U.S. GOVERNMENT PRINTING OFFICE

61–840 CC WASHINGTON : 2000

CAN THE FEDERAL GOVERNMENT BALANCE ITS

BOOKS? A REVIEW OF THE FEDERAL CONSOLIDATED FINANCIAL STATEMENTS

HEARING

BEFORE THE

SUBCOMMITTEE ON GOVERNMENT MANAGEMENT,

INFORMATION, AND TECHNOLOGY

OF THE

COMMITTEE ON

GOVERNMENT REFORM

HOUSE OF REPRESENTATIVES

ONE HUNDRED SIXTH CONGRESS

FIRST SESSION

MARCH 31, 1999

Serial No. 106–73

Printed for the use of the Committee on Government Reform

(

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

(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, 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

JOHN T. DOOLITTLE, California

HELEN CHENOWETH, Idaho

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, Washington,

DC

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

CARLA J. MARTIN, Chief Clerk

PHIL SCHILIRO, Minority Staff Director

SUBCOMMITTEE ON GOVERNMENT MANAGEMENT, INFORMATION, AND TECHNOLOGY

STEPHEN HORN, California, Chairman

JUDY BIGGERT, Illinois

THOMAS M. DAVIS, 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

MASON ALINGER, Clerk

FAITH WEISS, Minority Counsel

(III)

C O N T E N T S

Page

Hearing held on March 31, 1999 ............................................................................ 1

Statement of:

DeSeve, G. Edward, Deputy Director for Management, Office of Management and Budget, accompanied by Deidre A. Lee, Administrator, Office

of Federal Procurement Policy, Office of Management and Budget; and

Donald V. Hammond, Fiscal Assistant Secretary, Department of the

Treasury ......................................................................................................... 42

Walker, David M., Comptroller General of the United States, General

Accounting Office, accompanied by Gene L. Dodaro, Assistant Comptroller General, General Accounting Office ................................................. 13

Letters, statements, et cetera, submitted for the record by:

DeSeve, G. Edward, Deputy Director for Management, Office of Management and Budget, prepared statement of ................................................... 46

Hammond, Donald V., Fiscal Assistant Secretary, Department of the

Treasury, prepared statement of ................................................................. 61

Horn, Hon. Stephen, a Representative in Congress from the State of

California, prepared statement of ................................................................ 3

Turner, Hon. Jim, a Representative in Congress from the State of Texas,

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

Walker, David M., Comptroller General of the United States, General

Accounting Office, prepared statement of ................................................... 18

(1)

CAN THE FEDERAL GOVERNMENT BALANCE

ITS BOOKS? A REVIEW OF THE FEDERAL

CONSOLIDATED FINANCIAL STATEMENTS

WEDNESDAY, MARCH 31, 1999

HOUSE OF REPRESENTATIVES,

SUBCOMMITTEE ON GOVERNMENT MANAGEMENT,

INFORMATION, AND TECHNOLOGY,

COMMITTEE ON GOVERNMENT REFORM,

Washington, DC.

The subcommittee met, pursuant to notice, at 10 a.m., in room

2154, Rayburn House Office Building, Hon. Stephen Horn (chairman of the subcommittee) presiding.

Present: Representatives Horn, Davis, and Turner.

Staff present: J. Russell George, staff director and chief counsel;

Bonnie Heald, director of communications/professional staff member; Mason Alinger, clerk; Paul Wicker, Kacey Baker, and Richard

Lukas, interns; Faith Weiss, minority counsel; Jean Gosa, minority

clerk; and Earley Green, minority staff assistant.

Mr. HORN. A quorum being present, the Subcommittee on Government Management, Information, and Technology will come to

order.

Last year, the Nation’s first ever governmentwide audit provided

a comprehensive accounting of a multitude of financial problems

with the executive branch of the Federal Government. I am disheartened to report that the results of the fiscal year 1998 audits

are equally dismal. Once again, billions of taxpayers’ dollars were

lost to waste, fraud, and mismanagement, or just can’t be accounted for. This audit is required by the Government Management Reform Act of 1994, a bipartisan law in the 103d Congress.

The law specified that no later than March 31, 1998 and each

year thereafter, the Secretary of the Treasury, in coordination with

the Director of the President’s Office of Management and Budget,

shall annually prepare and submit to the President and Congress

an audited financial statement for the preceding fiscal year. The

audited financial statement should cover all accounts and associated activities of the executive branch of the Federal Government.

The required audit conducted by the legislative branch’s General

Accounting Office is being released today. The audited report shows

that the Federal Government is unable to report accurately to the

taxpayers or to Congress how it spent more than $1.8 trillion in fiscal year 1998.

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The audit report also shows that Federal agencies were unable to safeguard an account for $1.6 trillion in government assets, and

estimates of future costs are off by billions of dollars.

Also today we are issuing our second report card summarizing

the results of the 1998 audit reports on the 24 largest Federal

agencies. As you can see from the grades, there has been very little

improvement. In fact, some agencies have taken a step backward.

Of the 17 agencies that submitted the required report, 5 received

F’s, 6 received D’s. Only two agencies, the National Aeronautics

and Space Administration and the National Science Foundation,

earned A’s. Perhaps some of those distinguished scientists could be

loaned out to help unscramble the tangled financial web which

seems to plague the few other agencies.

The grades provide a summary status of these agencies that have

submitted their reports. But as of yesterday, 7 of the 24 agencies

still had not submitted reports, even though it is 1 full month after

the legal filing date and 6 full months after the end of the fiscal

year.

You will notice that these agencies, which include the Departments of Commerce, Education, Interior, State, and Transportation, received F’s on their report card. It is troubling to this subcommittee that they are unable to provide this report in a timely

way.

Both the General Accounting Office’s audit report and the individual agency reports weave a woeful tale of poor financial management practices within the Federal Government and the financial risks created by those weaknesses. We must pay close attention to the details of these reports because of their wide-ranging effects.

This report is our second warning. Next year there must be significant improvement.

I thank our distinguished witnesses for being here today to discuss the results of this comprehensive and important effort. We are

delighted to have the new Comptroller General of the United

States, Mr. David Walker, who is in charge of the General Accounting Office. It is Mr. Walker’s first time before this subcommittee,

and we welcome him. Accompanying him is Assistant Comptroller

General Gene Dodaro.

Also before us are a number of other key witnesses from the Office of Management and Budget and the Department of the Treasury, the Honorable G. Edward DeSeve, Deputy Director for Management, Office of Management and Budget. We wish him well as

he moves to the private sector. This is his last day technically on

the job for the executive branch. He has done a fine job in a very

difficult circumstance.

He is accompanied by Ms. Deidre A. Lee, the Administrator, Office of Federal Procurement Policy, Office of Management and

Budget. The other key witness is Dr. Donald V. Hammond, the Fiscal Assistant Secretary of the Department of the Treasury.

I now yield to the ranking Democrat, Mr. Turner of Texas, who

will have some opening comments, and then to the gentleman from

Virginia, Mr. Davis.

Mr. Turner.

[The prepared statement of Hon. Stephen Horn follows:]

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Mr. TURNER. Thank you, Mr. Chairman. The second audit of the

Federal Government’s books submitted to us today reflects a significant effort by the administration and the General Accounting

Office.

I want to commend the people who are responsible for the second

timely audit. It would not have been possible without the dedication and hard work of a number of employees at the General Accounting Office, the Department of the Treasury, and the Office of

Management and Budget.

The American taxpayers deserve to know when, where, and how

their tax dollars are being spent. The President in the National

Performance Review under Vice President Gore embraced this principle early in their first term. In September 1993, the National Performance Review recommended the preparation of an annual consolidated financial report and the establishment of comprehensive

governmentwide accounting standards. These recommendations became law as part of the Government Management Reform Act

passed by the Congress and signed by the President.

Government financial audits highlight a number of serious financial management concerns and show the extent to which certain

Federal agencies have experienced difficulty in keeping track of

their property and equipment, which is significant, because without

maintaining reliable inventories, it is impossible for agencies to

make new purchases and purchase supplies in a cost-effective manner.

As we have heard prior to today’s testimony, the Department of

Defense, Department of Agriculture, and the Department of Transportation have experienced similar property and equipment accounting problems.

Another area of concern that has been revealed deals with the

various agencies’ abilities to gain a clear picture of the scope of

their respective liabilities. Without a clear understanding of the

scope of liabilities, agencies cannot adequately minimize costs to

the taxpayers.

For instance, the Departments of Defense and Energy have experienced difficulty in estimating among their overall potential liabilities their respective environmental liabilities. Initially, some of the

largest credit agencies, such as the Departments of Agriculture and

Veterans Affairs, still lack historical data on their credit programs,

which is required by the Federal Credit Reform Act of 1990 and by

Federal accounting standards since fiscal year 1992.

Simply put, these audits impose new financial discipline on Federal agencies and provide new information relating to the cost of

Federal programs. For these reasons, there should be bipartisan

support for this audit effort and for the improved financial management that they have rendered.

I notice that the majority staff has assigned grades to the various

audits. I notice there are a lot of D’s and F’s on the report. I might

offer a word of caution, because it is my opinion, Mr. Chairman,

that the letter grades may be an oversimplified reflection of what

is actually happening in these various audits.

Clearly there have been improvements in the audited practices

and performance of these agencies in the last 3 years that we have

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mandated to be performed. Agencies are showing definite improvement in audit results.

Only 1 of the 24 major agencies had reliable financial statements, which we call a clean or unqualified opinion, in 1993. However, by fiscal year 1997, 11 agencies received clean opinions, and

this year the Office of Management and Budget anticipates that 13

agencies will receive clean opinions. Overall, we clearly have witnessed steady progress from our Federal agencies and improved

audit results.

I have a chart that I think illustrates this very clearly, which

shows the results of the audits for the past several years. You will

note on there that there has been steady progress. In 1993, as I

said, only one agency received a clean audit. In 1996, we had six.

By 1997, we had 11. In 1998 we had 13.

I am pleased to see progress. That does not indicate that there

is not much work to be done, but I do want to underscore that the

results of grading the agencies may not fairly reflect that there has

been significant progress.

I also found it interesting that the minority staff, Mr. Chairman,

took the majority staff’s grading approach and applied it to the

Congress. I have another chart that shows these results. If we

looked at the Congress itself and applied the same standards applied to our 24 Federal agencies, we would see that the Congress,

measured by the three standards of the grading system, would receive a D-minus.

I know the chairman is very much aware, as I am, that the Congress has made significant progress in the last several years in its

auditing results. So while there is much work yet to be done, we

should at least acknowledge, I think, the fact that there has been

progress made, and we hope that progress will continue.

Clearly we need to eliminate some of the obstacles that we will

hear about today that would result in a clean opinion, and I hope

all of us share, as I know the chairman does, the importance of the

auditing work that is ongoing and the importance of approaching

it in a bipartisan way.

Thank you, Mr. Chairman.

[The prepared statement of Hon. Jim Turner follows:]

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Mr. HORN. I thank the gentleman, and appreciate his comments.

I would merely say, with reference to Congress, after 210 years the

first audit in the history of the Congress was the one that the

Speaker commissioned when we took over in 1995, and every Member was sent a complete audit of the Congress for the first time in

history.

