U.S. GOVERNMENT PRINTING OFFICE

65–301 CC WASHINGTON : 2000

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
(II)

COMMITTEE ON GOVERNMENT REFORM

DAN BURTON, Indiana, Chairman

BENJAMIN A. GILMAN, New York

CONSTANCE A. MORELLA, Maryland

CHRISTOPHER SHAYS, Connecticut

ILEANA ROS-LEHTINEN, Florida

JOHN M. MCHUGH, New York

STEPHEN HORN, California

JOHN L. MICA, Florida

THOMAS M. DAVIS III, Virginia

DAVID M. MCINTOSH, Indiana

MARK E. SOUDER, Indiana

JOE SCARBOROUGH, Florida

STEVEN C. LATOURETTE, Ohio

MARSHALL ‘‘MARK’’ SANFORD, South

Carolina

BOB BARR, Georgia

DAN MILLER, Florida

ASA HUTCHINSON, Arkansas

LEE TERRY, Nebraska

JUDY BIGGERT, Illinois

GREG WALDEN, Oregon

DOUG OSE, California

PAUL RYAN, Wisconsin

HELEN CHENOWETH-HAGE, Idaho

DAVID VITTER, Louisiana

HENRY A. WAXMAN, California

TOM LANTOS, California

ROBERT E. WISE, JR., West Virginia

MAJOR R. OWENS, New York

EDOLPHUS TOWNS, New York

PAUL E. KANJORSKI, Pennsylvania

PATSY T. MINK, Hawaii

CAROLYN B. MALONEY, New York

ELEANOR HOLMES NORTON, District of

Columbia

CHAKA FATTAH, Pennsylvania

ELIJAH E. CUMMINGS, Maryland

DENNIS J. KUCINICH, Ohio

ROD R. BLAGOJEVICH, Illinois

DANNY K. DAVIS, Illinois

JOHN F. TIERNEY, Massachusetts

JIM TURNER, Texas

THOMAS H. ALLEN, Maine

HAROLD E. FORD, JR., Tennessee

JANICE D. SCHAKOWSKY, Illinois

———

BERNARD SANDERS, Vermont

(Independent)

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

THOMAS M. DAVIS III, Virginia

GREG WALDEN, Oregon

DOUG OSE, California

PAUL RYAN, Wisconsin

JIM TURNER, Texas

PAUL E. KANJORSKI, Pennsylvania

MAJOR R. OWENS, New York

PATSY T. MINK, Hawaii

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 deadline for

audited financial statements .................................................. 3

2. Progress is being made, but obtaining ‘‘clean’’ audit opinions

is not the end game ................................................................. 3

3. Material deficiencies in Federal Government’s financial information continue .................................................................. 4

4. Inconsistent reporting of certain Social Security and Medicare (Part A) projections ......................................................... 4

5. Material Control Weaknesses Continue to Exist .................... 5

6. Noncompliance with laws and regulations continue to exist . 5

C. Recommendations ................................................................................ 6

1. Continuation of regular congressional and Presidential oversight .......................................................................................... 6

2. Require top management attention to agencies’ financial

management systems remediation plans .............................. 6

3. Provide incentives for implementing effective financial management .................................................................................... 7

4. Ensuring that the Federal Government’s financial report

contains current information related to Social Security and

Medicare (Part A) trust funds ................................................ 7

5. Strengthen the ability of Inspectors General to carry out

their financial management oversight responsibilities ........ 7

6. Strengthen the President’s role as Chief Executive Officer

of the executive branch by establishing an Office of Management .................................................................................... 8

II. Report on the committee’s oversight review ................................................ 8

A. Background .......................................................................................... 8

1. The need for effective Federal financial management ........... 9

2. Federal financial management legislation .............................. 9

3. The importance of effective internal control ........................... 10

B. Results of the fiscal year 1999 governmentwide financial statements audit and related agency audits ............................................ 11

1. Oversight hearings held by the subcommittee ........................ 11

2. Federal department and agency financial management

grades ....................................................................................... 18

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 Management

Improvement Act .................................................................................................. 31

Appendix E.—List of witnesses .............................................................................. 37

VIEWS

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 ............. 40

(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)

1 Clause 1(h) (4) and (6) rule X of the Rules of the House of Repesentatives, 106th Congress.

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:

[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
2

2 Ibid., Clause 2(b)(1) (A) and (C).

3The 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 Manshall 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

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 state-
3

agement, General Services, National Science, Nuclear Regulatory Commission, Personnel Management, Small Business, and Social Security.

ments 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.

