U.S. GOVERNMENT PRINTING OFFICE

69–820 DTP WASHINGTON : 2001

ARE THE FINANCIAL RECORDS OF THE FEDERAL

GOVERNMENT RELIABLE?

HEARING

BEFORE THE

SUBCOMMITTEE ON GOVERNMENT MANAGEMENT,

INFORMATION, AND TECHNOLOGY

OF THE

COMMITTEE ON

GOVERNMENT REFORM

HOUSE OF REPRESENTATIVES

ONE HUNDRED SIXTH CONGRESS

SECOND SESSION

MARCH 31, 2000

Serial No. 106–182

Printed for the use of the Committee on Government Reform

(

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

http://www.house.gov/reform

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

Internet: bookstore.gpo.gov Phone: (202) 512–1800 Fax: (202) 512–2250

Mail: Stop SSOP, Washington, DC 20402–0001

(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

HELEN CHENOWETH-HAGE, Idaho

DAVID VITTER, Louisiana

HENRY A. WAXMAN, California

TOM LANTOS, California

ROBERT E. WISE, JR., West Virginia

MAJOR R. OWENS, New York

EDOLPHUS TOWNS, New York

PAUL E. KANJORSKI, Pennsylvania

PATSY T. MINK, Hawaii

CAROLYN B. MALONEY, New York

ELEANOR HOLMES NORTON, 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

LISA SMITH ARAFUNE, 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

BRYAN SISK, Clerk

TREY HENDERSON, Minority Counsel

(III)

C O N T E N T S

Page

Hearing held on March 31, 2000 ............................................................................ 1

Statement of:

Gotbaum, Joshua, Controller, Executive Associate Director, Office of

Management and Budget; and Donald V. Hammond, Fiscal Assistant

Secretary, Department of the Treasury ...................................................... 12

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

Accounting Office, accompanied by Jeff Steinhoff, Acting Assistant

Comptroller General for Accounting Information Management Division;

and Bob Dacey, Director of the Consolidated Financial Audit .................. 5

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

Gotbaum, Joshua, Controller, Executive Associate Director, Office of

Management and Budget, prepared statement of ...................................... 16

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

Treasury, prepared statement of ................................................................. 28

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

prepared statement of ................................................................................... 3

(1)

ARE THE FINANCIAL RECORDS OF THE

FEDERAL GOVERNMENT RELIABLE?

FRIDAY, MARCH 31, 2000

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 and Kanjorski.

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

Louise DiBenedetto, GAO detailee, Bonnie Heald, director of communications; Bryan Sisk, clerk; Ryan McKee, staff assistant; Trey

Henderson, minority counsel; and Jean Gosa, minority clerk.

Mr. HORN. The Subcommittee on Government Management, Information, and Technology will come to order. Today the Department of the Treasury is releasing its third financial report of the

U.S. Government’s fiscal affairs. This report, which covers fiscal

year 1999, is required by the Government Management Reform Act

of 1994. The law specified that no later than March 31st of each

year, the Secretary of the Treasury in coordination with the Director of the President’s Office of Management and Budget annually

prepares and submits to the President and Congress an audited financial statement for the preceding fiscal year. After this year, the

statutory deadline has been met.

I commend the Treasury Department, the General Accounting

Office, AND the Office of Management and Budget for meeting this

deadline of undoubtedly a lot of hard work and personal effort that

went into this endeavor. I believe that all parties agree that some

progress has been made.

However, I am disheartened but not surprised that significant

accounting discrepancies and financial weaknesses have again prevented the Comptroller General of the United States from issuing

a clean opinion on the government’s financial statements. In subcommittee hearings on individual agencies over the last few years,

we have had at least two executive branch departments acknowledge that they spent billions of dollars in inappropriate overpayments. For example, auditors of the Health Care Financing Administration, which administers the Medicare and Medicaid programs,

estimated that in 1999, the agency overpaid Medicare claims by

$13.5 billion. This massive amount represents nearly 8 percent of

all Medicare fee for service benefits paid out that year.

