many agencies from 
having management systems that provide reliable financial 
information on a day-to-day basis.
    Hearing witnesses from both the OMB and the GAO noted that 
many agencies continue to struggle with complying with FFMIA 
because of the overall, long-standing poor condition of agency 
financial systems. These systems were designed to track cash 
outlays under budget appropriations law, not accrual-based 
financial accounting. Specifically, the GAO noted five primary 
reasons that agencies are not complying with the law. (1) 
Agency financial management systems are not integrated; (2) 
agencies have inadequate reconciliation procedures; (3) agency 
financial systems are not compliant with the Federal Government 
Standard General Ledger; (4) agencies do not adhere to Federal 
accounting standards, and (5) agencies have weak security over 
their information systems.
    The GAO noted one especially significant fact. Even though 
more agencies received unqualified or ``clean'' audit opinions, 
their ongoing noncompliance with FFMIA's requirements prevent 
these same agencies from meeting the intent of the financial 
management reform legislation: to report complete, reliable, 
and useful financial information. As of publication of this 
report, 20 of 23 CFO Act agencies did not have financial 
management systems that comply with FFMIA, even though 14 of 
the 23 agencies received ``clean'' audit opinions. According to 
the GAO, these ``clean'' audit opinions are attained only by 
using costly, heroic efforts that go outside of the agencies' 
financial systems.
    Meeting the requirements of FFMIA presents long-standing 
significant challenges that will be attained only through time, 
investment, and sustained emphasis. The subcommittee learned at 
this hearing that, similar to the Government's year 2000 
conversion efforts, success in complying with FFMIA is 
dependent on strong commitment from top agency management. As 
noted by the GAO, ``consistent and persistent top management 
attention is essential to solving any intractable problem.'' 
\22\ That type of management commitment must be clearly 
demonstrated if the goals of FFMIA are to be met.
---------------------------------------------------------------------------
    \22\ ``Financial Management: Agencies Face Many Challenges in 
Meeting the Goals of the Federal Financial Management Improvement 
Act,'' GAO/T-AIMD-00-178, June 6, 2000.
---------------------------------------------------------------------------
2. Federal department and agency financial management grades
    On March 31, 2000, the subcommittee released its third 
annual report card measuring the effectiveness of financial 
management in the 24 CFO Act agencies required to produce 
audited financial statements. The grades were based on the 
results of the audit reports prepared by the agencies' 
Inspectors General, independent public accountants, and the 
U.S. General Accounting Office.
    The report card is a gauge for Congress to see where 
attention is needed to prod agencies toward getting their 
financial affairs in order. Again, this year, the grades are 
dominated by ``D's'' and ``F's.'' This year, for the first 
time, the subcommittee determined that the Federal Government 
as a whole earned a ``D plus.''
    The report card that follows is updated to reflect audit 
reports received as of June 29, 2000.
    The National Aeronautics and Space Administration and the 
National Science Foundation again demonstrated they could 
effectively manage their finances. Both agencies received 
``A's.''
    The Social Security Administration, General Services 
Administration, Department of Labor, and the Department of 
Energy all earned commendable ``B's.''
    Six agencies--the Agency for International Development, the 
Department of Agriculture, the Department of Defense, 
Department of Housing and Urban Development, Department of 
State, and the Office of Personnel Management--could not pass 
muster. Each earned a failing grade of ``F.'' At publication of 
this report, the Department of State had not yet issued its 
audit report.
    Although 14 agencies received ``clean'' audit opinions, 
significant financial management problems continue to prevent 
these agencies from achieving the ultimate goal of maintaining 
financial systems that allow them to produce accurate, reliable 
financial information on a day-to-day basis.
    Five of the 24 agencies failed to meet the March 1st 
deadline for filing their financial statements. Two agencies, 
the Department of the Interior and the Department of State, 
still had not filed their reports when the subcommittee held 
its March 31st hearing--1 month after the statutory deadline 
and 6 months after the close of the Government's fiscal year. 
The Department of the Interior submitted its financial 
statements in May 2000--8 months after the end of the fiscal 
year. At publication of this report, the Department of State 
had not submitted its audited financial statements.

                            III. Conclusions

    Poor financial management has been a long-recognized 
problem within the Federal Government. Congress has developed a 
strong legislative framework that if properly implemented, 
would significantly improve the Government's financial 
management. This, in turn, would lead to more efficient and 
effective Government operations, and more informed 
decisionmaking. Despite these efforts, however, many executive 
branch departments and agencies continue to struggle with 
improving long-standing financial management problems.
    Although steady progress continues to be made in financial 
accountability and meeting related legislative objectives, much 
remains to be done. Most Federal agencies still cannot account 
for billions of dollars in Federal spending in an accurate and 
timely manner.
    Subcommittee hearings held over the last 5 months and the 
fiscal year 1999 financial statements audit reports continue to 
raise serious questions about the soundness of the Government's 
financial information. To make informed decisions, Congress, 
the President, and the President's Cabinet must have reliable 
data on a timely basis. Without such information, both the 
quality of Government services and the fiscal health of this 
Nation are at risk.
    The Federal Government must continue to work at getting its 
financial house in order. To ensure that this occurs, the 
President needs the appropriate staff to focus on management 
problems within the executive branch of the Government. An 
Office of Management whose Director reports to the President 
would enable the President, his Cabinet officers, and agency 
administrators to focus on improved financial management, as 
well as improved general management and information management.
    Without such a governmentwide management structure, 
departments and agencies will not learn from past management 
failures, such as the computer debacles of the early 1990's. 
The Federal Aviation Administration's $4 billion was matched by 
a similar failure when the Internal Revenue Service sought to 
improve its information systems. Together, these programs cost 
taxpayers nearly $8 billion before they were stopped.
    Congress and the President must ensure that Federal 
departments and agencies place adequate attention to their 
financial management. The framework is in place for these 
Federal departments and agencies to step up to their 
fundamental responsibility: to be financially accountable to 
the American taxpayer.
       APPENDIX A--Major Federal Financial Management Legislation