I now yield to the gentleman from Virginia, Mr. Davis.

Mr. DAVIS. Thank you, Mr. Chairman. I am not sure whether to

argue if the glass is half full or half empty. I count, from the material given to us, we have eight agencies that are in compliance. We

have a number of incompletes.

The ones that I have, for the record, in compliance are NASA,

National Science Foundation, GSA, Labor, the Social Security Administration, FEMA, HUD, and the Nuclear Regulatory Commission. We have others that are qualified, and we have had no reports yet from Commerce, Education, EPA, Interior, Small Business Administration, State, and DOT. Hopefully some of these will

bring themselves into compliance. That is eight.

Even if we had 13 clean opinions, that would mean 11 are not

clean opinions after several years of working with this. If these

were my kids and that was their report card, they would be

grounded and they would be getting some tutorial to try to bring

them up to snuff, even though progress may be slightly in the positive direction.

Also, if this was a taxpayer and they submitted records like this,

it would be referred to the U.S. Attorney’s Office. This is just unacceptable in many of these cases with what is coming forward.

Let me just say, I look forward to the testimony today. For Ed

DeSeve, I think this will be his last testimony before an agency.

Ed, good luck in the private sector. I have enjoyed working with

you on a number of projects, and I think I can safely say for all

of us that you have left this city a lot better than you found it.

When you leave government, that is as good as it gets, I think.

And you have Dee Lee with you, and you have worked on a number of projects in my neighborhood, and Don Hammond, so I can’t

beat up on you too much.

But Ed, we really appreciate the efforts that you have made. You

have made a huge difference for the District of Columbia and the

Federal Government. You will be missed in public service.

Mr. HORN. I thank the gentleman very much.

We will now start with the Comptroller General. We welcome

you, and since we are an investigating committee, all the subcommittees of Government Reform have all witnesses sworn in, so

Comptroller General and Mr. Dodaro, if you will rise.

[Witnesses sworn.]

Mr. HORN. The clerk will note both witnesses have affirmed the

oath.

Your statement is automatically put in the record, as will the

other witnesses’ statements, once we introduce you. Please feel free

to proceed, whether you want to summarize it, whether you want

to read it. I have read it all and it is a very thoughtful statement,

as we would expect. We would welcome your comments.

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STATEMENTS OF DAVID M. WALKER, COMPTROLLER GENERAL OF THE UNITED STATES, GENERAL ACCOUNTING OFFICE, ACCOMPANIED BY GENE L. DODARO, ASSISTANT

COMPTROLLER GENERAL, GENERAL ACCOUNTING OFFICE

Mr. WALKER. Thank you, Mr. Chairman. It is a pleasure to be

here today. I will summarize my statement, since the entire statement has been put into the record.

I might note, Mr. Chairman, that you obviously don’t grade on

a curve, and that it is my understanding that if GAO had been applied to your ratings, that we might have gotten an A. At least that

is my understanding. I think it is important that we lead by example, because after all, we are the agency that is overseeing others.

I think it is important for us to do that.

Mr. Chairman, members of the committee, I am pleased to be

here today to discuss our report on the U.S. Government’s financial

statements for fiscal year 1998, and to underscore the importance

of continually improving how Federal departments and agencies

manage the finances of our National Government.

The Federal Government has underway the implementation of

important legislative reforms to promote greater accountability in

managing the finances of our National Government. Timely, accurate, and useful information has not been available across government to assure financial accountability and to help continuously

improve the economy, efficiency, and effectiveness of our government.

It is essential to improve how Federal departments and agencies

manage our finances in order to achieve better accountability at

the Federal Government level.

Fortunately, the President and the Office of Management and

Budget have taken financial management in general and the annual audit in particular very seriously, and they have made it a

priority. As a result, considerable effort is being made by agencies

to achieve the mandate of achieving a clean financial statement

opinion and eliminating material control weaknesses from their financial reporting. Steady improvements in financial accountability

are occurring.

However, several major agencies are not yet able to produce

auditable financial statements on a consistent basis, and they have

major obstacles to overcome. Similar challenges exist in producing

reliable statements for the entire U.S. Government.

The historic, longstanding inattention to financial management

issues in the government, combined with the size and complexity

of government operations, make corrective actions difficult, but imperative. Moreover, the pace of improvement will be greatly influenced by the progress government organizations are able to make

in, first, modernizing their information systems and internal controls; second, revamping their human capital practices to enhance

capacity; and third, implementing change management strategies

to achieve the discipline needed to follow sound financial management and reporting practices.

I might add a fourth, Mr. Chairman. It is absolutely critical that

there be sustained attention and commitment at the very top of all

the departments and agencies, as well as by the President and the

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Office of Management and Budget, to get this job done and to make

continuous improvement.

The executive branch recognizes the extent and severity of existing deficiencies. Addressing them will continue to require concerted

improvement efforts across government. With concerted effort, the

Federal Government can continue to make progress toward achieving accountability and generating reliable financial and management information on a regular basis.

It is critically important, Mr. Chairman, that we have this information on a regular basis, not just at year end. I will come back

to that later.

The balance of my remarks, Mr. Chairman, will be focused on

several points: first, outlining the findings of our report and the financial statements of the U.S. Government for fiscal year 1998; underscoring the critical need to fully implement legislative reforms;

emphasizing that unqualified or so-called ‘‘clean’’ opinions must be

accompanied by timely and reliable data, stronger controls, and

better financial and management information systems that will

help to continuously improve the economy, efficiency, and effectiveness of government.

Stated differently, receiving a clean audit opinion is not an end

in and of itself. It is an important and objective milestone which

we must strive for. However, we need to make sure that the systems and controls are in place to assure timely, accurate, and useful information to make informed decisions, and to improve the

economy, efficiency, and effectiveness of government on an ongoing

basis.

I would like to highlight the fact that human capital must absolutely become a more critical part of the management reform agenda in order to achieve the objectives of the Results Act and to move

toward a more performance-based government. I would urge that

the focus be on the term ‘‘accountability,’’ not accounting. We are

called the General Accounting Office, but we are about accountability, and financial management is one element of accountability,

but there are others that are important as well.

With regard to results, Mr. Chairman, last year the GAO reported in the first ever report on the U.S. Government’s financial

statements for fiscal year 1997, that because of serious deficiencies

in the government systems, recordkeeping, documentation, financial reporting and controls, amounts reported in the financial statements and related notes do not provide a reliable source of information for decisionmaking by the government or the public.

These deficiencies also affect the reliability of the financial statements and the government’s ability to measure the full cost and financial performance of programs and to manage related operations.

Our report on the U.S. Government’s financial statements for fiscal year 1998, which is being released today, has reached the same

conclusion. Specifically, due to these deficiencies, we are unable to

express an opinion on the financial statements of the U.S. Government.

Major challenges include the Federal Government’s inability to:

1) properly account for and report on billions of dollars of property,

equipment, materials, and supplies, and certain stewardship assets; 2) properly estimate the cost of most major Federal credit proVerDate 11-MAY-2000 11:11 Mar 06, 2001 Jkt 066696 PO 00000 Frm 00018 Fmt 6633 Sfmt 6602 E:\HEARINGS\61840 pfrm02 PsN: 61840
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grams and the related loans receivable and loan guarantee liabilities; 3) estimate and reliably report material amounts of environmental and disposal liabilities and related costs; 4) determine the

proper amount of various reported liabilities, including post retirement health benefits for military employees, accounts payable, and

other liabilities; 5) accurately report major portions of the net cost

of government operations; 6) determine the full extent of improper

payments that occur in major programs and that are estimated to

involve billions of dollars annually; 7) ensure that all disbursements are properly recorded; and 8) properly prepare the Federal

Government’s financial statements, including balancing the statements, accounting for billions of dollars of transactions between

governmental entities, in other words, intragovernmental transactions between one department and another, and properly and

consistently compiling the information to present consolidated financial statements.

Overall, we have found significant financial systems weaknesses

and problems with fundamental recordkeeping and financial reporting, incomplete documentation, and weak internal controls, including computer controls. These deficiencies continue to prevent

the government from accurately reporting a significant portion of

its assets, liabilities, and costs, and affect the reliability of the financial statements and the government’s ability to accurately

measure the full cost and financial performance of programs and

to manage its operations.

Mr. Chairman, you noted earlier the current status of individual

agency audit efforts, and Ranking Minority Member Turner also

noted the progress made over the last several years, but we have

still got a ways to go. I think it is important to note that a number

of agencies still have not completed their required audits, and yet

we are a number of months past the fiscal year end.

This in and of itself serves to demonstrate the challenges and the

complexities that these agencies face, and the underlying issues associated with the lack of adequate management information systems to prepare timely, accurate, and useful information for the

audit, much less for day-to-day decisionmaking and ongoing operations.

Producing audited financial statements by the March 1 statutory

deadline is still a challenge, but improvements were made this year

by certain agencies; in particular, the Department of Health and

Human Services. In addition, some agencies for the first time have

received clean audit opinions or unqualified audit opinions. I might

note, the Department of Housing and Urban Development, it is my

understanding, has received a clean opinion.

We have designated as high-risk certain agencies with the most

serious challenges: Financial management at DOD, IRS, the Forest

Service, and the FAA. All, however, have efforts underway to address these deficiencies. Importantly, the Customs Service was removed from our high-risk list due to their concerted efforts and

demonstrated progress in achieving positive results.

Audited financial statements are essential to providing an annual public scorecard on accountability. However, an unqualified or

clean audit opinion, while certainly being important and an objective milestone, is not an end in and of itself.

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For some agencies, the preparation of financial statements requires considerable reliance on ad hoc programming and analysis

of data produced by inadequate systems that are not integrated or

reconciled, and often require significant audit adjustments. Some

agencies undertake heroic efforts to obtain reliable year-end data

that can be audited, but these efforts are not backed up by fundamental improvements in the underlying financial and management

information systems and control mechanisms to support ongoing

program management and accountability.

As a result, these heroic efforts will not achieve the intended results of the CFO Act over the long-term; namely, the CFO Act is

intended to enhance overall accountability, and assure that the financial and management information systems and controls are in

place to continuously improve the economy, efficiency, and effectiveness of government.

To do so, systems must provide timely, accurate, and useful information for informed decisionmaking. Improving financial and

management information systems is essential.

For fiscal year 1997, agency financial auditors reported that 20

of 24 major agencies’ financial management systems did not comply

with the act’s requirements. Similar results are expected for fiscal

year 1998. In addition, agencies face the year 2000—Y2K—computing challenge of assuring that their systems can function properly as we change to the new millennium.

This task is appropriately taking priority, and will temporarily

sidetrack agencies from much needed other improvements in their

systems.

Strengthening computer controls is vital as well. We continue to

find serious and widespread computer security weaknesses that

place enormous amounts of Federal assets at risk of fraud and

abuse, financial information at risk of unauthorized modification or

destruction, sensitive information at risk of inappropriate disclosure, and critical operations at risk of disruption.

The GAO, as you know, Mr. Chairman, has done a tremendous

amount of work with the Congress to provide leadership, along

with working with the administration on the Y2K effort. It is very

clear that computer security will be fast on its heels once we get

past the new millennium.

Human capital, Mr. Chairman, is an integral part of financial

and information management reform, and indeed, any management

initiative. It involves acquiring, developing, and retaining the

human capital needed to achieve results.