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
4

4 ‘‘Financial Audit: 1999 Financial Report of the United States Government,’’ GAO AIMD–00–

131, Mar. 31, 2000.

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 dayto-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. 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 signifi-
5

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.

cantly 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.

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 en-
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.

acted 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

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
7

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
8

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
9

7Thomas 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.

. . . 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.

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
10

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 con-
11

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.

sumed 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

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;
12

9The Department of the Interior and the Department of State had not yet issued audited financial statements.

• 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.

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.
13

10 ‘‘Internal Revenue Service: Results of Fiscal Year 1999 Financial Statement Audit,’’ GAO/

T–AIMD–00–104, Feb. 29, 2000. 11 ‘‘IRS Modernization: Business Practice, Performance Management, and Information Technology Challenges,’’ GAO/T–GGD/AIMD–00–144, Apr. 10, 2000. 12Public Law 105–206, July 22, 1998.

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

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

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

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 al-
14

13Testimony 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. 14 ‘‘IRS Modernization: Business Practice, Performance Management, and Information Technology Challenges,’’ GAO/T–GGD/AIMD–00–144, Apr. 10, 2000. 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.

most 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.

The GAO warned, however, ‘‘. . . the magnitude of this modernization effort makes it a high-risk venture that will take years

to fully implement.’’ 14

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

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.
15

17Testimony of Roger C. Viadero, Inspector General, U.S. Department of Agriculture, Mar. 21,

2000.

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.

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 addi-
16

18OIG 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. 19Testimony of Deputy Secretary Saul N. Ramirez, Jr., ‘‘HUD’s Financial Management Systems,’’ Mar. 22, 2000.

tion, 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

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.

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.
17

20Statement 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. 21 ‘‘Department of Defense: Progress in Financial Management Reform,’’ GAO/T–AIMD/

NSIAD–00–163, May 9, 2000.

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

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

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
18

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.

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.

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.
19

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.
20
21

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.

(23)

APPENDIX A—MAJOR FEDERAL FINANCIAL MANAGEMENT

LEGISLATION

Public Law Key Financial Management Provisions 1

Budget and Accounting Procedures Act

of 1950

(Chapter 946, 64

Stat. 832)

• The Budget and Accounting Procedures Act of 1950 provided that the 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

(Public Laws 95–452

and 100–504)

• The Inspector General Act (IG Act) requires that Inspectors General 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.
24

Public Law Key Financial Management Provisions 1

Federal Managers’ Financial Integrity

Act of 1982

(Public Law 97–255)

• The Federal Managers’ Financial Integrity Act of 1982

[FMFIA] 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

(Public Laws 97–365

and 104–134, sec.

31001)

• The Debt Collection Act, as amended, provides greater

powers to Federal agencies in collecting debts owed to

the Federal Government 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.
25

Public Law Key Financial Management Provisions 1

• 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

(Public Law 101–576)

• The Chief Financial Officers Act of 1990 (CFO Act) creates a new 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

(Public Law 103–

356) 2

• The Government Management Reform Act of 1994

[GMRA] expands 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.
26

Public Law Key Financial Management Provisions 1

• 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

(Title VIII of Public

Law 104–208)

• The Federal Financial Management Improvement Act of

1996 [FFMIA] 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.
27

Public Law Key Financial Management Provisions 1

• 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.’’
(28)

APPENDIX B—FEDERAL ACCOUNTING CONCEPTS AND STANDARDS
(29)

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
30

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.

occur and not be detected within a timely period by employees in

the normal course of performing assigned functions.’’ 23

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.
(31)

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.
32

(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
33

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 agencywide 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
34

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;
35

(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:
36

‘‘SEC. 4001. SHORT TITLE.

‘‘This division and division E may be cited as the ‘ClingerCohen 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 ‘ClingerCohen 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 ClingerCohen Act of 1996.

This Act may be cited as the ‘‘Treasury, Postal Service, and

General Government Appropriations Act, 1997’’.
(37)

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.
38

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.
39

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.
(40)

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 op-
41

pose 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
42

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.
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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
44

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 profes-
45

sional 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
46

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.

Æ