                                ------                                

----------------------------------------------------------------------------------------------------------------
            Public Law                                 Key Financial Management Provisions \1\
----------------------------------------------------------------------------------------------------------------
Budget and Accounting Procedures
 Act of 1950
                                     The Budget and Accounting Procedures Act of 1950 provided that the
(Chapter 946, 64 Stat. 832)          maintenance of accounting systems and producing of financial reports with
                                     respect to the operations of executive agencies be the responsibility of
                                     the executive branch and that the auditing for the Government be conducted
                                     by the Comptroller General to determine the extent to which accounting and
                                     related financial reporting fulfill the purposes specified, financial
                                     transactions have been consummated in accordance with laws, regulations, or
                                     other requirements, and adequate internal financial control over operations
                                     is exercised.
                                     The Comptroller General was given the responsibility of prescribing
                                     accounting and auditing principles and standards to be followed in the
                                     preparation of financial reports by executive agencies and by the GAO in
                                     the audit of the financial transactions of each executive, legislative, and
                                     judicial agency.
----------------------------------------------------------------------------------------------------------------
Inspector General Act of 1978, as
 amended by the Inspector General
 Act Amendments of 1988
                                     The Inspector General Act (IG Act) requires that Inspectors General
(Public Laws 95-452 and 100-504)     perform audits in accordance with generally accepted government auditing
                                     standards.
                                     The Chief Financial Officers Act of 1990, as expanded by the
                                     Government Management Reform Act, and amended by the Federal Financial
                                     Management Improvement Act, has demanded shifts in the focus of the
                                     Inspectors' General work.
----------------------------------------------------------------------------------------------------------------
Federal Managers' Financial
 Integrity Act of 1982
                                     The Federal Managers' Financial Integrity Act of 1982 [FMFIA]
(Public Law 97-255)                  required that internal accounting and administrative controls of each
                                     executive agency be established in accordance with standards prescribed by
                                     the Comptroller General, and shall provide reasonable assurance that:
                                     obligations and costs are in compliance with applicable law; assets are
                                     safeguarded from waste, loss, unauthorized use, or misappropriation; and
                                     revenues and expenditures applicable to agency operations are properly
                                     recorded and accounted for.
                                     The head of each agency is required to report to the President and
                                     Congress whether the agency's systems of internal accounting and
                                     administrative control fully comply with the Comptroller General's
                                     requirements. For all material weaknesses, the agency head must describe in
                                     the report the plan and schedule for correcting any such weaknesses.
----------------------------------------------------------------------------------------------------------------
Debt Collection Act of 1982, as
 amended, and Debt Collection
 Improvement Act of 1996
                                     The Debt Collection Act, as amended, provides greater powers to
(Public Laws 97-365 and 104-134,     Federal agencies in collecting debts owed to the Federal Government
 sec. 31001)                         including: reporting a delinquent debtor to a consumer reporting agency;
                                     offsetting the salary of Federal employees who are delinquent in the
                                     payment of debts; disclosing to a Federal lending agency that an applicant
                                     has a tax delinquency and deny such individual credit; disclosing a
                                     taxpayer's address to an agency to use for purposes of collecting
                                     delinquent debt; administratively offsetting all Federal payments,
                                     including tax refunds; garnishing wages; and charging of interest and
                                     penalties on any debt.
                                     Agencies are required to report to the Director of the Office of
                                     Management and Budget and the Secretary of the Treasury at least once a
                                     year information regarding its debt collection activities. Further, the
                                     Secretary of the Treasury must report that information to Congress annually
                                     and provide a one-time report, not later than April 1999, to Congress on
                                     the collection services provided by it and other entities collecting on
                                     behalf of Federal agencies.
----------------------------------------------------------------------------------------------------------------
                                     Agencies are required to make Federal payments to individuals by
                                     electronic fund transfer, except for tax refunds.
                                     Agencies, except for the IRS, can contract with a collection
                                     service to pursue outstanding debts of the agency or to sell debt over 90
                                     days delinquent.
                                     Agencies are required to collect the taxpayer identification number
                                     of any individual or entity doing business with the Government.
----------------------------------------------------------------------------------------------------------------
Chief Financial Officers Act of
 1990
                                     The Chief Financial Officers Act of 1990 (CFO Act) creates a new
(Public Law 101-576)                 leadership structure for Federal financial management, including the
                                     creation of a Deputy Director of Management, a Controller who advises the
                                     Deputy Director, and an Office of Federal Financial Management within the
                                     Office of Management and Budget. The Deputy Director is responsible for
                                     providing financial management leadership including the establishment and
                                     oversight of Federal financial policies and practices.
                                     The Office of Management and Budget is required by the CFO Act to
                                     prepare and submit to Congress a governmentwide 5-year financial management
                                     plan. The plan describes the planned activities of OMB and agency's CFO
                                     over the next 5 years to improve financial management.
                                     The CFO Act also requires that 24 agencies have Chief Financial
                                     Officers and Deputy Chief Financial Officers and lays out their authorities
                                     and functions. It also stipulates the qualifications and responsibilities
                                     for each of the positions.
----------------------------------------------------------------------------------------------------------------
Government Management Reform Act
 of 1994
                                     The Government Management Reform Act of 1994 [GMRA] expands
(Public Law 103-356) \2\             requirements for executive branch agencies contained in section 303(a) of
                                     the CFO Act.
                                     GMRA requires all 24 agencies covered under the CFO Act to have
                                     agencywide audited financial statements, beginning with fiscal year 1996.
                                     Those statements, due March 1, 1997, and each year thereafter, must cover
                                     all accounts and associated activities.
----------------------------------------------------------------------------------------------------------------
                                     GMRA provides that, for each audited financial statement required
                                     from the agency, the auditor (the Inspector General, independent public
                                     accountant, or the GAO) must submit a report on the audit to the head of
                                     the agency. This report is to be prepared in accordance with generally
                                     accepted Government auditing standards.
                                     GMRA requires that a consolidated financial statement for all
                                     accounts and associated activities of the executive branch be prepared by
                                     the Secretary of the Treasury, in coordination with the Director of the
                                     Office of Management and Budget, for fiscal year 1997 and each year
                                     thereafter. Such statements are to be audited by the Comptroller General.
                                     The audited financial statements must be submitted to the President and
                                     Congress by March 31, 1998.
----------------------------------------------------------------------------------------------------------------
Federal Financial Management
 Improvement Act of 1996
                                     The Federal Financial Management Improvement Act of 1996 [FFMIA]
(Title VIII of Public Law 104-208)   requires that agencies conform to promulgated Federal Government accounting
                                     and systems standards, and use the U.S. Government Standard General Ledger.
                                     FFMIA requires auditors performing financial audits to report
                                     whether agencies' financial management systems comply substantially with
                                     Federal accounting standards, financial systems requirements, and the
                                     Government's Standard General Ledger at the transaction level.
                                     For agencies that are not in material compliance with the standards
                                     described above, the head of the agency, in consultation with the Director
                                     of the Office of Management and Budget, must prepare a remediation plan
                                     that addresses the problems. This plan shall include resources, remedies,
                                     and intermediate target dates necessary to bring the agency's financial
                                     management systems into substantial compliance. The remediation plan shall
                                     bring the agency's financial management systems into substantial compliance
                                     within 3 years after the date a determination is made by the auditors that
                                     the agency is not in compliance.
----------------------------------------------------------------------------------------------------------------
                                     The Director of the Office of Management and Budget is required to
                                     report to Congress, not later than March 31 of each year, regarding
                                     implementation of FFMIA.
                                     The Comptroller General is required to report to Congress, no later
                                     than October 1 of each year, concerning compliance with the requirements of
                                     FFMIA and the adequacy of applicable accounting standards of the Federal
                                     Government.
----------------------------------------------------------------------------------------------------------------
\1\ These laws, except FFMIA, are compiled in Laws Related to Federal Financial Management, House Report 104-
  745. FFMIA is included in Appendix D to this report.
\2\ The section of GMRA that deals with financial management is also referred to as the ``Federal Financial
  Management Act of 1994.''