Enlightened leaders understand that effectively managing employees, otherwise known as human capital, is essential to maximizing the effectiveness of any organization’s performance. Only

when the right employees with the right skills are on board and

are provided with the training, tools, structure, incentives, and accountability to work effectively, is organizational success possible.

As it relates specifically to financial management, the CFO Act

recognizes the importance of leadership in creating CFO positions

throughout government and in establishing a goal of improving the

qualifications of financial management personnel throughout government.

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While some attention to delineating critical core competences,

needed skills, and appropriate training has occurred in the government, a great deal more needs to be done.

We plan to give greater attention to recommending the ways that

the government can improve the strategic approaches to human

capital planning, the acquisition and development of staff with

skills to meet critical needs, and the creation of performance-oriented organizational cultures, while protecting reasonable merit

principles.

Without a firm foundation of reliable, timely, accurate, and useful financial and management information, the many reforms underway across government to move to a performance-based focus

will never be successfully fulfilled. Only then can the government

assure adequate accountability to taxpayers, manage for results,

and help decisionmakers make timely and well-informed judgments.

Experimentation is now underway across government to develop

single accountability reports on individual departments and agencies. These reports will consolidate and integrate audited financial

statements and reporting under the Results Act and other related

laws, to show the degree to which an agency meets goals, at what

cost, and will aid the reader in determining whether the agency is

well run.

I might note that the Social Security Administration is leading

the way in this effort, and should be commended for it. Reliable accountability reports, including information on the full costs and results of carrying out Federal activities, will help to correct the

problem of a lack of complete and reliable information that has

been a source of concern for congressional and agency decisionmakers for decades, and it will greatly aid decisionmaking for our

National Government.

Reliable financial information also is essential for analyzing the

government’s financial condition and helping inform the budget deliberations by providing additional information beyond that provided in the budget.

In closing, Mr. Chairman, I would like to commend you and the

subcommittee for its diligent oversight and actions to improve financial management of our Federal Government. Your hearings

have helped to underscore the critical importance of the issue, and

to make progress at a more rapid pace.

I look forward to working with you and the other members of

this subcommittee as we strive to enhance accountability and to

continuously improve the economy, the efficiency, and the effectiveness of the Federal Government. Thank you, Mr. Chairman.

[The prepared statement of Mr. Walker follows:]

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Mr. HORN. We thank you for that very fine statement.

What we are going to do now is alternate between Members here

of 5 minutes each, and as chairman, I will yield my first 5 minutes

to the gentleman from Virginia, Mr. Davis.

Mr. DAVIS. Thank you, Mr. Chairman.

Mr. Walker, you talked about a clean audit opinion, while certainly important and almost a starting point, is not an end in itself.

Could you just briefly elaborate on that?

Mr. WALKER. Obviously, a clean audit opinion or an unqualified

opinion is generally recognized and is an objective measure. It is

one that we should strive for, and ultimately should hope to

achieve clean audit opinions on all agencies and departments, as

well as at the overall Federal Government level.

However, it is possible to achieve a clean or unqualified audit

opinion and still have fundamental problems with regard to the financial and management information systems, and have material

control weaknesses that subject the agency to potential fraud,

waste, abuse, and mismanagement.

As a result, while we want to get the clean audit opinion, we

want to make sure that structural improvements are made, too, at

the same time.

Mr. DAVIS. Without a clean audit opinion, though, it is much

more difficult to get at the core issues, isn’t it?

Mr. WALKER. I would say that one of the benefits of striving for

a clean audit opinion is it focuses you on these underlying issues.

However, it is possible and, in fact, it has already occurred, as evidenced by the summary sheet; some agencies that have clean audit

opinions have not dealt with the underlying problems and need to

deal with the underlying problems, because it is possible, through

heroic efforts, to do a tremendous amount of work as of the beginning of the year and the end of the year to get a clean audit opinion, but yet the agencies don’t have the systems to make ongoing

management decisions.

Mr. DAVIS. Now, to make the governmentwide financial statements balance, Treasury recorded a net $24 billion item which it

labeled unreconciled transactions. If this number is a net number,

what is the gross number or real amount of the difference?

Mr. WALKER. We can’t tell you that, Congressman. If we knew

what the gross number was, I think we would be able to make

more progress in allocating it properly. That is the net number and

it is one of the reasons that we can’t express an opinion.

Mr. DAVIS. But it could literally——

Mr. WALKER. Gene.

Mr. DODARO. We do know, for example, Mr. Davis, that in just

the intergovernmental accounts or transactions that occurred, there

was a net difference of about $250 billion. So we don’t know exactly

what the total gross differences are, but there are a number of

problems that occur. One is the fact that Treasury records do not

agree with the agency records in all cases, and there are a lot of

unreconciled transactions. That is No. 1.

No. 2 are these intergovernmental transactions. The government

does a tremendous amount of business among agencies. Agencies

cannot eliminate all of those transactions when it comes to the

Treasury level. Treasury thus has difficulty reconciling those transVerDate 11-MAY-2000 11:11 Mar 06, 2001 Jkt 066696 PO 00000 Frm 00037 Fmt 6633 Sfmt 6602 E:\HEARINGS\61840 pfrm02 PsN: 61840
34

actions. So the amounts that are out of balance also includes adjustments to the agency statements that come in. It is not yet clear

that the data that are on these agency individual statements is the

same data that Treasury is using to roll into the governmentwide

statements.

Progress has been made this past year in providing greater certification that that has happened, but that is why the process of

compiling these statements is still a problem.

Mr. DAVIS. If the taxpayers sent this kind of form up to the IRS,

what would be the reaction, do you think?

Mr. WALKER. The IRS would probably be less lenient.

At the same point in time, one has to recognize——

Mr. DAVIS. It would spark an investigation if you sent these

kinds of records up, wouldn’t it, if you were a normal taxpayer, a

corporate business?

Mr. WALKER. I couldn’t tell you that, Congressman.

Mr. DAVIS. You don’t think it would; they would say, this is fine,

if the numbers don’t add up?

Mr. WALKER. I didn’t say it was fine. They would be very concerned about it, there is no question about it. We have to keep in

mind——

Mr. DAVIS. Very concerned? It could in fact be a referral, couldn’t

it?

Mr. WALKER. It could. I think we have to keep in mind that unlike the private sector, where audits have been in existence for decades, and even, frankly, in the State and local government sector

where audits have been in existence for a couple of decades, the

Federal Government rightly or wrongly is a laggard in this regard.

We are a fairly new player to having audited financial statements.

I think that we should have had better financial and management information systems all along. But the fact that we are now

having this audit demonstrates a lot of the challenges that existed

before that had not been brought to light.

Mr. DAVIS. I understand that the Department of Defense Inspector General reported that the Department of Defense made over

$1.5 trillion in adjustments to its financial records in an attempt

to prepare financial statements.

Is that possible? Is that number accurate?

Mr. WALKER. My understanding is that is correct.

Mr. DAVIS. What does this tell us about the state of confusion

over there?

Mr. WALKER. I would say that the Defense Department probably

represents the single largest challenge in the area of financial management. It probably represents also——

Mr. DAVIS. It is probably half the spending of all the agencies,

right?

Mr. WALKER. It is half of discretionary spending, I think. As you

know, mandatory spending keeps going up every year. Mandatory

spending is about 70 percent of the Federal budget. It is a major

challenge, and it is not only a challenge with regard to financial

management, Congressman, it is also a challenge with regard to

virtually every other area of management: strategic planning,

human capital, information technology, et cetera.

35

Mr. DAVIS. Let me ask just one last question. You talked about

human capital, effectively managing employees, and the challenge

in an information age.

There is a worldwide and certainly a national and regional shortage of finding qualified people to do things. We see this every day

in the private sector, where they are bidding up people. Of course,

in private companies you have stock options and a whole host of

what we call golden handcuffs to hold onto people and retain them.

The government does not have that available. Are current government compensation levels adequate to attract key managers in

these areas? Or is that just something maybe you are not—you

haven’t focused on?

Mr. WALKER. I was in charge of Arthur Andersen’s global human

capital practice, so compensation is something I know a little bit

about. Obviously, the Federal Government is not and never will be

competitive with the private sector with regard to compensation.

We rely to a great extent on getting individuals who are dedicated

to public service to come here.

There are, however, real, serious issues we need to look at in the

compensation area in the Federal Government, especially for certain critical skills where there is a tremendous imbalance. I think

there is a need for comprehensive human capital reform in the Federal Government, and compensation is one of the areas we need to

look at.

Mr. DAVIS. I would just note that I agree with that. We had

FEPCA a few years ago, the Federal Employees Pay Comparability

Act. Every year the administration has come in well under the

numbers that would have been recommended in keeping that up.

It seems in some of these very critical areas we are losing people.

In procurement we are losing people. We are losing people in key

management positions, where they can walk across the street and

get significantly more money, compensation, and a career path, and

the Federal Government today just doesn’t offer the same kind of

opportunities.

Maybe we are asking our agencies to do things that, under the

current compensation formulas, are very, very difficult to do. I

would just leave that parting thought with you.

Thank you very much, Mr. Chairman.

Mr. HORN. I completely agree with the gentleman from Virginia.

We are delighted to have a number of dedicated public servants before us today, both you in the legislative branch and those that are

to come in the executive branch.

I yield 5 minutes to the gentleman from Texas, Mr. Turner.

Mr. TURNER. One of the things that I would like for you to explain to put everything in context, I know when you do these audits and come up with less than perfect opinions, that it could

mean that there was a lack of documentation and evidence furnished by the respective agency, or it could be that there is something there that would show us that there is some fraud or waste

and abuse.

Could you give me an example of something that is found in

these audits that would clearly show us that there is fraud or

waste or abuse in that agency, as compared to something that is

found that we really don’t know until we look deeper?

36

Mr. WALKER. I will start, and then ask Mr. Dodaro if he wants

to add to it.

I think the absence of effective internal controls is—where you

have material control weaknesses over disbursements, for example—represents an area where you clearly have an opportunity for

waste, fraud, abuse, or mismanagement.

One area where progress has been made in this regard is Medicare, where they have estimated for the last several years the

amount of improper payments.

A lot of reasons can lead to an improper payment. Part of this

was because of the focus that was placed on this issue as a result

of the audit of HCFA and HHS. The amount of improper payments,

fortunately, has come down from about $20 billion a couple of years

ago to I think about $12.6 billion this year.

So HCFA is making progress, but a lot of the reasons improper

payments are possible is because of the lack of adequate internal

controls. But again, one of the benefits of this audit is that agencies

are now focused on it, and they are trying to make progress.

Gene.

Mr. DODARO. I think the area of improper payments that the

Comptroller General was just noting is probably one of the most

vivid examples where the financial audits have served to quantify

how much money is going out of those programs that should not

be.

The area of Medicare is a clear example. The reason is it ranges

from inadvertent error to fraud and abuse. We know in the Medicare area that there is a significant amount of fraud and abuse of

that system.

Other areas have been rent subsidies for the Housing and Urban

Development program, the Supplemental Social Security program,

the SSI program. They have been able to quantify overpayments,

so that has been very effective.