2

The stewards of our tax revenues, the Internal Revenue Service,

has its own problems. Auditors examining the agency’s 1999 books

found one instance in which the IRS issued a $15,000 tax refund

even though the individual had been identified as owing nearly

$350,000 in outstanding taxes. With such loose financial controls,

is it any wonder that taxpayers have little confidence that their

hard earned money is being well spent?

Despite laws some nearly a decade old that require agencies to

be financially accountable, the General Accounting Office continues

to warn us about the potential for fraud, waste, and misuse of billions of dollars of taxpayer provided dollars.

Today the subcommittee is issuing a third report card grading

the 24 largest executive branch departments and agencies on the

quality of their 1999 financial statements. Again, the grades are

dominated with Ds and Fs. Only 22 of the 24 agencies submitted

the required financial reports. As of yesterday, neither the Department of the Interior nor the Department of State had submitted

their 1999 financial statements, which were due on March 1, 6

months after the end of the fiscal year. Obviously they both received Fs. On the other hand, the Social Security Administration,

which is also a large and complex agency, managed to complete its

financial statements 6 weeks after the end of the fiscal year. Perhaps the Office of Management and Budget, which oversees financial management as well as budgets in the executive branch, can

explain the disparity in accountability.

Based on this year’s consolidated audit report, the subcommittee

has determined that overall the Federal Government earned a Dplus. Although 13 agencies received clean audited opinions, they

have still missed the most important goal, which is to maintain financial systems that will allow them to produce accurate, reliable

financial information on a day-to-day basis.

On a related matter, we are also concerned that the Social Security-Medicare boards of trustees have again released their latest

projections on the solvency of these vital programs only 1 day before the consolidated audit report is due. These program projections

which are included in today’s audit report are now already outdated. I understand that by law the trustees must release the new

projections by April 1, but surely the law does not preclude them

from providing this new information early enough to include it in

the government’s audited financial report. Such poorly timed data

creates confusion about the financial status of two very important

programs. It also raises serious questions about the Government’s

ability and commitment to report accurately on its finances.

We will be looking very carefully at this issue. We have many

questions for our witnesses, all of which hold key roles in determining the credibility of the Government’s financial management. We

welcome each of you and look forward to your testimony.

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

3

4

5

Mr. HORN. We will now start with panel one, the Comptroller

General of the United States, the Honorable David Walker. If you

will rise, General, and raise your right hand.

[Witnesses sworn.]

Mr. HORN. The clerk will note that the oath has been affirmed,

and we welcome you here and you are into your second year now,

I guess. It seems like just yesterday when you started.

Mr. WALKER. Seventeen months on the calendar. Three years on

the clock and a lot of frequent flier miles, Mr. Chairman.

Mr. HORN. You’re doing a great job.

STATEMENT OF DAVID M. WALKER, COMPTROLLER GENERAL

OF THE UNITED STATES, GENERAL ACCOUNTING OFFICE,

ACCOMPANIED BY JEFF STEINHOFF, ACTING ASSISTANT

COMPTROLLER GENERAL FOR ACCOUNTING INFORMATION

MANAGEMENT DIVISION; AND BOB DACEY, DIRECTOR OF

THE CONSOLIDATED FINANCIAL AUDIT

Mr. WALKER. Thank you. It’s a pleasure to be before this subcommittee again, Mr. Chairman. I’d also like to note at the outset

that several GAO personnel have accompanied me, in particular

Jeff Steinhoff, who is sitting right behind me, the Acting Assistant

Comptroller General for the Accounting Information Management

Division, and Bob Dacey, who is the Director of the Consolidated

Financial Statement Audit. I point out that they are here and, if

necessary, are available to this committee for detailed questions.

I’m pleased to be here today to discuss our report on the U.S.

Government’s financial statements for the year 1999. Today’s hearing comes at an especially appropriate juncture. First, we’re nearing the 10th anniversary of the Chief Financial Officers Act’s passage, which has provided the underpinning for financial management reform necessary to help improve the economy, efficiency, and

effectiveness of the Federal Government. A critical financial management reform component established by the Congress entails requirements for annual audited financial statements for the 24

major Federal departments and agencies beginning in fiscal 1996.

We have seen steady increase in the number of vacancies that have

obtained unqualified opinions on their financial statements and

agencies’ timeliness in issuing them has also improved.