         APPENDIX B--Federal Accounting Concepts and Standards

        APPENDIX C--Basis for Agency Financial Management Grades

    The grades for each of the 24 departments and agencies are 
based on the results of the financial statement audits. These 
audits were performed by the agency's Inspector General, 
independent public accounting firms, and the General Accounting 
Office. All auditors were required to follow generally accepted 
Government auditing standards. These standards incorporate the 
American Institute of Certified Public Accountant's Statements 
on Auditing Standards, the same standards required for audits 
of private sector entities. However, Generally Accepted 
Government Auditing Standards [GAGAS] adds certain requirements 
beyond the Statements on Auditing Standards. Most notably, 
GAGAS has additional reporting requirements beyond an opinion 
on the financial statements.
    Three reports are required at the completion of each audit 
of Government entities under GAGAS and as incorporated in OMB 
Bulletin 98-08, Audit Requirements for Federal Financial 
Statements. These reports are an opinion of the financial 
statements, a report on internal controls, and a report on 
compliance with laws and regulations.
    The opinion provides the auditor's assessment of the 
reliability of the information contained in the financial 
statements. There are four types of opinions that the auditor 
can render--Unqualified, Qualified, Adverse, or Disclaimer. An 
unqualified opinion signifies that the information in the 
financial statements was reliable in all material respects. A 
qualified opinion signifies that, except for specified 
information in the financial statements, the information is 
reliable. An adverse opinion means the statements are not 
reliable. Last, a disclaimer of opinion signifies that the 
auditor was unable to determine if material information in the 
statements was reliable.
    The report on internal control provides an assessment by 
the auditors of the effectiveness of internal controls. The 
report is required to identify any instances of material 
weaknesses or reportable conditions in internal controls that 
surfaced during the course of the audit. The American Institute 
of Certified Public Accountants defines a material weakness in 
internal controls as ``. . . a condition in which the design or 
operation of one or more of the internal control components 
does not reduce to a relatively low level the risk that errors 
or irregularities in amounts that would be material in relation 
to the financial statements being audited may occur and not be 
detected within a timely period by employees in the normal 
course of performing assigned functions.'' \23\
---------------------------------------------------------------------------
    \23\ Codification of Statements on Auditing Standards (Including 
Statements on Standards for Attestation Engagements). No.s 1 to 82, 
American Institute of Certified Public Accountants, as of Jan. 1, 1997; 
AU sec. 325.15.
---------------------------------------------------------------------------
    The report on compliance with the laws and regulations 
provides the auditor's assessment of instances in which the 
agency did not follow or conform materially to requirements of 
the laws and regulations deemed material to the financial 
operations of that agency. The Office of Management and Budget 
also provides guidance to the auditors in OMB Bulletin 98-08 
regarding which general laws and regulations need to be 
considered during the audit.
    Starting with fiscal year 1997, an agency's adherence to 
FFMIA must be assessed in the report on compliance with laws 
and regulations, in accordance with OMB guidance. FFMIA 
specifically requires that agencies conform to promulgated 
Federal Government accounting and systems standards, and use 
the Government standard general ledger. Many agencies did not 
materially conform to the requirements of FFMIA.
    The subcommittee reviewed each financial report on an 
absolute scale and assessed grades on a 4 point scale with 
``A'' = 4, ``B'' = 3, ``C'' = 2, ``D'' = 1, and ``F'' = 0. In 
the financial information category, when an unqualified opinion 
was rendered by the auditor, an ``A'' (4 points) was given; a 
qualified opinion received a ``C'' (2 points) and a disclaimer 
received an ``F'' (0 points). There were no adverse opinions 
rendered in fiscal years 1996, 1997, 1998, or 1999, however, an 
adverse opinion would have also received an ``F.''
    If no material weaknesses in internal controls were 
reported, the agency received an ``A'' (4 points). Conversely, 
if material weaknesses were reported, the agency received an 
``F'' (0 points) in this category.
    Similarly, if the auditor reported that the agency had no 
known instances of non-compliance with laws and regulations an 
``A'' (4 points) was awarded. If material non-compliances were 
reported, an ``F'' (0 points) was given.
    These grades were then averaged (with equal weight) to 
determine the overall grade for the agency.
    If no report was completed or provided prior to March 31, 
2000, the agency was given an ``F.'' When reports became 
available, the agency's grade was reassessed, as stated above. 
The grades included in this report are based on audit reports 
issued as of the publication of this report.

     APPENDIX D--Public Law 104-208, Title VIII--Federal Financial 
                       Management Improvement Act

                                ------                                

          TITLE VIII--FEDERAL FINANCIAL MANAGEMENT IMPROVEMENT

SEC. 801. SHORT TITLE.

      This title may be cited as the ``Federal Financial 
Management Improvement Act of 1996.''

SEC. 802. FINDINGS AND PURPOSES.