Also in the computer security area, we know, for example, the

SSA IG found employees stealing, identity fraud, that led to the

creation of false Social Security forms and subsequent issues. We

also know at DOD that they and we have found in a number of

cases where embezzlements have occurred.

The other area is in safeguarding assets. The Federal Government has a tremendous amount of inventory, property, and sometimes those assets are not properly safeguarded and could be subject to theft or unnecessary deterioration.

So it is a combination. We certainly have those items that you

mentioned. There is an awful lot of documentation that is not there

so that leaves a lot of questions unresolved. So it is a combination

of both issues.

Mr. TURNER. Mr. Walker, are you satisfied that once these audits

are done, that the agencies actually take the results of them seriously and begin to try to resolve the problems that the audits reveal?

Mr. WALKER. It is clear to me that by the President making financial management a priority and setting goals for having clean

audit opinions for all the agencies, as well as the Federal Government, and with the Office of Management and Budget’s followup,

37

that they are taking it a lot more seriously today than they were

several years ago. Progress is being made.

However, we have a ways to go. One of the challenges we face

is that agencies have to deal with new reporting standards and

new accounting standards that have become effective. Some have

a difficult time being able to deal with that because of some of the

inherent weaknesses in their financial and information systems.

Mr. TURNER. One of the things that disturbs me the most about

the results that we are looking at today is the seven agencies that

have failed to complete their audit by the March 1st deadline.

I guess I could reserve this question also for Mr. DeSeve, but I

would like to know why these agencies did not meet the statutory

deadline.

Mr. WALKER. I think it is best to direct that question to Mr.

DeSeve. It is my understanding that several of these agencies had

difficulty in dealing with some of the new accounting standards

and the new reporting requirements that were effective for this

year. That could be one of the reasons. But I would suggest that

you ask him about that.

I think it is a problem, however, that here we are, March 31st,

and the fiscal year end was September 30, and we are 1 month

past the deadline for the agencies to present their audited financial

statements, and they still haven’t done that. That shouldn’t happen. If that was the case in the private sector, you would have serious problems with getting credit and your stock price would probably be adversely affected.

Mr. TURNER. I look forward to hearing those explanations. Obviously, some of the reasons may be understandable, but when we

talk about—one significant portion of this audit is to determine

whether the agency has complied with Federal laws and regulations, and obviously one of them is this deadline of March 1st to

complete this audit. I would hope the agencies would take that seriously.

One other question that I would have for you. When we look at

the intergovernmental transfer issue, which you threw out a big

number a moment ago, I think it would be helpful if you would just

explain to us what an intergovernmental transfer is, give us an example of one, and then from that example, explain how that cannot

be properly accounted for and why we have that kind of problem.

Mr. DODARO. A good example would be the Internal Revenue

Service purchases a lot of goods from the Government Printing Office for the tax forms that are sent to the public. The IRS records

may indicate an amount that they owe the Government Printing

Office.

Part of the problem is rooted in the fact that years ago agencies

were having difficulty with one another actually recouping the

amounts that were owed them, so the Treasury set up a process—

and Mr. Hammond can explain this because they are trying to fix

this right now, where in this case, GPO could go to Treasury and

say the IRS owes us a certain amount of money for these tax forms

that we have printed and mailed directly to the public, for postage,

et cetera, and take the money out of IRS’s account at the Treasury,

because the Treasury maintains fund balances. The agencies do not

have, by and large, cash accounts where they write checks. It is all

38

done through central banking functions, pretty much, by and large,

except for some defense activities.

In this case, the IRS accounting records may show a different

payable that would be different than what would be on the GPO’s

books. When those records then go up to the Treasury Department,

they are unable to reconcile them. On one hand the IRS would

show a payable to GPO, GPO’s records might show not a compensating receivable, and then you wouldn’t be able to eliminate

that.

Those types of transactions go on all across the government. For

example, Social Security Administration performs a lot of services

for HCFA in the Medicare area, in actually issuing Medicare cards.

Then Social Security charges HCFA. HCFA basically then pays

them.

We have situations where the General Services Administration

operates a lot of government buildings and actually charges the

agencies rent. So the rent that is on the GSA books might not necessarily correlate to the amounts that the agencies say that they

owe GSA.

A lot of agencies buy equipment from the Federal prison system.

It just goes on and on throughout the government. There are estimates of several hundreds of billions of dollars of buying and selling that goes on among the agencies.

Right now there is not an identification in the systems, and this

goes back to a systems problem, that would allow Treasury to properly consolidate that the way you would in the private sector if you

had a large holding company with several subsidiaries, and you

need to be able to consolidate.

Mr. HORN. I thank the gentleman.

Let me ask a few more questions, and then we will go to our next

witnesses. I believe—can you stay with us, Comptroller General?

Mr. WALKER. Yes, we can, Mr. Chairman.

Mr. HORN. Let me get into the trust funds for a minute. Comptroller General, your General Accounting Office’s report states that

the trust fund investments and liabilities, which amounted to $1.8

trillion as of September 30, 1998, are netted out to zero in the

statements.

Could you explain to me what that means and what is the significance of those amounts being, in essence, eliminated?

Mr. WALKER. Basically, it represents a practice that is consistent

with what would happen in the private sector. Let’s take Social Security as an example. Under current law for trust funds, to the extent that you end up having excess receipts over disbursements in

a given year, the excess must be invested in U.S. Government securities. That, obviously, represents an obligation of the U.S. Government.

So, you have a situation where, on one hand, you have a budget

account known as the trust fund that has obligations of the U.S.

Government. That is a receivable. On the other hand, you have the

U.S. Government, the operating entity, that owes money to the

trust fund, which is a liability or a commitment to that trust fund.

Intergovernmental transactions get eliminated in consolidated financial statements. So as a result, the only debt that you have in

39

these consolidated financial statements is debt held by the public,

which is third-party debt.

One point I would like to make on this, Mr. Chairman, if I can,

is our report was issued today. Yesterday the trustees’ report for

Social Security and Medicare was released.

Some of the information which I think is important that it receive more prominent disclosure in the annual consolidated financial statement audit is stewardship information with regard to Social Security and Medicare.

The fact is, the information that we have in the 1998 audit is

based on last year’s trustees’ report, because this had not been released, and yet they are coming out one day apart.

I think one of the things that really needs to be considered is

whether the consolidated financial statement audit might come

possibly a couple of weeks later, such that significant information

like this could be incorporated into the consolidated financial statements, so we don’t end up confusing the public by, in a matter of

days, talking about different numbers or different dates on programs as important as Social Security and Medicare.

Mr. HORN. Having heard your answer to that, I guess I would

ask this: ‘‘Does it provide us with the proof, when you take a look

at the Federal Government as a whole, that is, the consolidated financial statement, that indeed there is no money set aside to pay

for those future costs of programs supported by those trust funds?’’ How does that work?

Mr. WALKER. Basically, under current law, the trust funds are

invested in government securities. Those government securities are

backed by the full faith and credit of the U.S. Government. They

are guaranteed as to principal and interest. In effect, they represent a first call on general revenues in the future. They do not

represent what you and I would normally refer to as a normal trust

fund that is a separate and distinct legal entity with hard assets

in it, that are invested in the markets, that are subject to fiduciary

responsibilities, so the Federal trust funds are a claim on future

general revenues.

Mr. HORN. One of the things that concerns me is the money that

comes in from FICA, Social Security, and Medicare. Is it sort of

just dumped in a general pot? It doesn’t come in and go to a FICA

trust account, Social Security, or Medicare. It simply goes into the

nearest bank designated by the Department of the Treasury, and

there is a group in the IRS, sort of an office of estimates, where

they somehow just speculate as to what amount of that money really ought to go into the ‘‘Social Security trust fund,’’ because there

really isn’t much of a trust fund.

I just wonder what you as a new Comptroller General think you

ought to look at with regard to this—how they do it? Let’s take Social Security. Where the employer is responsible for half the payments, the employee is responsible for half of the payments. The

employer is really taking both payments of the 15 percent and

sending a check for maybe two times the number of employees,

maybe times 2,000 or 200,000, to the Internal Revenue Service.

And yet, we really aren’t sure that every check that said, well, this

is my FICA contribution on the quarterly reports, we don’t know

if it is ever in the right place.

40

Mr. WALKER. There are some challenges here, Mr. Chairman,

that I think both the executive branch and we need to keep our eye

on.

For one thing, the information that is reported as far as revenues

that are received, as you properly point out, are really handled by

the Treasury and the IRS. The amounts used by Social Security for

benefit payments are different and, therefore, there can be circumstances in which individuals are getting paid for benefits that

the government never, ever collected the taxes on the underlying

wages.

This is one of the areas that we pointed out in our report that

needs to be focused on to a greater extent. I would ask Gene to

speak on that.

Mr. DODARO. Yes. The issue of allocation to the trust fund is one

that we have focused a lot on in doing the audit of the consolidated

statements, and we have been working with other auditors.

It is a fairly complicated process, and part of the reason that

there are estimates and allocations made emanates from the fact

that the IRS believes it would create an undue burden on taxpayers to have them identify all the different types of taxes at the

time the taxes are deposited.

Right now the only basic separation are among income and payroll taxes, because they are withheld at source, by and large, and

are deposited by companies into financial institutions and then

flow to Treasury. So there is a category they check, we sent in $100

million this month. Of the $100 million, $70 million was for income

taxes that we withheld for individuals, as well as Social Security

withholdings and Medicare withholdings, and $30 billion was for

excise taxes that we owe.

Then that—because that money is not identified at that point in

time—is the only information comes in when the tax return is filed

by that company. Then the IRS uses that information on these tax

returns from the companies to determine how much is apportioned

to the trust funds, and then it goes back and double checks the estimates, and makes any sort of adjustments at the end of the year.

As you point out, the adjustments are given by the Office of Tax

Assessment at the Treasury Department. They give the amount of

allocations on how to distribute the revenues to the Treasury Financial Management Service, and they make the allocations to the

trust funds during the year in terms of the appropriate securities

that should be credited to the trust funds.

The excise taxes are a little bit different, since they are supposed

to be allocated based on collections, rather than assessments. We

have pointed that out as a problem in the past, and the IRS has

come up with a new approach on how to handle that. But we strive

to look at this issue from the inception from the revenue coming

to the government, how it is allocated through this process to the

individual trust funds, and to make sure they are properly credited.

So we are trying to cover that and every year we get a little bit

better at making sure we have the total picture covered. But that

is one area we think is very important, Mr. Chairman, and we

have been focusing a lot of attention on that.

41

Mr. HORN. Well, what you are saying is of the 15 major trust

funds, you would like to see all of them in a real, true trust fund

relationship where money is earmarked if it is to go into the trust

fund and you don’t have an office of estimates on this or tax assessments?

Mr. DODARO. We think with modern computer systems now that

it would be very beneficial to have the information in electronic

form, if most taxpayers could submit it, a break-out of the specific

taxes at the time those taxes are actually deposited by the organizations into the Treasury accounts. We have pointed that out in

every audit we have done of the IRS. We have had this area on the

radar screen with them for a while now. Unfortunately, they have

been sidetracked because of their preparations for the year 2000

problem. They have also had, as you know, some major systems

failures over the past few years. Treasury has a new electronic tax

deposit system now that has a lot greater capability and we plan

to work with Treasury to try to identify a way to do this that

doesn’t impose any undue burden on the taxpayers. But that is the

only way to really make sure that you track it as it is being deposited into the Treasury account, and then it can flow through the

process without an estimation approach.