In addition, and importantly, in October 1999, the American Institute of Certified Public Accountants recognized the Financial Accounting Standards Advisory Board as an authoritative standard

setting body. As a result, we now will be able to say and other

auditors in accordance with generally accepted accounting principles, which is very important because that is a term which the

public is accustomed to and therefore can serve to enhance credibility of financial management reporting.

At the same time several major departments are not yet able to

produce audited financial statements on a consistent basis. The

most significant in this regard is the Department of Defense, which

represents a large percentage of the Government’s assets, liabilities, and net cost. None of the military services of the department

as a whole has yet been able to produce auditable financial statements. For the last 2 years, we reported that because of serious deficiencies in the Government’s systems, recordkeeping, documentaVerDate 11-MAY-2000 09:36 Feb 16, 2001 Jkt 000000 PO 00000 Frm 00009 Fmt 6633 Sfmt 6633 C:\DOCS\69820.TXT HGOVREF1 PsN: HGOVREF1
6

tion, financial reporting, and controls, amounts reported in the U.S.

Government’s consolidated financial statements and related notes

may not provide a reliable source of information for decisionmaking

by the Government or the public.

In other words, Mr. Chairman, we unfortunately have had to disclaim an opinion. The executive branch recognizes that because of

the extent and severity of financial management deficiencies addressing them will require concerted improvement efforts across

government. Annual financial audits represent an important means

to assure continued progress in connection with improving Federal

financial management.

Further, the President has designated Federal financial management improvement as a priority management objective and efforts

are under way across government to address pervasive, generally

long-standing financial management problems.

However, while clean opinions are essential to providing an annual public scorecard, they do not guarantee that agencies have financial statements needed to dependently produce reliable financial information on a timely basis. As you said, Mr. Chairman,

while obtaining a clean opinion, it’s an important and objective

milestone and a true accomplishment. It is not the end game.

The purpose of Federal financial management is to assure that

there is timely, accurate, and useful information available day to

day to make informed management decisions. And in addition, it’s

critically important that there be effective, internal controls and in

addition, it’s also critically important that there be systems in

place to assure compliance with applicable laws and regulations.

Agency financial systems are in poor condition in many cases and

they do not provide adequate information to effectively manage

day-to-day government operations and to hold managers accountable. Over the longer term, improving financial systems will involve harnessing technology and applying the information technology management framework outlined in the Clinger-Cohen act.

Another integral part of financial management reform is revamping human capital practices to build greater capacity, to implementing change management, and to achieve the discipline needed

to follow sound financial management and reporting practices.

Mr. Chairman, the remainder of my testimony will focus on matters and findings in our report on the consolidated financial statements of the U.S. Government for fiscal year 1999. But before I do

give that bottom line summary, I would first like to address an important financial information topic that you touched on in your

opening remarks, and that is the issue of Social Security and Medicare.

The Government’s fiscal year 1999 financial report and therefore

our report on the audit of these financial statements includes certain information concerning the Social Security and Medicare Part

A trust funds, such as projected contributions and expenses, dates

where expenditures are expected to exceed contributions and dates

when such funds are expected to be exhausted. Such information

is as of January 1, 1999 for Social Security and as of September

30, 1999 for Medicare Part A. This was the most recent information

publicly reported by the Government and made available to the

GAO.

7

Yesterday, as you noted, the trustees issued updated information

on these two important Federal programs as of January 1, 2000.

The Government’s issuance of dated information in this financial

report at about the same time that it issues more current information may cause confusion to the Congress and the public. This can

serve to reduce the confidence in and the credibility of the Government’s annual financial report. This is especially true when there

are significant differences in the trustees’ new projections and

those contained in the annual report, which is the case this time,

which was the case last year as well.

Given the importance of this information, steps should be taken

in future years to assure that the Government’s financial report

contains up-to-date information as of no earlier than the end of the

most recent fiscal year in these important Federal programs. Because the current information on the solvency of Social SecurityMedicare is critical to assessing the financial condition of the Nation, aging and budget deliberations—aiding in budget deliberations and fostering public debate, we will include the updated information on these two important Federal programs in our report on

the audit as a supplement when we issue it within the next couple

of weeks.