      (a) Findings.--The Congress finds the following:
            (1) Much effort has been devoted to strengthening 
        Federal internal accounting controls in the past. 
        Although progress has been made in recent years, 
        Federal accounting standards have not been uniformly 
        implemented in financial management systems for 
        agencies.
            (2) Federal financial management continues to be 
        seriously deficient, and Federal financial management 
        and fiscal practices have failed to--
                    (A) identify costs fully;
                    (B) reflect the total liabilities of 
                congressional actions; and
                    (C) accurately report the financial 
                condition of the Federal Government.
            (3) Current Federal accounting practices do not 
        accurately report financial results of the Federal 
        Government or the full costs of programs and 
        activities. The continued use of these practices 
        undermines the Government's ability to provide credible 
        and reliable financial data and encourages already 
        widespread Government waste, and will not assist in 
        achieving a balanced budget.
            (4) Waste and inefficiency in the Federal 
        Government undermine the confidence of the American 
        people in the government and reduce the federal 
        Government's ability to address vital public needs 
        adequately.
            (5) To rebuild the accountability and credibility 
        of the Federal Government, and restore public 
        confidence in the Federal Government, agencies must 
        incorporate accounting standards and reporting 
        objectives established for the Federal Government into 
        their financial management systems so that all the 
        assets and liabilities, revenues, and expenditures or 
        expenses, and the full costs of programs and activities 
        of the Federal Government can be consistently and 
        accurately recorded, monitored, and uniformly reported 
        throughout the Federal Government.
            (6) Since its establishment in October 1990, the 
        Federal Accounting Standards Advisory Board 
        (hereinafter referred to as the ``FASAB'') has made 
        substantial progress toward developing and recommending 
        a comprehensive set of accounting concepts and 
        standards for the Federal Government. When the 
        accounting concepts and standards developed by FASB are 
        incorporated into Federal financial management systems, 
        agencies will be able to provide cost and financial 
        information that will assist the Congress and financial 
        managers to evaluate the cost and performance of 
        Federal programs and activities, and will therefore 
        provide important information that has been lacking, 
        but is needed for improved decision making by financial 
        managers and the Congress.
            (7) The development of financial management systems 
        with the capacity to support these standards and 
        concepts will, over the long term, improve Federal 
        financial management.
      (b) Purpose.--The purposes of this Act are to--
            (1) provide for consistency of accounting by an 
        agency from one fiscal year to the next, and uniform 
        accounting standards throughout the Federal Government;
            (2) require Federal financial management systems to 
        support full disclosure of Federal financial data, 
        including the full costs of Federal programs and 
        activities, to the citizens, the Congress, the 
        President, and agency management, so that programs and 
        activities can be considered based on their full costs 
        and merits;
            (3) increase the accountability and credibility of 
        federal financial management;
            (4) improve performance, productivity and 
        efficiency of Federal Government financial management;
            (5) establish financial management systems to 
        support controlling the cost of Federal Government;
            (6) build upon and complement the Chief Financial 
        Officers Act of 1990 (Public Law 101-576; 104 Stat. 
        2838), the Government Performance and Results Act of 
        1993 (Public Law 103-62; 107 Stat. 285) and the 
        Government Management Reform Act of 1994 (Public Law 
        103-356; 108 Stat. 3410); and
            (7) increase the capability of agencies to monitor 
        execution of the budget by more readily permitting 
        reports that compare spending of resources to results 
        of activities.

SEC. 803 IMPLEMENTATION OF FEDERAL FINANCIAL MANAGEMENT IMPROVEMENTS.

      (a) In General.--Each agency shall implement and maintain 
financial management systems that comply substantially with 
Federal financial management systems requirements, applicable 
Federal accounting standards, and the United States Government 
Standard General Ledger at the transaction level.
      (b) Audit Compliance Finding.--
            (1) In general.--Each audit required by section 
        3521(e) of title 31, United States Code, shall report 
        whether the agency financial management systems comply 
        with the requirements of subsection (a).
            (2) Content of Reports.--When the person performing 
        the audit required by section 3521(e) of title 31, 
        United States Code, reports that the agency financial 
        management systems do not comply with the requirements 
        of subsection (a), the person performing the audit 
        shall include in the report on the audit--
                    (A) the entity or organization responsible 
                for the financial management systems that have 
                been found not to comply with the requirements 
                of subsection (a);
                    (B) all facts pertaining to the failure to 
                comply with the requirements of subsection (a), 
                including--
                            (i) the nature and extent of the 
                        noncompliance including areas in which 
                        there is substantial but not full 
                        compliance;
                            (ii) the primary reason or cause of 
                        the noncompliance;
                            (iii) the entity or organization 
                        responsible for the non-compliance; and
                            (iv) any relevant comments from any 
                        responsible officer or employee; and
                    (C) a statement with respect to the 
                recommended remedial actions and the time 
                frames to implement such actions.
      (c) Compliance Implementation.--
            (1) Determination.--No later than the date 
        described under paragraph (2), the Head of an agency 
        shall determine whether the financial management 
        systems of the agency comply with the requirements of 
        subsection (a). Such determination shall be based on--
                    (A) a review of the report on the 
                applicable agency-wide audited financial 
                statement;
                    (B) any other information the Head of the 
                agency considers relevant and appropriate.
            (2) Date of determination.--The determination under 
        paragraph (1) shall be made no later than 120 days 
        after the earlier of--
                    (A) the date of the receipt of an agency-
                wide audited financial statement; or
                    (B) the last day of the fiscal year 
                following the year covered by such statement.
            (3) Remediation plan.--
                    (A) If the Head of an agency determines 
                that the agency's financial management systems 
                do not comply with the requirements of 
                subsection (a), the head of the agency, in 
                consultation with the Director, shall establish 
                a remediation plan that shall include 
                resources, remedies, and intermediate target 
                dates necessary to bring the agency's financial 
                management systems into substantial compliance.
                    (B) If the determination of the head of the 
                agency differs from the audit compliance 
                findings required in subsection (b), the 
                Director shall review such determinations and 
                provide a report on the findings to the 
                appropriate committees of the Congress.
            (4) Time period for compliance.--A remediation plan 
        shall bring the agency's financial management systems 
        into substantial compliance no later than 3 years after 
        the date a determination is made under paragraph (1), 
        unless the agency, with concurrence of the Director--
                    (A) determines that the agency's financial 
                management systems cannot comply with the 
                requirements of subsection (a) within 3 years;
                    (B) specifies the most feasible date for 
                bringing the agency's financial management 
                systems into compliance with the requirements 
                of subsection (a); and
                    (C) designates an official of the agency 
                who shall be responsible for bringing the 
                agency's financial management systems into 
                compliance with the requirements of subsection 
                (a) by the date specified under subparagraph 
                (B).

SEC. 804. REPORTING REQUIREMENTS.

      (a) Reports by the Director.--No later than March 31 of 
each year, the Director shall submit a report to the Congress 
regarding implementation of this Act. The Director may include 
the report in the financial management status report and the 5-
year financial management plan submitted under section 
3512(a)(1) of title 31, United States Code.
      (b) Reports by the Inspector General.--Each Inspector 
General who prepares a report under section 5(a) of the 
Inspector General Act of 1978 (5 U.S.C. App.) shall report to 
Congress instances and reasons when an agency has not met the 
intermediate target dates established in the remediation plan 
required under section 3(c). Specifically the report shall 
include--
            (1) the entity or organization responsible for the 
        non-compliance;
            (2) the facts pertaining to the failure to comply 
        with the requirements of subsection (a), including the 
        nature and extent of the non-compliance, the primary 
        reason or cause for the failure to comply, and any 
        extenuating circumstances; and
            (3) a statement of the remedial actions needed to 
        comply.
      (c) Reports by the Comptroller General.--No later than 
October 1, 1997, and October 1, of each year thereafter, the 
Comptroller General of the United States shall report to the 
appropriate committees of the Congress concerning--
            (1) compliance with the requirements of section 
        3(a) of this Act, including whether the financial 
        statements of the Federal Government have been prepared 
        in accordance with applicable accounting standards; and
            (2) the adequacy of applicable accounting standards 
        for the Federal Government.