Mr. HORN. What would be the impact on the Presidents? Regardless of party, we know that Presidents have dipped into the general

revenue of the Treasury, much of which was being sent to be in Social Security or Medicare.

What would be the economic impact and the political impact if

what you say and what a lot of us up here say, we ought to isolate

these funds so that they are clearly set aside and we can say to

the American people on the unfunded liabilities that we have the

proper amount in there to cover the unfunded liabilities? Is there

any danger in that in terms of future Presidents, current Presidents, it doesn’t matter what party they are in; they have all

dipped into the Treasury funds to some extent, to show that we

have less of a deficit, shall we say? If we isolated that off, would

that be part of the national debt deficit, or would it just be on its

own and sitting out there, to be invested, obviously?

Mr. WALKER. There is a difference obviously between the economic, the investment and the accounting aspects of this issue. It

is a very, very complicated issue. We have stated on the record that

we believe that reducing, from an economic standpoint, debt held

by the public is a good thing to do because it ends up helping build

future economic capacity. We have also stated that obviously, with

regard to Social Security, a lot of the current unified budget surplus, in fact all of it this year, is coming from Social Security. I

think it is a separate issue as to what the investment policy ought

to be, but the only kind of debt that is going to be appearing on

the consolidated financial statements of the U.S. Government

under current accounting principles is debt held by the public.

We do, however, believe that it is important to more prominently

disclose in the consolidated financial statements of the Federal

Government, information with regard to Social Security and Medicare because every American cares about those programs. This

audit report is not just for the Congress and not just for the Federal Government, it is for the American people too.

42

Mr. HORN. All right. I now yield 5 minutes to the gentleman

from Texas, and after that we will call up the Treasury witness

and the OMB witnesses, and then you will be sitting with them,

and we can in any case get back to more questions for everybody.

The gentleman from Texas.

Mr. TURNER. Mr. Chairman, I yield back my time. I don’t believe

I have any further questions.

Mr. HORN. OK. Mr. Turner is going to yield his time until a future occasion after the Treasury and OMB have testified. So if we

can have those witnesses come forward. The Honorable G. Edward

DeSeve, the Deputy Director for Management, Office of Management and Budget, accompanied by Administrator Deidre A. Lee,

head of the Office of Federal Procurement Policy, Office of Management and Budget; and Mr. Donald V. Hammond, Fiscal Assistant

Secretary of the Department of the Treasury.

[Witnesses sworn.]

Mr. HORN. I would like to note that all three witnesses have affirmed the oath.

We will begin with the distinguished gentleman. This is the last

day of government service for this round, and Mr. DeSeve, we are

glad to have you here. We wish you well. You have done a fine job

for the administration and for the people. So we hope you will do

as very fine a job in the private sector.

STATEMENTS OF G. EDWARD DeSEVE, DEPUTY DIRECTOR FOR

MANAGEMENT, OFFICE OF MANAGEMENT AND BUDGET, ACCOMPANIED BY DEIDRE A. LEE, ADMINISTRATOR, OFFICE

OF FEDERAL PROCUREMENT POLICY, OFFICE OF MANAGEMENT AND BUDGET; AND DONALD V. HAMMOND, FISCAL ASSISTANT SECRETARY, DEPARTMENT OF THE TREASURY

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

the subcommittee. I am here today to discuss the progress made

during the last year in financial management, and particularly as

reflected in the financial report of the U.S. Government. I am also

here to describe the challenges that still face us.

In his transmittal of the audit report, audit of the financial report, Comptroller David Walker said, ‘‘These financial reporting requirements are prompting steady improvements in financial accountability and there has been good progress toward meeting legislative objectives. At the same time, major departments are not

yet able to produce auditable financial statements consistently.’’

The requirement for a governmentwide financial report began

with fiscal year 1997 and a similar requirement extending coverage

of the Chief Financial Officers Act to all major agencies that was

contained in the Government Management Reform Act. Chart one

shows the progress under these statutes over the last 6 years. It

is very similar to the chart that Mr. Turner showed you earlier, although not quite as colorful as his chart.

In addition, the GAO report—actually, I want to stop for a second and congratulate the Department of Housing and Urban Development, the Federal Emergency Management Agency, and the National Science Foundation who, for the first time, received unqualified opinions on their financial statements.

43

In addition, the GAO report of the financial report of the U.S.

Government for fiscal year 1998 stated that ‘‘Action is now underway across the government to address pervasive, generally longstanding problems discussed in this report.’’

Chart two depicts our expectations. Mr. Turner asked, what

progress do you expect to continue? What you see is what we anticipate for 1998. The blanks are disclaimers for qualified opinions.

What we see in 1999 is that we expect 20 of 24, and then finally

23 of 24 in the year 2000. The lone exception will be the Defense

Department, which does not expect a clean opinion at this point

until beyond the year 2000.

While agencies have made substantial progress, challenges remain. Recognizing these challenges, President Clinton issued a

memorandum to all agency heads on May 26, 1998, directing agencies to develop corrective action plans for addressing these challenges and to submit quarterly reports of progress. Agencies submitted these plans and reports to OMB. They formed the basis for

discussion between senior agency officials, including the Inspectors

General, and senior executives from OMB, Treasury, and GAO on

the process the agencies were employing to meet planned goals and

their prospects for success. The team’s assessment is that while the

challenges facing certain agencies are daunting, the commitment of

the agencies is reassuring.

Chart three, please. I would like to show you these challenges by

functional area and by department for those agencies that do not

have clean opinions. The departmental challenge is primarily in

the Department of Defense, with the Department of Agriculture

and a couple of others having some challenges. But the functional

area that faces us with the most difficult problems is the one that

we talked about earlier, intragovernmental payments. The Defense

Department has taken significant steps to deal with its problem.

The department believes that lasting effective solutions to its difficulties in producing reliable information in the form of audited financial statements requires a Defensewide management information overhaul, and they have embarked on such an effort. Over the

last few years the department has streamlined its numerous incompatible finance and accounting systems by eliminating over 200

systems that did not collect information needed to comply with current accounting standards.

More recently, the department has been developing a blueprint

for financial management reform and in the fall released the first

comprehensive financial management improvement plan. We and

GAO, and Treasury and the department Inspectors General have

worked with them to review and refine that plan.

IRS revenue collection and public debt receive clean opinions is

my next headline. In addition to the progress previously referred

to in terms of the number of unqualified agency financial statements, for fiscal year 1998, the GAO reported on the results of the

audits in the Internal Revenue Service and the Bureau of Public

Debt. The Internal Revenue Service’s statement of custodial activities, which the chairman referred to earlier, received an unqualified opinion. The schedule of public debt reflected a similar unqualified opinion. The amount of money that the IRS covered was

44

about $1.8 trillion and over $5.5 trillion of public debt was similarly included.

GAO also points out in addition to the qualification in opinions

a series of areas that need ongoing attention. These are the management internal control weaknesses that the Comptroller General

talked about earlier.

The administration for the past several years has been putting

out a report on priority management objectives. I would like to get

the next chart, please. These priority management objectives are

chosen, as the President said in his budget, to reflect ‘‘areas in

need of real change that will receive ongoing attention for the administration.’’ We didn’t put these out in response to last year’s report or the report of the year before. We put them out because they

are things that the administration wants to get done. You can see

that heading the list is managing the year 2000 problem, followed

closely by improving the results orientation of program management. That is PGPRA.

Next, audited financial statements, improving financial management information. These are things that were formally committed

to, were managed with a monthly planning process in response to

these.

I don’t need to tell you, Mr. Chairman, where we are in Y2K. We

last night gave you the results of the flash reports from the precincts, the flash reports from the agencies that show that more

than 92 percent of the financial systems are compliant. We expect

that the committee will want a full review of that, and we will be

happy to provide that information as it comes in.

We agree with the Comptroller General that protecting critical

infrastructure and particularly computer security is the next Y2K

challenge. In fact, we are using the techniques that we have developed in Y2K to begin that process. The President issued PDD–63

last year, requiring agencies to prepare plans and requiring a national plan for computer security to be prepared. Sector groups,

going out into the private sector, led by Federal agencies, just as

we are doing in Y2K, will be mobilized in the computer security

area.

Another area that the Comptroller General pointed out in his report is better managing financial portfolios. We agree that loan

portfolios in particular need to have improved management. Working with this committee, the Debt Collection Improvement Act has

given us some new tools, and my formal statement gives you the

ways that we are implementing those tools.

Next, verifying that the right person is getting the right benefit.

We also agree with the Comptroller General that for fiscal year

1997 we had a 14 percent error rate in the Medicare program. Unacceptable. Totally unacceptable. The current error rate of about 7

percent is similarly unacceptable, but it is half the previous rate,

and that is because we have been trying to manage that problem

that was identified through auditing.

Throughout the government, there are a series of report crosscutting groups that are working together to set standards. The

Federal Accounting Standards Advisory Board, the Joint Financial

Management Improvement Project and the Chief Financial Officers

Council, as well as the Chief Information Officers Council are

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bringing agencies together to prepare standards that give us the

ability to tackle some of the challenges that don’t exist just in one

agency. One agency doesn’t have an intragovernmental payment

problem. It takes at least two to have such a problem.

In summary, Mr. Chairman, I would like to again quote the

Comptroller General by saying,

The executive branch recognizes the extent and severity of the financial management deficiencies and that addressing them will require concerted improvements

across government. The administration has set goals for individual agencies as well

as government as a whole to complete timely audits and receive unqualified opinions. With concerted effort the Federal Government as a whole can continue to

make progress toward generating reliable information on a regular basis.

Mr. Chairman, and members of the subcommittee, the administration has demonstrated from the President on down that it recognizes the need for continued concerted action to continue to make

progress. Given where we were in 1993 and the obstacles we face,

the progress we have made to date is extraordinary. Notwithstanding the formidable nature of the remaining challenges we set

a high bar for ourselves and will redouble our efforts to improve

the reliability of financial information provided by agencies and the

government.

Thank you very much, Mr. Chairman.

[The prepared statement of Mr. DeSeve follows:]

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Mr. HORN. We thank you. We now go to Mr. Hammond, the Fiscal Assistant Secretary of the Department of the Treasury. You are

a career member as I recall, is that correct?

Mr. HAMMOND. That is correct, Mr. Chairman.

Mr. HORN. How many years have you had with the Treasury?

Mr. HAMMOND. Fifteen.

Mr. HORN. Well, you are going on 30 then, right?

Mr. HAMMOND. We are off to a good start.

Mr. HORN. I knew Bill Parsons, who was about 30 years ahead

of you and one of the great fiscal assistant secretaries and management secretaries down there. So welcome.

Mr. HAMMOND. Thank you very much. Mr. Chairman and members of the subcommittee, I appreciate the opportunity to appear

today to discuss matters involving the second annual financial report of the U.S. Government. First, I would like to take this opportunity to thank the chairman, the ranking member, and other

members of the subcommittee for your continued support and encouragement to improve financial accountability and reporting in

the Federal Government. Last year was the first year in its history

in which the government prepared comprehensive financial statements covering all of its diverse activities. While a great deal of

work has been done and progress made over the last year, there

are still significant challenges and obstacles that must be overcome

to enhance and improve the reliability of the accrual-based financial information presented for the U.S. Government.