I might note, Mr. Chairman, that the new numbers are on page

1 of the Washington Post. They are also in the New York Times.

I hope we get page 1 tomorrow but I doubt very seriously we will.

So this serves to reinforce how important this information is to the

public and to other parties and it is critically important that the

annual financial report include up-to-date information.

In addition, Mr. Chairman, I might note that at present, this

critical information is not subject to audit. I think that needs to be

reviewed as well given the importance of this topic.

Mr. HORN. On that point, I might say you bring a particular perspective to this because you served on one of those trustee boards.

Which one was it?

Mr. WALKER. I served on all of them, Mr. Chairman. I served on

the Social Security and Medicare Board of Trustees for 5 years,

1990 to 1995. I think it’s critically important that the trustees be

able to go through their process and that they be able to announce

what their conclusions are with regard to these projections. At the

same point in time, I think it’s critically important that it be done

in a manner that will allow for inclusion and a timing that will

allow for inclusion of the most up-to-date information in this annual consolidated financial statement audit because this is a subset

of the overall audit. So it is important that the overall audit include up-to-date information.

Mr. HORN. Is this a problem of a law that needs to be changed

so that the trustees would be in synchronization with the rest of

the Government?

Mr. WALKER. Mr. Chairman, I think that while the trustees have

a statutory responsibility to report by April 1, theoretically they

can report before that. In my opinion, I think one of the things that

we need to look at is first work together with the trustees to try

to accelerate their reporting. And it may also make sense to accelerate the statutory due date for their report.

8

In addition, I might note for the record that the trustees have for

a number of years conducted their projections as of January 1 or,

in other words, the calendar year rather than the end of the fiscal

year. If they were to conduct their projections as of the end of the

fiscal year, September 30, which is the same date as the financial

statements, that change in and of itself ought to be able to accelerate their reporting date by 3 months. So I think this is something

that, one, we have already talked to OMB about and the Treasury

Department and I think it’s something we will continue to work

with you and the Congress on what, if any, changes might be appropriate here.

Mr. HORN. What are the options the trustees would have in

terms of a particular set of numbers when we’re talking about reform in both political parties, of Social Security, Medicare, where

we know there’s been a lot of waste in Medicare and everybody admits it and we’ve got to help them focus in on that? What kind of

game plan could be the result of either not having those numbers

tied in with the rest of the whole government or with putting them

in, say, the day before the hearing?

Mr. WALKER. Well, I think first merely by what has happened in

the last 2 years where new numbers have been released in this

particular case a day before the consolidated financial statements,

last year a day after the consolidated financial statements, I think

frankly it makes government look foolish. These numbers are the

largest numbers in the financial statements. These numbers are

arguably probably the most important numbers in the financial

statements and yet within a 24-hour period either before or after

the issuance of this report, we have whole new numbers coming

out.

You know as well as I do, Mr. Chairman, how important these

programs are to Americans. You know that there are current debates ongoing with regard to whether and to what extent these programs should be reformed and how they ought to be reformed, and

I think not having consistent information in both these reports

serves to undermine credibility and confidence in this report and

I think that’s inappropriate.

Mr. HORN. These are 70-year projections, right?

Mr. WALKER. Seventy-five years.

Mr. HORN. Now, over the history of those projections, have we

ever had someone go back and say, well, what were the projections

in the late 30’s, the 40’s, the 50’s, the 60’s, and how accurate were

they?

Mr. WALKER. That does get done and in fact in the report, in the

longer report, there is data dealing with some historical projections. I think we have to realize that there can be significant differences from year to year. In fact, in the Medicare program alone,

there has been a 22-year improvement in the last 3 years in the

estimated date of exhaustion for Medicare. That’s a dramatic

change in Medicare.

There are many reasons for that. In some cases it’s because of

improved economy. In some cases it’s because the trustees or actuaries believe that the recent changes in health care cost, the lowering of those costs are likely to continue. I think that’s debatable.