SEC. 805. CONFORMING AMENDMENTS.

      (a) Audits by Agencies.--Section 3521(f)(1) of title 31, 
United States Code, is amended in the first sentence by 
inserting ``and the Controller of the Office of Federal 
Financial Management'' before the period.
      (b) Financial Management Status Report.--Section 
3512(a)(2) of title 31, United States Code, is amended by--
            (1) in subparagraph (D) by striking ``and' after 
        the semicolon;
            (2) by redesignating subparagraph (E) as 
        subparagraph (F); and
            (3) by inserting after subparagraph (D) the 
        following:
                    ``(E) a listing of agencies whose financial 
                management systems do not comply substantially 
                with the requirements of Section 3(a) the 
                Federal Financial Management Improvement Act of 
                1996, and a summary statement of the efforts 
                underway to remedy the noncompliance; and''
      (c) Inspector General Act of 1978.--Section 5(a) of the 
Inspector General Act of 1978 is amended--
            (1) in paragraph (11) by striking ``and'' after the 
        semicolon;
            (2) in paragraph (12) by striking the period and 
        inserting ``; and''; and
            (3) by adding at the end the following new 
        paragraph:
            ``(13) the information described under section   
        05(b) of the Federal Financial Management Improvement 
        Act of 1996.''

SEC. 806. DEFINITIONS.

      For purposes of this title:
            (1) Agency.--The term ``agency'' means a department 
        or agency of the United States Government as defined in 
        section 901(b) of title 31, United States Code.
            (2) Director.--The term ``Director'' means the 
        Director of the Office of Management and Budget.
            (3) Federal Accounting Standards.--The term 
        ``Federal accounting standards'' means applicable 
        accounting principles, standards, and requirements 
        consistent with section 902(a)(3)(A) of title 31, 
        United States Code.
            (4) Financial management systems.--The term 
        ``financial management systems'' includes the financial 
        systems and the financial portions of mixed systems 
        necessary to support financial management, including 
        automated and manual processes, procedures, controls, 
        data, hardware, software, and support personnel 
        dedicated to the operation and maintenance of system 
        functions.
            (5) Financial system.--The term ``financial 
        system'' includes an information system, comprised of 
        one or more applications, that is used for--
                    (A) collecting, processing, maintaining, 
                transmitting, or reporting data about financial 
                events;
                    (B) supporting financial planning or 
                budgeting activities;
                    (C) accumulating and reporting costs 
                information; or
                    (D) supporting the preparation of financial 
                statements.
                    (6) Mixed system.--The term ``mixed 
                system'' means an information system that 
                supports both financial and nonfinancial 
                functions of the Federal Government or 
                components thereof.

SEC. 807. EFFECTIVE DATE.

      This title shall take effect for the fiscal year ending 
September 30, 1997.

SEC. 808. REVISION OF SHORT TITLES.

      (a) Section 4001 of Public Law 104-106 (110 Stat. 642; 41 
U.S.C. 251 note) is amended to read as follows:

``SEC. 4001. SHORT TITLE.

      ``This division and division E may be cited as the 
`Clinger-Cohen Act of 1996'.''.
      (b) Section 5001 of Public Law 104-106 (110 Stat. 679; 40 
U.S.C. 1401 note) is amended to read as follows:

``SEC. 5001. SHORT TITLE.

      ``This division and division D may be cited as the 
`Clinger-Cohen Act of 1996'.''
      (c) Any reference in any law, regulation, document, 
record, or other paper of the United States to the Federal 
Acquisition Reform Act of 1996 or to the Information Technology 
Management Reform Act of 1996 shall be considered to be a 
reference to the Clinger-Cohen Act of 1996.
      This Act may be cited as the ``Treasury, Postal Service, 
and General Government Appropriations Act, 1997''.

                     APPENDIX E--INDEX OF WITNESSES

                                ------                                

    ALDERMAN, Karen C., Executive Director, Joint Financial 
Management Improvement Program, June 6, 2000.
    AMERAULT, Vice Admiral James F., Deputy Chief of Naval 
Operations (Logistics), United States Navy, May 9, 2000.
    APP, Steven O., Deputy Chief Financial Officer, Department 
of Treasury, February 29, 2000.
    BATEMAN, Victoria, Comptroller, Federal Housing 
Administration, Department of Housing and Urban Development, 
March 22, 2000.
    BROWN, June Gibbs, Inspector General, Department of Health 
and Human Services, March 15, 2000.
    CALBOM, Linda M., Director, Resources, Community, and 
Economic Development, Accounting and Financial Management 
Issues, Accounting and Information Management Division, U.S. 
General Accounting Office, March 21, 2000.
    COBURN, General John C., Commanding General, U.S. Army 
Materiel Command, United States Army, May 9, 2000.
    DALRYMPLE, John M., Chief Operations Officer, Internal 
Revenue Service, February 29, 2000.
    GAFFNEY, Susan, Inspector General, Department of Housing 
and Urban Development, March 22, 2000.
    GOERL, Vincette, Deputy Chief, Office of Finance and Chief 
Financial Officer, U.S. Forest Service, Department of 
Agriculture, March 21, 2000.
    GOTBAUM, Joshua, Executive Associate Director and 
Controller, Office of Management and Budget, March 31, 2000, 
and June 6, 2000.
    HAMMOND, Donald V., Fiscal Assistant Secretary, Department 
of Treasury, March 31, 2000.
    HASH, Michael M., Deputy Administrator, Health Care 
Financing Administration, Department of Health and Human 
Services, March 15, 2000.
    HEIST, James, Director of Financial Audits Division, Office 
of the Inspector General, Department of Housing and Urban 
Development, March 22, 2000.
    HOLZ, Arnold G., Chief Financial Officer, National 
Aeronautics and Space Administration, June 6, 2000.
    HSIAO, Benjamin, Director of Information Systems Audits 
Division, Office of the Inspector General, Department of 
Housing and Urban Development, March 22, 2000.
    JACOBSON, Lisa, Director of Defense Audits, Accounting and 
Information Management Division, U.S. General Accounting 
Office, May 9, 2000.
    JARMON, Gloria L., Director, Health, Education and Human 
Services Accounting and Financial Management Issues, Accounting 
and Information Management Division, U.S. General Accounting 
Office, March 15, 2000, and June 6, 2000.
    KEATING, David L., Senior Counselor, National Taxpayers 
Union, April 10, 2000.
    KELLEY, Colleen M., National President, National Treasury 
Employees Union, April 10, 2000.
    KELLY, Keith, Administrator Farm Service Agency, Department 
of Agriculture, March 21, 2000.
    KUHL-INCLAN, Kathryn, Assistant Inspector General for 
Audit, Department of Housing and Urban Development, March 22, 
2000.
    KUTZ, Gregory D., Associate Director, Governmentwide 
Accounting and Financial Management, Accounting and Information 
Management Division, U.S. General Accounting Office, February 
29, 2000.
    LIEBERMAN, Robert J., Assistant Inspector General for 
Auditing, Department of Defense, May 9, 2000.
    LYLES, General Lester L., Commander, Air Force Materiel 
Command, United States Air Force, May 9, 2000.
    LYNN, William J., Under Secretary of Defense (Comptroller), 
Chief Financial Officer, Department of Defense, May 9, 2000.
    NEWBY, James, Senior Policy Advisor for Rural Development, 
Department of Agriculture, March 21, 2000.
    OVESON, W. Val, National Taxpayer Advocate, Internal 
Revenue Service, April 10, 2000.
    RAMIREZ, Saul N., Deputy Secretary, Department of Housing 
and Urban Development, March 22, 2000.
    ROGERS, Lawrence W., Acting Chief Financial Officer, 
Internal Revenue Service, February 29, 2000.
    ROSSOTTI, Charles O., Commissioner, Internal Revenue 
Service, April 10, 2000.
    SEBASTIAN, Steven J., Assistant Director, Governmentwide 
Accounting and Financial Management, Accounting and Information 
Management Division, U.S. General Accounting Office, February 
29, 2000.
    SKELLY, Thomas P., Director, Budget Service and Acting 
Chief Financial Officer, Department of Education, June 6, 2000.
    STEINHOFF, Jeffrey C., Assistant Comptroller General, 
Accounting and Information Management Division, U.S. General 
Accounting Office, May 9, 2000, and June 6, 2000.
    THOMPSON, Sally, Chief Financial Officer, Department of 
Agriculture, March 21, 2000.
    TOYE, Nelson E., Deputy Chief Financial Officer, Department 
of Defense, May 9, 2000.
    VENGRIN, Joseph E., Assistant Inspector General for Audit 
Operations and Financial Statement Activities, Department of 
Health and Human Services, March 15, 2000.
    VIADERO, Roger C., Inspector General, Department of 
Agriculture, March 21, 2000.
    WALKER, David M., Comptroller General of the United States, 
U.S. General Accounting Office, March 31, 2000.
    WARREN, David R., Director Defense Management Issues, 
National Security and International Affairs Division, U.S. 
General Accounting Office, May 9, 2000.
    WILLIAMS, McCoy, Assistant Director, Resources, Community, 
and Economic Development, Accounting and Financial Management 
Issues, Accounting and Information Management Division, U.S. 
General Accounting Office, March 21, 2000.
    WINTER, Kenneth J., Deputy Chief Financial Officer, 
National Aeronautics and Space Administration, June 6, 2000.
    WRIGHTSON, Margaret T., Associate Director, Tax Policy and 
Administration Issues, U.S. General Accounting Office, April 
10, 2000.
    YOUNG, Robert W., Deputy Assistant Inspector General for 
Audit, Department of Agriculture, March 21, 2000.