The Government Management Reform Act of 1994 requires that

not later than March 31 of each year, the Secretary of the Treasury, in coordination with the Director of the Office of Management

and Budget, shall prepare and submit to the President and the

Congress audited financial statements for the preceding fiscal year,

covering all of the accounts and associated activities of the executive branch. This is the second time such audited financial statements have been prepared on a governmentwide basis. The financial report of the U.S. Government for fiscal year 1998 provides the

President, the Congress, and the American people with information

about the government’s assets and liabilities, its cost of operations,

and its sources of financing. The financial report is prepared on the

accrual basis of accounting as prescribed by Federal accounting

standards. These differ from the cash basis of accounting used in

the preparation and reporting of budget results. Each method is a

useful tool in its own right for looking at the government’s operations for different purposes.

Since the passage of the Government MRA, we have been working very closely in cooperation with OMB, GAO, and the Federal

program agencies to create the standards and systems necessary to

create and implement an entirely new system of identifying and

tracking all of the operations of the U.S. Government.

This past year, Treasury focused much of our attention on three

important areas: first, increasing the consistency of information reported to us by program agencies; second, identifying and reducing

inaccurate eliminations of intragovernmental transactions; and

third, assisting agencies in reconciling their fund balances with

Treasury records. I will briefly summarize our efforts in each of

these three areas.

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It is essential that the information used by Treasury to prepare

the governmentwide statements be consistent with the information

contained in the respective agency-level financial statements. The

agency-level financial statements are separately audited and the

audit of the governmentwide financial statements relies heavily on

those audits. Consistency problems need to be addressed by the

agencies working in very close cooperation with OMB, Treasury

and the GAO.

This past year, Treasury initiated actions to provide agencies

with ongoing support, guidance and training. We issued written

guidance to program agencies in an effort to improve consistency.

Treasury has also conducted both formal and informal training

with agencies directed at the specific consistency problems associated with their respective financial systems.

As a result of our close work with the agencies this year, we

achieved a 20 percent increase in consistent reporting; 25 of the 32

entities so reported this year. We will continue to work with the

program agencies on this important issue and, based on our experiences this past year, we are very optimistic that future reporting

will improve. Both last year’s and this year’s audits of the financial

statements disclosed transactions between agencies for governmentwide reporting. If these transactions are not properly eliminated, total government assets, liabilities, revenues and expenses

will be misstated by the amount of those transactions.

Treasury, OMB, and GAO have been actively working together

in a governmentwide task force to find methods and solutions for

the elimination problem. The task force has looked for solutions

that not only help the agencies identify and reconcile transactions

among themselves, but also improvements to the Treasury’s process of creating the governmentwide financial statements. After

careful analysis, the task force identified several detailed categories

which can be summarized in two broad categories of

intragovernmental transactions: Investment and loan transactions

and all other activity between the agencies.

During fiscal year 1998, we focused most of our attention on resolving the intragovernmental issues for investment and loan

transactions. These investment and loan transactions are primarily

the types of transactions discussed earlier occurring between the

trust funds and various government agencies, and at least at one

endpoint involves the Treasury Department. They involve trillions

of dollars on an annual basis. In December, Treasury, after consultation with the agencies, issued elimination guidance for the

preparation of the fiscal year 1998 statements. As a result of these

efforts, significant progress, as detailed in my written statement,

was made in fiscal year 1998 in reconciling these intragovernmental investment and loan transactions. We plan to make even

more progress in fiscal year 1999.

In addition to assisting the agencies with other transactions,

Treasury provided two digit identification codes, the use of which

is absolutely critical to the ability to eliminate and reconcile the

purchase and sale and other activity between the agencies. In fiscal

year 1998, 24 of the 32 agencies required to use these partner

codes were able to identify 80 percent or more of the dollar value

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of their transactions. That is good progress. We are not there yet,

and we need to do considerably more to deal with this issue.

The third issue has to do with our activity of reconciling fund

balances. Since Treasury acts as a banker for the government, as

agencies request payments to be made or receive funding, their account balance with the Treasury will change. This fund balance

amount is an agency-level asset account that reflects the agency’s

available budget spending authority. Both the agency and Treasury

independently track the account balance. Treasury notifies agencies

of discrepancies in their fund balances as determined from our

records, and agencies are then responsible for resolving these differences. We have made significant efforts to assist agencies in reconciling their fund balance amounts with the amounts reported by

us, including surveys of their information needs, the issuance of

standard operating procedures, training, improved communication

between us and the agencies, and the provision of technical assistance. We are expecting continued and significant improvements in

agencies’ abilities to reconcile fund balances again for this year.

However, we are facing many challenges as we go forward. As

Secretary Rubin stated, ‘‘A great deal of work has been done, but

the development of this new method of reporting is an immense

task and a great deal of additional effort will be necessary to create

and implement an entirely new system of reporting on the operations of the U.S. Government.’’ We at Treasury are committed to this effort, and we have both

short-term and long-term actions underway to address them.

In the short term, we will continue to make those changes necessary to continue to improve the preparation of the financial report. In the long term, we are embarking on a project to make fundamental changes in the way we do business. Our most significant

short-term challenges are in three specific areas. First, we need to

continue to make substantial progress in eliminating

intragovernmental transactions. Second, additional improvements

are needed to make data reported to Treasury for the financial report consistent with the agency’s audited financial statements. And

third, we need to enhance the process of identifying the data needed to do a complete reconciliation of the budget results reported on

the cash basis with the financial statements’ results of operations.

Regarding the elimination of intragovernmental transactions,

Treasury intends to put in place additional procedures and processes to ensure that progress in eliminating transactions in the investment and loan category continue, but most of our efforts this

year will be spent working with OMB and the program agencies to

identify and put in place processes to effect the other types of

intragovernmental transactions. We feel confident that by continuing our focus on attention in these areas we can again make

more progress.

With respect to ensuring consistency of reporting, this year’s report, or this year’s process has identified areas where we can continue to improve and make reporting less burdensome on the government agencies. We have also identified several problems agencies had in verifying their financial statements with the detailed

information sent to us. These problems relate to the need for additional information, formatting issues, and the reporting of changes

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in opening balances. Building from this base, we will take further

steps to again show improvements in consistency next year.

Finally, regarding reconciliation of the budget results with the financial statements results of operations, a team of Treasury staff

with assistance from private contractors will develop the necessary

information requirements and procedures to accomplish this reconciliation. Our plans are to ask for the necessary information in

next year’s report process, and our goal is to make significant

strides in identifying all of the information necessary to complete

such a reconciliation next year.

While making short-term changes to improve the financial statements process is important, we have also committed and recently

initiated a major project to fundamentally rethink and redesign our

central accounting system and processes. We will be working with

OMB, GAO, the program agencies, and the Federal Reserve System

in developing new processes that will provide more timely, accurate, accessible accounting information, follow established accounting standards, and support the control of resources and management decisionmaking. Goals of the new processes include reducing

the reporting and reconciliation burden on program agencies.

We also intend to develop processes that maximize data accuracy

at the time of collection and capture information once at the earliest time possible to meet multiple reporting requirements. Improving financial management and accountability is a Treasury priority. We have taken and will continue to take actions to correct

weaknesses and problems in the preparation of our governmentwide financial statements. We are working hard to resolve these

problems, but much work remains to be done. Treasury will also

continue its leadership role in providing guidance, assistance and

support to the agencies in their ongoing efforts to improve their accounting practices and financial management systems.

Thank you very much, Mr. Chairman. That concludes my remarks this morning.

[The prepared statement of Mr. Hammond follows:]

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Mr. HORN. We thank you. We would now like the Comptroller

General, Mr. Walker, and the Assistant Comptroller General to

come forward and join the panel, so that we will have the concluding questions over the next 20 minutes.

The gentleman from Texas, Mr. Turner, will begin.

Mr. TURNER. Mr. DeSeve, you heard me earlier ask the question

about the seven agencies that failed to meet the March 1st deadline for failing to meet the financial statements requirements.

Could you give the reasons that they failed to do so?

Mr. DESEVE. Yes, sir, I think I can. Let me first describe the

process that we use throughout the year. We meet with the agencies, their Inspectors General and their financial staffs in their

agencies and spend a considerable amount of time talking with

them about the very specific problems that they are having. And

then literally weekly and sometimes daily, we talk to them about

what the status of their audit reports are.

We are finding two major problems this year. One is a new set

of auditing standards and financial statements that the agencies

did not have to deal with before, particularly the statement of

budgetary results. It is a new one, and it is giving some of them

problems. As a result, whenever you have a problem in this circumstance, you will have an independent auditor or sometimes an

outside auditor and an Inspector General and the financial folks

who together have to agree that the information that is put together is, in fact, correct. So getting agreement on these new statements is a big challenge for some.

Of the seven, we expect that five will have clean opinions, and

that relates to the second issue. Some of them are the heroic efforts

that the Comptroller General talked about where they are in the

midst of doing special studies on things like loan portfolios that

have taken them beyond the deadline. We expect them to be clean,

but not timely. We, like you, share the desire to have them be both

clean and timely and we have been encouraging them in that direction.

Mr. TURNER. So it is not a lack of sensitivity to meeting the

March 1st deadline, and you feel every agency is working diligently

to get the work done?

Mr. DESEVE. Yes, sir. It is not unwillingness, it is inability to in

this case.

Mr. TURNER. One of the things that Mr. Hammond mentioned in

his written statement, you were referring to the progress that the

Treasury has made in reconciling intragovernmental investment

and loan transactions. I was noticing in your written statement you

said with regard to that, specifically for investments and Federal

debt securities, the difference last year was $3.1 billion. The difference this year was $3.9 million for interest receivable and interest payable, the difference last year was $3.2 billion, the difference

this year was $855 million. For interest revenue and interest expense, the difference last year was $8.5 billion; the difference this

year was $214 million. And for loan receivables and amounts due

the Treasury, the difference last year was $7 billion. The difference

this year is $353 million.

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That seems to be significant progress. What accounts for the dramatic reduction, and do you feel you are going to even move beyond

the progress you have made?

Mr. HAMMOND. We do feel that that is significant progress, but

obviously those numbers need to come down to zero.

What accounts for that progress this year are two things. First,

we learned a lot from last year’s process and were able to build in

enhancements in this year’s process that allowed us to plan for

those types of transactions. We focused a lot of time and attention

on the investment and loan accounts.

In addition, Treasury has the advantage of being at one end of

pretty much every one of those transactions. As a result, because

of the clean opinion we received on the statement of the public

debt, we have great confidence in the numbers that we produce and

are, therefore, able to go back and work with the individual agencies, note differences, and be able to work to resolve them. The

progress you see there really reflects that close cooperation with

the agencies who hold the trust funds for their program needs, and

to be able to walk through the appropriate transactions.

The differences that remain typically result from timing differences on behalf of the agencies, as well as circumstances where

they may be doing certain technical adjustments to interest accounts such as accruing interest receivables or amortizing discount

and premium over different periods or using different accounting

methods. We need to get a consistency of approach between the

agencies and we think those numbers will then go to zero.