But the fact of the matter is the first issue is we ought to have conVerDate 11-MAY-2000 09:36 Feb 16, 2001 Jkt 000000 PO 00000 Frm 00012 Fmt 6633 Sfmt 6633 C:\DOCS\69820.TXT HGOVREF1 PsN: HGOVREF1
9

sistent information so we’re not confusing the public and so we

don’t inadvertently undermine credibility but, second, I think the

second issue that needs to be focused on is whether and to what

extent this information should be subject to audit.

Mr. HORN. Well, I would think one of the options is people could

say, well, look, we’re in a very healthy shape, why do we have to

reform anything? And is that one option that comes out of this with

the numbers in this situation so that people just give up on it and

say we don’t need to touch it anymore?

Mr. WALKER. One of the concerns that we had, Mr. Chairman,

is it decreases the sense of urgency. Second, it may also increase

the momentum to expand benefits in a program that already has

$2.9 trillion in unfunded promises that eventually we’re going to

have to come to grips with. But that’s a policy decision the Congress will have to make. But I think each of the quotes that are

in the Washington Post paper today from several Senators and

other Members note that it’s a double-edged sword, these new projections, because we know we’re going to have to reform these programs. There’s no debate about that. It’s a matter of when and how

that gets accomplished.

Would you like me to complete, Mr. Chairman?

Mr. HORN. Just to round this one out, are those numbers audited

by the trustees? Do they have that authority to bring in people or

how does that work?

Mr. WALKER. Mr. Chairman, the way it works right now is the

trustees ultimately must approve the assumptions, the key demographic assumptions, the key economic assumptions, and the key

assumption in the case of Medicare, which is the health care cost

trend rate, what they call the market basket rate, what’s going to

happen with health care costs going forward. They rely to a great

extent, as is understandable, on the recommendations and the advice and counsel of the Social Security actuary and HCFA actuary

who are very capable individuals. At times it may take supplemental efforts to try to reach outside that to try to draw upon other

experts, as we did when I and Stan Ross were trustees.

So ultimately they have to buy off on the assumptions and the

actuaries of Social Security Medicare do issue an actuarial opinion

to say that the projections have been done in accordance with generally accepted actuarial methods and that the assumptions are

reasonable in their opinion, but they are not subject to separate

independent audit. And in fact, comparable sets of numbers to the

extent that you can say they are comparable, pension projections,

health and welfare projections in the State and local government

arena as well as in the private sector would be subject to audit and

they are not at the present point in time at the Federal level.

Mr. HORN. Will that take a law to provide that?

Mr. WALKER. Mr. Chairman, no, I don’t believe it will. I think

that what we would have to do is—I frankly need to converse with

my colleagues, the Director of OMB in particular, to talk about

this. As you know, the Financial Accounting Standards Advisory

Board sets accounting and reporting standards but they don’t set

auditing standards. We might be able to accomplish this administratively. Obviously a law would assure that it would happen, but

10

I think we can try to proceed and see whether or not it’s possible

to do it administratively.

Mr. HORN. Social Security and Medicare are really the only

group within the Federal Government where they have this particular situation of special trustees, actuarial agreement and all

that. No other agency does it and maybe HUD does. I don’t know.

There would be something there in terms of projections.

Mr. WALKER. Nothing of the significance and magnitude that

we’re dealing with here, Mr. Chairman. Right now, as you know,

the information with regard to Social Security and Medicare is provided in a required supplemental stewardship statement. And

those statements aren’t currently subject to audit. There’s more

than just these two statements, but what I’m really focusing on

right now quite frankly is the information with regard to these two

programs. I mean, this just reinforces the importance of this information and please don’t—I don’t want anybody to misunderstand

that I think it’s important the trustees be able to continue what

they are doing. I think it’s important that they continue to be able

to release this information and the fact that it’s not audited

shouldn’t be drawing an inference one way or the other as to the

reliability of their projections. I just think it’s important that we

do it in a coordinated manner and I think serious consideration

needs to be given as to whether or not they ought to be audited

in order to further enhance public confidence, especially given the

magnitude of these numbers.

Mr. HORN. I know you have a lot more in your statement and

what we are going to do when you get done with the big thrust of

the statement, we’ll get panel two up and if you could stay, we’ll

have a dialog then between the three of you.