MINORITY VIEWS OF HON. HENRY A. WAXMAN, HON. JIM TURNER, HON. TOM 
  LANTOS, HON. MAJOR R. OWENS, HON. EDOLPHUS TOWNS, HON. PAUL E. 
  KANJORSKI, HON. PATSY T. MINK, HON. CAROLYN B. MALONEY, HON. ELEANOR 
  HOLMES NORTON, HON. ELIJAH E. CUMMINGS, HON. DENNIS J. KUCINICH, HON. 
  ROD R. BLAGOJEVICH, HON. DANNY K. DAVIS, HON. JOHN F. TIERNEY, HON. 
  THOMAS H. ALLEN, HON. HAROLD E. FORD, JR., AND HON. JANICE D. 
  SCHAKOWSKY

                            I. Introduction

    A decade ago, financial management at most Federal agencies 
meant little more than reporting how appropriations were spent. 
This approach to Federal Government financial matters began to 
change in 1990 when Congress passed the Chief Financial 
Officers Act [CFO Act], which established a new framework for 
financial accountability. Several other legislative initiatives 
followed which were designed to significantly improve financial 
management throughout the Federal Government. The current 
system now provides the opportunity to identify and resolve the 
most significant financial problems existing in the Federal 
Government.
    This report is the result of a series of Subcommittee on 
Government Management, Information, and Technology oversight 
hearings to examine the financial management practices of 
Federal departments and agencies. This subcommittee reviewed 
the financial management challenges and progress made at the 
Internal Revenue Service, Health Care Financing Administration, 
Department of Agriculture, Department of Defense, and 
Department of Housing and Urban Development. In addition, the 
Office of Management and Budget [OMB] and General Accounting 
Office [GAO] reported on the challenges agencies face in their 
attempts to report accurate financial information 
governmentwide and comply with the requirements of the Federal 
Financial Management Improvement Act of 1996 [FFMIA]. 
Unfortunately, we learned that many of the 24 CFO Act agencies 
are still unable to produce reliable and timely financial 
information on a regular basis and annual financial statement 
audits continue to report significant weaknesses in agencies' 
financial management controls and systems. The Federal 
Government has much work to do before we achieve our goal of a 
credible, accurate governmentwide financial system.
    We commend the committee's efforts to highlight the 
importance of effective financial management and note that many 
of the report's findings and recommendations are valid. 
However, we are concerned that the report lacks balance because 
it does not adequately acknowledge the progress agencies have 
made to date, the tremendous scope of the problem, and the 
ongoing efforts to improve Federal financial management. We 
therefore reluctantly oppose this financial management report. 
Unfortunately, the majority report has turned financial 
management into a partisan issue by grading agencies in a 
manner that unfairly portrays the state of agencies' financial 
affairs. The majority report assigns numerous D's and F's to 
Federal agencies to convey the impression that the 
administration is failing to take financial management 
seriously. In fact, just the opposite is true.