Mr. TURNER. You know, it is really hard to imagine what it must

have been like before the Chief Financial Officers Act was passed

in 1990 and the Government Management Reform Act passed in

1994, because prior to that, we wouldn’t even be here having this

discussion today. I want to commend the chairman on his diligence

in making sure that both of those pieces of notable legislation are

working by continuing to hold the agencies accountable for the implementation of both of those Federal statutes.

One of the things that struck me about your testimony, Mr.

Hammond, was your reference to the goals that the Treasury has

for reducing the reporting and reconciliation burden on agencies. It

seems to me that with these new laws and requirements for reporting, there are probably many a Chief Financial Officer who is feeling a tremendous burden of all of the various reporting that takes

place. It would be helpful, I think, to give us an example of some

of the burden you are talking about and what you are thinking

about doing that would reduce the burden of all of this multitude

of activities that they are charged with performing.

Mr. HAMMOND. I would be happy to. I think that is in fact a very

significant area of stress for a number of agencies of all of the various reporting requirements. As we look at the compilation of the

governmentwide financial statements, fundamentally what we have

done is we have tried to accomplish the production of these statements by using information that comes from systems that weren’t

designed to produce the information needed for an accrual-based financial report. The result is that we ask agencies to take budget

information, present it to us in a different format, and then provide

it to us in a way that then has to be reconciled back to the informaVerDate 11-MAY-2000 11:11 Mar 06, 2001 Jkt 066696 PO 00000 Frm 00072 Fmt 6633 Sfmt 6602 E:\HEARINGS\61840 pfrm02 PsN: 61840
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tion they are using to present their own financial statements, as

well as the information that they are doing for their budgetary reporting. Given the short-term horizon and the need to produce

these statements, it is the best we can do in the short term and

we continue to work around the edges to enhance that. But fundamentally, the systems needed to supply information to produce

these systems shouldn’t be the type of situation where you have

system A coming in, system B coming in, system C, and creating

the need for all of these reconciliations as you move along. They

should, in fact, come from a common source of information, and

then simply present that same information in different formats.

That, in essence, is the principal goal or one of the principal goals

of our longer-term effort to redesign the central accounting system.

Mr. DESEVE. Mr. Turner, may I add to that and make a small

commercial here. The Comptroller General earlier referred to accountability reports of the Social Security Administration, the Veterans’ Administration, and others have produced those. Those are

an attempt to consolidate information from GPRA, FFMRA,

FFMIA, the GMRA, the CFO Act and even some other statutes,

and potentially the IG semi-annual reports into a single location in

a readable form so people can actually use them as a corporate annual report is used.

Right now there are pilots under the Government Management

Reform Act for accountability reports. We would like to work with

the committee to propose extending those pilots, and encouraging

agencies, if not making those kinds of reports mandatory for agencies, because we think it will give them the ability to have a single

report that contains lots of different information. I would think we

could even add some Clinger-Cohen information to it as well.

Mr. TURNER. Thank you.

Mr. WALKER. Mr. Chairman, we have supported these pilot

projects and we believe that the idea of expanded accountability reports where you end up getting valuable information on a consolidated basis in plain English with charts and graphs is a good idea.

Mr. HORN. I want to pick up on that, Comptroller General. On

page 10 of your statement you refer to the Brown Act which was

Senator Brown from Colorado, now retired, and who really knew a

lot about this type of audit and accounting, and that is the Federal

Financial Management Improvement Act of 1996. And then you

also note the difference in conformity here between 1997 and 1998,

and that similar results are expected for fiscal year 1998.

I would just ask this question. Are some of the problems with

these agencies that they don’t have a full-time Chief Financial Officer where either the Assistant Secretary for Management or somebody else there has said, ‘‘I am the Chief Financial Officer?’’ That

bothers me. I know the people that work in OMB. Mr. Hammond,

these are 18 hour-a-day jobs, often 7 days a week. It just seems to

me when they bury the CFO under some of these other agency rubrics like Assistant Secretary for Management, I realize they might

not want to give up all that power they have as Assistant Secretary

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priate executive, the Deputy Secretary or the Secretary. I just wonder what your thinking is on that.

Mr. WALKER. Well, I think there is little question that—given the

challenges that we face in the financial management area, and

given the fact that the objective is not just to get a clean opinion,

but to have underlying financial management information systems

that will be continuously improved to improve economy, efficiency,

and effectiveness—the CFO for any major department or agency is

a full-time job. I might ask if Ed has any comments.

Mr. HORN. Does anybody else want to comment on that?

Mr. DESEVE. We would be delighted to, Mr. Chairman. We have

seen different organizational structures in different agencies. The

Justice Department has the Assistant Secretary for Management

structure, the Department of Housing and Urban Development has

the stand-alone CFO structure. The act permits either, as you

know, as long as the reporting requirement is clear.

I think the decision made by the reporting agency to give the appropriate amount of responsibility is even more important. We

strongly support budget authority in the hands of the CFO. There

is still at least one agency and there may be two where budget authority is not in the hands of the CFO. We have been very active

in trying to move them in that direction.

We also find though that the role of the career Deputy CFO is

terribly important. When we and the CFO counsel merged the two

groups—the groups of Deputies and the CFOs—into a single body,

it became much more apparent to us that that career Deputy in

many cases was the go-to guy, go-to gal in lots of places. Where we

had career CFOs who would come and go over a 2 or 3-year period,

the Deputies were the continuity. So it is the strength of the organization up and down the organization. My own preference would

be in most cases, in most departments to see a single CFO in those

departments. It has always been my preference, and that person

should be at least at the Assistant Secretary level. There may be

some departments where the Under Secretary level could be an appropriate focus for the CFO organization.

Mr. HORN. I am certainly not against a Deputy CFO, and it

ought to be a career person, without question. We want a strong

CFO in that agency and we want to see a different result next

year.

Now, you are not going to be here next year. You might be on

contract, but—— Mr. DESEVE. Mr. Chairman——

Mr. HORN. You may be working as a contractor.

Mr. DESEVE. I have been working in-house and out-house for

many years.

Mr. HORN. I don’t want to followup on the in-house and the outhouse.

Mr. DESEVE. I realize we are on TV, so we both have to be circumspect about that. But I think the desire that I have and that

the administration has is that the Chief Financial Officer responsibilities are well done in each agency and we have tried to make

that case time and time again to some of the agencies.

Mr. WALKER. Mr. Chairman, I think one other thing has to be

emphasized in addition to the importance of the CFO. There has

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to be an active partnership between the CFOs and the CIOs in this

regard, because we are looking to a move toward integrated systems that will provide key financial and other management information. The CIO job is a big job too. Eventually we are going to

have to end up looking to something else, and that is CHCO, chief

human capital officer, because people are the most valuable asset

we have, and we don’t pay enough attention to it.

Mr. HORN. Let me move to one that everybody has mentioned at

one time or another, and that is the computer security control

weaknesses that have been found and reported across the government, and there are various instances where auditors were unable

to gain authorized access or penetrate the systems. These weaknesses affect the integrity and reliability of the government’s financial and programmatic information. I guess I would ask all of you

how pervasive are these weaknesses, and are you able to penetrate

a lot of these systems, and what are the agencies and OMB needing to do to correct these weaknesses? Mr. DeSeve.

Mr. DESEVE. I think the statutory framework that we have at

this point is probably a pretty good one. I am satisfied that from

the Computer Security Act of 1987 to the Paperwork Reduction Act

of 1995 and on to Clinger-Cohen, we have the laws in place. What

we have had to do is increase awareness within the departments

and agencies, especially when they were overtaken with the idea

of Y2K. Y2K in some ways is a security problem. It is a problem

that we created for ourselves, it is not an external problem. The

Defense Department, working with the rest of the intelligence community, has engaged, and Gene can tell you more about this than

I can in some ways, has engaged in a very major review of the external threats to the Federal Government from cyber terrorism. We

would be happy to get you a briefing on cyber terrorism. It is very

real, it is something we are very concerned about, and with the National Security Agency and DOD, they have been building a set of

scanning systems and deflection systems. Much of that information

is classified, but again we would be happy to get you a briefing on

it.

Mr. HORN. Comptroller General, do you want to comment on

that?

Mr. WALKER. Mr. Chairman, we are doing a lot of work in this

area, because obviously there are many aspects that are troubling

when you deal with computer security. It is not just getting accurate, timely and useful financial information, it also involves issues

that deal with national security, defense, as well as economic security, as well as personal privacy. We spent a fair amount of time

in this area already. We anticipate that this area will be our No.

1 area of focus in the information management area after we get

past Y2K. Gene might have some comments on anything in specific

that he might think might be appropriate here.

Mr. DODARO. Basically, this is a serious pervasive problem across

government we have computer systems that are more integrated,

more accessible. We have seen examples in just the last day or two

of how vulnerable computer systems are through the introduction

of some of these viruses. There are two types of problems. One is

vulnerability of people outside the agencies being able to hack into

the systems, and there are vulnerabilities there. There are also

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vulnerabilities of authorized users within the systems that have too

much access, and both problems are plaguing the Federal Government. We raised this as a high-risk area across the government in

February 1997. As Mr. DeSeve pointed out, in October of that year

the President’s Commission on Critical Infrastructure Protection

said, this is not only a problem for the Federal Government, it is

a problem across all sectors. They have taken some initiatives to

address this issue. We suggested the CIOs made computer security

a priority. They have done that. GAO has gone out and studied

best practices in the private sector. We have issued those. The CIO

counsel has endorsed those best practices and are in the process of

putting them in place. We think each agency needs a comprehensive risk assessment approach and followup process. Also, there

needs to be coordinated efforts at the governmentwide level of

OMB, the National Security Council and others, and we have made

those recommendations. They are beginning to do that, but there

is a long way to go. I do think there is a need to reexamine the

basic statutory framework, and the Computer Security Act was

issued in 1987. It has been a long time since that has been looked

at. We are in the process of thinking about ways to strengthen

those requirements.

Mr. HORN. Thank you very much.

I yield to the gentleman from Texas, Mr. Turner.

Mr. TURNER. Mr. Chairman, I have only a brief remark. I just

really think it would be appropriate for us to acknowledge the good

work that Mr. DeSeve has given to the administration since its inception in his role at the Office of Management and Budget. His

service to the administration has been commendable, and his willingness to endure the vigorous oversight of this Congress also is to

be commended. We wish you well in your transition to the private

sector, and we appreciate the contributions that you have made to

us all.

Mr. DESEVE. Thank you.

Mr. TURNER. I know there are many people listening today who

are probably in the same position I am in. I am beginning to start

my work and fill out my tax return, and I had it all spread out on

the kitchen table the other night. And you know the way it always

is, you always find something you know you have to go retrieve before you can actually do it. So I am at that stage now.

There is one question that was on my mind as I began my tax

return preparation, and I know it is going to be on the minds of

a lot of taxpayers, and I am sure, Mr. DeSeve, you can answer this

question as one of your final responses to this subcommittee.

I noted that this year I have to make out my check to pay my

taxes to the U.S. Treasury instead of the Internal Revenue Service,

and I wish you would explain to us why we are changing who we

pay our taxes to, and perhaps that will relieve the minds of a lot

of us taxpayers.