Mr. WALKER. I’d be happy to, Mr. Chairman. Let me see if I can

just summarize the major points in our audit. Our audit on the

U.S. Government’s financial statements for fiscal year 1999 states

that certain significant financial system weaknesses, problems with

fundamental recordkeeping and financial reporting, incomplete documentation, and weak internal control, including computer controls, continue to prevent the Government from accurately reporting a significant portion of its assets, liabilities, and cost.

Major challenges include in the Federal Government, in this area

relate to, first, the inability to properly account for and report material amounts of properly—materials and supplies, certain stewardship assets primarily at the Department of Defense; to properly

estimate the cost of certain major Federal credit programs and the

related loans receivable and loan guarantee liabilities primarily at

the Department of Agriculture; to estimate and reliably report material amounts of environmental and disposal liabilities and related

costs primarily at the Department of Defense; to determine the

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

and other liabilities for certain agencies; to accurately report major

portions of net cost government operations; to ensure that all disbursements are properly recorded and to properly prepare the financial—government’s consolidated financial statements, including

balancing the statements, accounting for substantial amounts of

11

transactions between governmental entities, and reconciling the results of operations to budget results.

Mr. Chairman, we also pointed out several material internal control weaknesses, deficiencies dealing with such things as improper

payments, the Government’s tax collection activities. I would like

to reinforce, Mr. Chairman, that while a clean opinion on the financial statements is an important milestone and it’s one the public

understands and it’s one that should be deemed to be an accomplishment, that it is not the end game and it is not enough and in

fact it can be misleading because there are certain departments

and agencies that have undertaken heroic efforts and spent a lot

of money in order to be able to get in a position where auditors can

express a clean opinion and yet they don’t have effective controls

and they don’t have the type of systems in place to be able to have

information to make informed decisions every day, and I would say

that having effective controls and having—and being in compliance

with FFMIA and related statutes are equally important as just getting a clean opinion on the financial statements, especially if that

clean opinion is obtained 6 months or in some cases up to a year

after the end of the year which is being examined.

In summary, Mr. Chairman, progress has been made. It is fair

to say that progress has been made every year in this area and as

one knows, for the Federal Government unfortunately it has been

a lag indicator in financial management. The private sector has

had to have its act together for years. State and local governments

have been ahead of us, although State and local governments many

times took a number of years to come around to comply as well.

I think it’s critically important that this continue to be a top priority. I think we have to look beyond clean opinions and also look

at internal controls and also look at effective systems to have timely, accurate, useful information every day. And I would like to commend you, Mr. Chairman, and this subcommittee for your continued diligence and efforts in placing attention on this important

matter and we look forward to continuing to work with you and

making further progress in the years ahead and I hope, Mr. Chairman, that during my 15-year tenure that I will be able to at some

point in time express an unqualified or clean opinion on the financial statements of the U.S. Government.

Thank you, Mr. Chairman.

Mr. HORN. We share in that hope. The question is next year, 2

years, 10 years, and I think with you in there with your 15 years,

you’re very conscious of getting the things done soon. So I would

hope the executive branch would get that regardless of who is in

control of the executive branch.

Mr. WALKER. I think it very well may be possible, Mr. Chairman,

that we get to the point of having some qualified opinion before we

get to the point of having a clean opinion, as has been the case

with a number of the different departments and agencies that

you’ve noted.

Mr. HORN. Well, we will now have panel two join panel one. We

have Joshua Gotbaum, the Controller, Executive Associate Director, Office of Management and Budget, and Donald V. Hammond,

the Fiscal Assistant Secretary, Department of the Treasury. If you

gentlemen will stand and raise your right hands. And anybody

12

that’s also going to help you with that from the staff, please have

them stand so we don’t have to swear them in. Do you have anybody behind you?

Mr. GOTBAUM. No.

[Witnesses sworn.]

Mr. HORN. The clerk will note that both have affirmed the oath

and we will now start with Mr. Gotbaum, who’s had a very rich career in government.