                       II. Progress Is Being Made

    This administration has done more than any other to improve 
the financial accountability of the Federal Government. 
According to GAO Comptroller General David Walker in his 
testimony on March 31, 2000, ``the President has designated 
financial management improvement as a priority management 
objective and efforts are underway across the government to 
address pervasive, generally long-standing financial management 
problems.''
    As a result of the administration's focus on this issue, 
most agencies have significantly improved the accuracy and 
timeliness of financial reporting each year. Consider the fact 
that in 1994, only four Federal agencies produced reliable 
financial information on their balance sheets. By 1998, 10 
Federal agencies were able to produce reliable information on 
their balance sheets. For fiscal year 1999, the majority of 
agencies received unqualified or ``clean'' audit opinions. 
Furthermore, timeliness of financial reports improved this 
year, increasing from 6 agencies that met the statutory 
deadline in 1997 to 19 agencies in 2000. The best example of 
agency improvement is arguably the Social Security 
Administration, which for 2 years running has managed to issue 
annual reports in November--4 months before the March 1 
statutory deadline--and has received clean audits as well.
    The administration's financial management accomplishments 
are even more extraordinary when you consider that 10 years 
ago, almost no agencies prepared and issued audited financial 
statements or had a set of governmentwide accounting standards. 
At that time, the Federal Government as a whole could not 
produce consolidated financial statements, let alone audited 
statements. It was not until the creation of the Federal 
Accounting Standards Advisory Board [FASAB] in 1990 that a 
mechanism was put in place which would finally lead to the 
development and issuance of a complete set of basic accounting 
standards and concepts in 1996. In October 1999, as validation 
of the administration's process and progress, the American 
Institute of Certified Public Accountants [AICPA] recognized 
FASAB standards as Generally Accepted Accounting Principles 
[GAAP]. This independent acknowledgment by an internationally 
recognized standard setting authority marks a significant 
milestone in improving public confidence in Federal financial 
management. Now, agencies issue financial statements annually, 
and the Federal Government has just produced its third 
governmentwide financial statement.
    As shown by the experience of State governments, 
modernizing financial management and reporting is a long-term 
process, requiring years, not just months. With few exceptions, 
individual State governments began issuing GAAP-based financial 
statements backed by independent audits in the 1970's, well 
before the Federal Government had such requirements. In 1980, 
Standard & Poors, a rating agency, issued a policy statement 
directing that all State bond issuers' financial reports should 
be prepared in conformity with GAAP, audited by independent 
auditors, and issued within 6 months of year end, lest their 
ratings be affected. By 1990, 10 years later, 43 States issued 
GAAP-based statements; of those, 25--or half of all State 
governments--received an unqualified or ``clean'' opinion. In 
1995, 15 years later, 49 out of 50 States issued GAAP 
statements; however, only about three-quarters received clean 
opinions. By comparison, more than half (54 percent) of the CFO 
Act agencies were able to achieve clean opinions in just 4 
years.
    Aside from not properly acknowledging the administration's 
successes, this report does not adequately address the key 
factors that may impede an agency's ability to effect change 
such as funding problems, outdated infrastructures, addressing 
multiple FFMIA problems, and competing priorities, e.g., the 
year 2000 crisis. We believe the report should take into 
account the following:
         At the beginning of this administration, 
        financial management systems, such as they were, did 
        not keep standard accounts, could not communicate with 
        each other, and could not provide accurate, timely, and 
        meaningful information. This administration has 
        developed standards and established a program of 
        comprehensive testing of financial management systems 
        to ensure compliance. Only those systems certified as 
        compliant may be purchased by government agencies.
         Financial management systems improvements must 
        be achieved with an infrastructure dominated by older 
        legacy computer systems that were not designed to 
        support current requirements or technology. In an era 
        where budget resources are limited, infrastructure 
        modernization remains a challenging problem.
         Agency efforts to improve their antiquated 
        infrastructures may complicate their ability to produce 
        timely financial audits. For example, this year, HUD's 
        inability to complete the audit by March 1 is primarily 
        the result of technical difficulties occasioned by the 
        transition to a new financial system. HUD was 
        consolidating several accounting systems to a new 
        general ledger system as part of its ongoing 
        modernization of its financial management systems--an 
        action recommended by both the Office of Inspector 
        General and GAO. While we regret that HUD missed its 
        deadline this time, we are pleased that HUD has been 
        able to correct system deficiencies and expect that in 
        the long term its financial systems will benefit.
         The Federal financial systems environment 
        includes over 700 financial systems among the 24 CFO 
        Act agencies, most of which are custom designed for a 
        particular agency or bureau. These systems cost 
        approximately $2 billion annually to maintain and 
        operate, and almost 80 percent of the systems have 
        plans to be or are currently being upgraded or 
        replaced.
         These financial management systems originally 
        were built to keep track of cash outlays under budget 
        appropriations law, not accrual-based financial 
        accounting or to comply with the requirements of the 
        Government Performance Results Act. These systems track 
        expenditures very carefully, but they were never 
        designed to develop the financial information needed to 
        produce GAAP statements. Now, for the first time, we 
        are asking these systems to do both.
         Large agencies with multiple bureaus typically 
        operate systems that are not integrated. They cannot 
        share information automatically, even within the 
        agency.

                           III. Discrepancies

    We would also like to address the following points in the 
report:
         The majority report states, ``similar to the 
        Government's year 2000 conversions efforts, success in 
        complying with FFMIA is dependent upon strong 
        commitment from top agency management.'' It should also 
        be noted that, unlike year 2000 efforts which addressed 
        a single technical problem that affected everyone in a 
        similar manner, FFMIA attempts to address multiple 
        problems affecting multiple systems. Furthermore, in 
        addition to management commitment and oversight, 
        significant resources are also needed.
         The chart on page 26 of the report needs an 
        additional bullet to state that the head of the agency 
        is responsible for determining whether the agency 
        complies with FFMIA. The agency head considers all 
        relevant information, including the audited financial 
        statements, in making this determination.
         The majority report states, ``Specifically, 20 
        of the agencies were not compliant with the 
        requirements of the Federal Financial Management 
        Improvement Act [FFMIA] of 1996.'' It should be noted 
        that compliance determination rests with the agency 
        head and not the auditor, as specified in the Public 
        Law 104-208, section 803(c)(1). Agency heads in six of 
        the CFO Act agencies reported their fiscal year 1999 
        financial statement audit reports that their agencies 
        were in substantial compliance with FFMIA. In three of 
        the six agencies (Social Security Administration, the 
        Office of Personnel Management, and the Federal 
        Emergency Management Agency), the auditors did not 
        agree with the agency heads' assessments. The majority 
        report, therefore, is reporting the auditors compliance 
        determinations, not the statutorily required 
        determinations by agency heads.