Mr. DESEVE. I am really going to let Mr. Hammond from the

Treasury Department handle the question. I think the vigorous

oversight of this committee has talked to Commissioner Rossotti

and other folks in the IRS about the major restructuring that is

going on there. I think that we will see over the next several years

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oriented and one that understands better how to deal in an electronic age with taxpayers, where they live, and in the kinds of organizations in which they find themselves.

But I am going to kick the question on IRS versus the Treasury

to Mr. Hammond. You are sending the check to Mr. Hammond.

Mr. HAMMOND. Hopefully not personally.

Mr. DESEVE. Of course not personally.

Mr. HORN. Is your fax machine going to be jammed?

Mr. HAMMOND. That’s right. No. I think there are two reasons,

actually. One is that the payee information of the U.S. Treasury

better indicates that the taxpayer is, in fact, not supporting the operations of the Internal Revenue Service by their payment, but is,

in fact, making a tax payment on behalf of the entire government.

In addition, I think it also helps deal with some of the characterizations, when the address ‘‘Internal Revenue Service’’ lent itself in

some cases to people putting IRS on check payee information

which, in some cases I believe was eligible to be forged or manipulated, and so I think there is also a corrective action attached to

this.

Mr. DODARO. Mr. Chairman, I might add that our audits of IRS,

as this committee has heard, that last point that Mr. Hammond

raises is a valid one. A lot of people would change the IRS abbreviation. Even though the instructions would say ‘‘Internal Revenue

Service,’’ to spell it out, if they put an I in there, they changed the

I to an M, and then it became ‘‘Mrs.’’, and put a name on. That

issue has been a problem in the past with people basically taking

some of those checks and falsifying them. So we are pleased to see

that change.

Mr. TURNER. Well, I thought somebody was going to tell me that

we had eliminated an intragovernmental—— Mr. DODARO. That is one of the few where everything is working

well.

Mr. TURNER. What I think I learned is that we are just paying

our taxes to a friendlier payee.

Mr. WALKER. The amount doesn’t change, though.

Mr. TURNER. Right.

Thank you, Mr. Chairman. It has been a pleasure to have all of

our witnesses before us today.

Mr. HORN. Well, I agree with you on that, and I must say I have

suggested this in the past, but I don’t get too many followings in

the House on this. All Members of Congress should sit in the

House of Representatives on April 15th with no tax advisors and

make out their own 1040 Form, and file that one with a check. I

think we would reform the tax laws so fast we wouldn’t know what

hit us. But you know, we are all getting a little comfortable with

the Beardsley Rommel idea of withholding its source which, if we

had to pay one big check at the end of the year with no withholding, that too would create a tax revolution. But apparently

those ideas aren’t acceptable to a majority here.

Let me just mention a few comments that I want to get out of

you and your thoughts. One of our problems in these various financial statements that are before us involve the nuclear cleanup liability. Comptroller General, in your testimony you say the executive branch has significantly underestimated the future costs that

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will be needed to clean up environmental contamination and the

disposal of hazardous waste.

What is the amount that GAO has picked on this particular

area?

Mr. WALKER. Mr. Chairman, it is difficult for us to estimate what

the exact amount is. That is one of the reasons that this is a problem area. But we know that it is in the tens of billions of dollars

range.

Mr. HORN. Would it be more than $100 billion? Because we are

talking nuclear reactor waste, we are talking nuclear submarines

being chopped up and their waste, and as I understand it, a lot of

this occurs in the State of Washington, and we know nationwide

we have this in the nongovernmental sector, hospitals, nuclear

waste piled up waiting for disposal.

Mr. WALKER. It could be, but it is probably not, because there

have been increases that have occurred over the last several years

to increase the estimate of that liability, and I think as you know,

Mr. Chairman, there is a range of issues here. It is not only with

regard to the defense industry, for example, the decommissioning

of nuclear subs, but it is also in the utility sector, the energy field

with regard to nuclear power plants. It is a very serious issue, especially in light of base closings and other things where you have

things that aren’t nuclear, that there can be environmental issues

associated with that as well that aren’t nuclear related.

Mr. HORN. Well, I think we had the problem throughout the executive branch. One, the Department of Defense has a strong program in terms of cleaning up the environment on bases that have

been closed. But I must say, I don’t see much action in that area,

and I think there should be a lot more. And we also have the problems in other agencies on their own assets that they really can’t

account for them and put a dollar figure on them, which is very

hard. What is the dollar figure on Yellowstone? It is priceless. You

don’t have—$100,000 or $100 million wouldn’t be relevant. How

are we going to handle objects like that?

Mr. WALKER. Well, I think that is why we have to look at what

is meaningful financial information to the Congress, to the President, and to the American public, and to the extent that it provides

meaningful financial information, then we ought to express it in

dollar amounts. To the extent that it really doesn’t and it is more

of a stewardship responsibility, there needs to be accountability— the numbers don’t necessarily mean anything. We have to keep in

mind what the purposes of these financial statements are and who

the users are when we are thinking about things like heritage assets, such as monuments, national parks, even weapons systems.

It is appropriate to have some accountability for the cost of weapons systems, but how significant is it to know what the discounted

amortized cost of a B–2 bomber is? What are we going to be able

to do with it? I doubt that we are going to have an alternative use

for it.

Mr. HORN. Of all of the agencies that the General Accounting Office looked at, which agencies have the worst inventory records on

their supplies and all the rest?

Mr. WALKER. DOD.

Mr. HORN. And that is known as the Department of Defense?

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Mr. WALKER. That is correct, the Defense Department.

Mr. HORN. And they tell us they are low on munitions. So do

they just not have a system that tells us where they have in warehouses all over the world, or what?

Mr. WALKER. They have real challenges with regard to the inventory area. Our high-risk report noted that there was about $22 billion, is that correct? It was about $22 billion worth of inventory

items that they may have, they just don’t know where they are.

Now, obviously that creates difficulty in trying to decide how to utilize inventory when you need it, whether you ought to order any

additional materials to replace it, how you can effectively secure it,

a range of issues. And a lot of this is normal inventory items rather

than major weapons systems.

Mr. DESEVE. Let me take the department’s part in this in two

ways. One, the department had systems for logistics and inventory

that were controlled at various levels, they weren’t necessarily centralized, and they didn’t talk to their financial systems. Why?

Never asked them to. We have never asked these questions before.

So the department feels that it has good controls; they are not perfect controls, but good controls over its inventory and over its property. It has never had to do valuation before. The challenge of valuing Yellowstone is similar to the challenge of valuing Fort Ord or

valuing some of the other properties that the department operates.

So the valuation challenge remains and they are in the process of

solving that problem.

But second, I think we have to be careful not to mix apples and

oranges here in the sense of a field commander knowing where his

inventory is, being able to get a logistics system to get him that information or get him that material quickly is one test. Having that

under control, under good asset control, having a central agency or

a subordinate—a superior officer being able to see several inventories is also very important. But the department I think would tell

you that they believe they have adequate controls in lots of different places. GAO would suggest that controls could be better, the

efficiency of the department and its effectiveness would be improved by having better visibility of these assets. I agree with both

things.

Mr. WALKER. Mr. Chairman, if I could add on that, I think DOD,

the Department of Defense is a good example. As I look at government, there are two dimensions—the business of government and

the mission of government. Missions vary, depending upon what

department and agency you are dealing with. But all aspects of

government need to run from an economical and an efficient basis.

If you look at DOD from an effectiveness standpoint, some of the

logistical issues that Ed is talking about are clearly an ‘‘A’’ on effectiveness. We are No. 1 militarily, we have proved it time and time

again. On the other hand, from the standpoint of economy and efficiency, at best they are a ‘‘D.’’ We need to place a lot more time

and attention on getting that grade up and freeing up billions of

dollars for readiness, to close the delta on the needs versus wants

versus affordability issue on critical weapons systems. Part of

DOD’s problem is that they have so many silos and mini silos and

so many different systems nobody talks to each other. That is a

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management problem which can affect effectiveness as well. Fortunately, it hasn’t to a great extent.

Mr. HORN. I agree with you on that.

Mr. DODARO. Mr. Chairman, I might add, on the inventory area,

the DOD inventory area, we at GAO have had that as one of our

high-risk areas since 1990. There are problems in terms of keeping

accurate inventories, and in some cases this is a contributing factor

to over-purchasing in order to make sure everything is on hand.

We are working with the department to try to improve their inventory-taking procedures to make sure that they have accurate perpetual inventories. They have so much inventory it is very difficult

to use conventional end-of-the-year, wall-to-wall, inventory-taking

type techniques. So they need to improve that.

The one positive thing I would say is that for the first time this

past year, the logistical community and the acquisition community

have engaged with GAO, the IGs, in undertaking efforts to work

with the financial management community to support and fix some

of these systems. Eighty percent of all of the information to prepare

DOD’s financial statements comes from outside the financial services arena, and in many cases their logistical records and some of

the documentation and support of logistical records is not there as

well.

Mr. HORN. I thank you.

I want to wind this up now. We might send a few questions to

each of you for the record, and without objection, the question and

answers will be put in at this point.

Let me first thank the staff that has worked on this hearing. J.

Russell George, the staff director, chief counsel for the Government

Management, Information, and Technology Subcommittee; Bonnie

Heald, the director of communications, professional staff member;

to my immediate left, the person that has had the most work on

this particular subject is Larry Malenich, the detailee from the

General Accounting Office; and Mason Alinger, the clerk for our

subcommittee; and then our faithful interns, Paul Wicker, Kacey

Baker, Richard Lukas; and for the minority we have Faith Weiss

and Jean Gosa. Faith is the counsel, Jean is the clerk for the minority. Willie Green is staff assistant; and our two court reporters,

Lee Dotson and Julie Bryan.

Let me just say in closing a few words. The financial story that

we have portrayed over the last 2 hours probably is disconcerting

to various taxpayers in the Nation, and I think we should all share

with them, while progress has been made over 5 years. When we

passed the act in the 103d Congress, we gave the executive branch

5 years to prepare for the first balance sheet in the history of the

country. Well, progress is coming, but we sure have a lot more to

do, and I will look to the Comptroller General, the Director of the

Budget, and the Secretary of the Treasury working together, despite two branches of the Constitution being involved. I think our

work has just begun in a lot of ways and we have a long way to

go.

In terms of the ongoing series of financial oversight by this subcommittee, we have already held hearings on the Internal Revenue

Service, on the Federal Aviation Administration, on the Department of Justice, and on the Health Care Financing Administration.

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We will be going into this with other agencies, and health care financing in particular is one that concerns us, just as it concerns

the administration. We would rather have all of that money that

sometimes is overpayments or sometimes fraud, waste, and abuse

in the program helping people, rather than sort of a loss to the Nation.

We will continue our oversight on the financial accountability of

the Department of Defense next month. We have them scheduled

for then. Clearly, we need strong leadership in this area, and often,

as we all know, financial accountability sort of wears people out

and they sort of start dozing and their eyes droop and all of that.

But it is very important. This is the taxpayers’ money, and we

want to make sure it is put to good use.

I want to thank you again for coming and testifying and wish

you all well. With that, we are adjourned.

[Whereupon, at 12 p.m., the subcommittee was adjourned.]

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