             IV. Response to the Majority's Recommendations

    Section 1 of the report's recommendations states that 
``Each department and agency should provide a detailed, annual 
status report on its financial management operations.'' While 
we agree with this recommendation, we wanted to emphasize that 
current financial management plans are required by OMB Circular 
A-11 as part of the agency budget submission to OMB and are 
reviewed by OMB.
    We question section 2 of the committee's recommendation 
that would require agency financial management systems 
remediation plans to provide a detailed description of planned 
actions with clear and reasonable milestones, including the 
names of staff members responsible for resolving particular 
issues. This is contrary to section 803(c)(3)(A) of FFMIA which 
does not require the names of staff members responsible. 
Ultimately, the agency head is responsible for ensuring agency 
compliance.
    Additionally, the report states, ``A draft of the approved 
plan should be sent to the Comptroller General who would 
coordinate the agency's actions and related milestones in the 
remediation effort. These parties must meet regularly to 
monitor the agency's progress in meeting the objectives of the 
plan.'' This recommendation would remove the responsibility for 
correcting deficiencies from the agency and place 
responsibility with the Comptroller General. There is also a 
question as to whether coordinating the agency's remediation 
efforts, which is an operational authority of the executive 
branch, is an appropriate role for the Comptroller General.
    We are troubled with section 3 of the committee's 
recommendations which would require that Federal agencies be 
financially penalized if they fail to produce timely and 
reliable financial information. Given the learning curve for 
implementing effective financial management, the tremendous 
challenges of improving financial systems, accommodating 
geographical differences, and addressing issues beyond agency 
control, punitive measures are inappropriate at this time. 
Positive incentives for agencies to implement reforms in their 
financial systems would be helpful. However, depriving agencies 
of their needed funds may hinder substantial financial reforms. 
Faced with a potential loss of appropriations, agencies may be 
inclined to implement ``band-aid'' repairs to their financial 
systems rather than making the appropriate long-term system 
modifications.
    While we agree with section 4 of the report's 
recommendations that the Federal Government should avoid 
inconsistent reporting of certain Social Security and Medicare 
(Part A) projections, we want to emphasize that the Department 
of the Treasury and other administration officials are already 
working to better coordinate the release of these two reports 
so that they will be able to present similar data. OMB staff is 
currently researching the feasibility and desirability of 
making any changes in regard to the audit coverage of social 
insurance information in future Federal financial statements. 
This will be done in the context of the FASAB's deliberations 
on potential changes to the accounting standards relating to 
required supplemental stewardship information.
    Section 5 of the committee's recommendations states, ``The 
Office of the Inspector General must ensure that all candidates 
for Inspector General positions are qualified to perform 
financial statement audits or specific segments of audits 
requiring specific expertise. These qualifications should be 
determined through a review by an external party and may be 
incorporated into the peer review process.'' In light of the 
qualification reviews that are already required by the OIG, 
these two statements need clarification. OIG assigns GS-511 
auditors to perform financial statement work and these 
employees are already required by the Office of Personnel 
Management to have successfully completed 24 semester hours of 
accounting and related courses. (GS-510 accountants, usually 
employed by the offices of the CFOs, are also required to have 
the same education.) Many OIG employees involved in financial 
statement work are Certified Public Accountants [CPAs], who 
have an additional requirement to complete 80 hours of 
continuing professional education every 2 years. In order to 
ensure quality performance, each OIG is subject to a triennial 
peer review by another OIG. The peer review includes an 
examination of auditors' qualifications to perform the work 
assigned. The committee should specify what additional 
requirements are necessary if any are needed.
    Additionally, we question the report's recommendation that 
a board review the qualifications of Inspector General 
candidates before the nomination is forwarded to the Senate for 
consideration. We believe that it is the President's 
prerogative to select candidates who possess the qualifications 
required for Inspectors General under the Inspector General Act 
of 1978 (Public Law 95-452). During the confirmation process, 
the Senate has both the responsibility and the opportunity to 
review those qualifications.
    Finally, we also question whether there is a need for a 
statutorily-mandated Office of Management within the executive 
branch as called for in section 6 of the committee's 
recommendations. OMB Director Jack Lew, in his April 7, 2000, 
testimony, noted that ``In the real world, resource allocation 
and management are fundamentally interdependent. Given the 
complex systems that are necessary to address public problems, 
we must operate with the consideration of management and budget 
together, not apart. This reflects the realization that these 
two sets of concerns are in fact intertwined in actual 
operations.'' He further noted that OMB provides the President 
with the management expertise through OMB's Resource Management 
Offices [RMOs]. The Director stated that ``RMOs play a pivotal 
role in . . . management guidance to Federal agencies. Staff 
are experts in their program and policy areas and are 
responsible for . . . implementation of governmentwide 
management initiatives. While each unit has its own focus, OMB 
. . . fulfills its responsibilities because of continuing 
collaboration among its offices and divisions.''
    The committee notes that a separate Office of Management 
``could help the President and his Cabinet to focus on the 
critical management challenges facing the Federal Government.'' 
OMB already has a mechanism in place to address these issues. 
In order to improve government management, each year the 
Director of OMB, after consulting with the President, the Vice 
President, and others in the administration, designates a 
series of Priority Management Objectives [PMOs]. Issues 
designated as PMOs receive coordinated, sustained, and 
intensive management attention. For example, in 1999 PMO No. 1 
was the year 2000 challenge. This year, PMO No. 1 is to use 
performance information to improve program management and make 
better budget decisions; improving financial management 
information is PMO No. 2. This effort includes not only 
improved and timely financial reporting, backed by independent 
audits, but also the achievement of the financial systems goals 
of FFMIA.
     It is unclear whether creating a new management agency 
will improve government management or whether separating 
management functions from budget functions will backfire and 
result in less attention being placed on management reform at 
Federal agencies. Presidents can create organizations within 
the executive branch that focus on management reform. In 
addition, a number of high-level interagency working groups 
focused on improving government management have taken hold, 
such as the Chief Financial Officers Council and the Chief 
Information Officers Council. Alternative approaches to 
improving management should be encouraged and explored. An 
Office of Management is just one approach.

                             V. Conclusion

    We believe that Congress has implemented a legislative 
framework that will provide agencies the opportunity to 
identify and resolve the most significant financial problems 
existing in the Federal Government. It is a tremendous 
challenge to improve financial systems to produce accurate, 
reliable, consistent, and timely information for program and 
financial managers. While significant progress has been made in 
Federal financial accountability, we agree that much work 
remains to be done. We emphasize that financial management 
modernization is a long-term, complex process that cannot be 
solved in a matter of months. The assignment of poor grades to 
agencies merely politicizes the process and does not take into 
account the different circumstances and successes the Federal 
Government has made to date. By all accounts, agencies are 
clearly headed in the correct direction and are taking great 
strides toward achieving our goal of financial accountability. 
We would like to recognize the agencies' CFOs and their finance 
and accounting staff for the progress they have made in 
financial management.
                                   Hon. Henry A. Waxman.
                                   Hon. Jim Turner.
                                   Hon. Tom Lantos.
                                   Hon. Major R. Owens.
                                   Hon. Edolphus Towns.
                                   Hon. Paul E. Kanjorski.
                                   Hon. Patsy T. Mink.
                                   Hon. Carolyn B. Maloney.
                                   Hon. Eleanor Holmes Norton.
                                   Hon. Elijah E. Cummings.
                                   Hon. Dennis J. Kucinich.
                                   Hon. Rod R. Blagojevich.
                                   Hon. Danny K. Davis.
                                   Hon. John F. Tierney.
                                   Hon. Thomas H. Allen.
                                   Hon. Harold E. Ford, Jr.
                                   Hon. Janice D. Schakowsky.

                                  
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