STATEMENTS OF JOSHUA GOTBAUM, CONTROLLER, EXECUTIVE ASSOCIATE DIRECTOR, OFFICE OF MANAGEMENT AND

BUDGET; AND DONALD V. HAMMOND, FISCAL ASSISTANT

SECRETARY, DEPARTMENT OF THE TREASURY

Mr. GOTBAUM. Mr. Chairman, thank you very much. I appreciate

the opportunity to be here today. Mr. Chairman, I have been Controller since the end of November and before I start, and I realize

my time is limited but I just wanted to pay an individual note of

thanks to the folks in the Office of Federal Financial Management

with whom I have worked now for 4 or 5 months. When I was confirmed, Sheila Conley, who had just been promoted to a Branch

Chief at OMB, a management position, was the Acting Controller,

the Acting Deputy Controller, and the Branch Chief. She had a lot

of work to do. I’m joined here by Joe Kull, who we just appointed

as Deputy Controller, and James Short, Dave Zavada, Kim Geier,

Karen Shaffer. I just wanted to say and to put on the record the

appreciation I have for these incredibly hard-working, very professional people.

I also want to say before I get to the formal testimony that I

thought General Walker’s characterization of the state of Federal

financial management, which is what we do want to talk about

today, was accurate.

We have made very substantial progress. We’re proud of it. It

was the result of a lot of effort. We also have a heck of a long way

to go. I thought, Mr. Chairman, that the most useful thing I could

do to start is to talk about where we’ve come because 10 years ago

when Congress passed the CFO Act, no agencies prepared financial

statements. The Federal Government as a whole couldn’t produce

consolidated financial statements, let alone audited financial statements. Now agencies issue those statements annually and the Federal Government, and my colleague Don Hammond will talk about

it, has produced its third governmentwide financial statement. We

have plenty to do but the fact is we’ve come a long way.

In 1990, the Federal Government did not have a set of governmentwide accounting standards. We buckled down. We created the

Federal Accounting Standards Advisory Board and over the years

they have produced a set of standards. This past year we have accomplished something of which we are quite proud: the AICPA has

recognized FASAB standards as generally accepted accounting

principles. So we’ve created a set of standards and they have been

recognized by the international standard setting community as

‘‘generally accepted accounting principles.’’

Financial management systems, such as they were, did not keep

standard accounts, couldn’t communicate with each other, and

couldn’t provide accurate, timely or meaningful information. Let’s

13

be clear, Mr. Chairman, many of those challenges remain today.

General Walker was entirely accurate in that regard. But we are

making progress.

We have developed standards for these systems. We’ve established a program jointly with the GAO, the Joint Financial Management Improvement Program Office for comprehensive testing of

these systems, and we’ve said to government agencies ‘‘Unless the

financial systems you buy pass muster in these tests, you can’t buy

them.’’ Mr. Chairman, there’s plenty yet to achieve but the community

has made real strides. This is the result of a lot of work by thousands of people. They track down financial information that the

Federal Government had never before kept. They recorded that information in standardized accounts using standards we didn’t before have. They developed new computer systems to maintain those

accounts. They created financial reports that we never before made

and they had those reports independently audited. I lay all this

out, Mr. Chairman, because I think it is important we all recognize

that this is an extraordinarily complicated and difficult endeavor.

Let me turn to the 1999 financial statements for the agencies.

Thanks to the miracle also of modern technology and thanks to

your staff, if you look at the chart, we have, as General Walker

said, made progress in the agency reports each year. Within the

last year, we have improved in timeliness because obviously one of

the most important things about financial information is: it’s got to

be timely to be used. Last year 15 of the 24 CFO Act agencies came

in by the deadline. This year we got 19. I will tell you Mr. Chairman, we would have had one more, but one agency that had

achieved a clean opinion wanted to take the time to talk with the

GAO and convince themselves that they were all doing the right

thing, so they held off a few days to have that conversation. So

from my perspective I think it would actually have been 20.

Also, Mr. Chairman, the quality of those statements has been improved. Last year by this time there was an issue of both timeliness and cleanliness. We had 8 of the 24 CFO Act agencies that

had clean opinions. Ultimately 12 made it. This year we have already received 13 clean opinions. The two agencies that have not

yet reported did achieve clean opinions last year, so we’re hopeful

that number might even go up, and might be as much as 15.

Within those numbers, Mr. Chairman, I think it’s important to

recognize some real progress. The Departments of Commerce and

Transportation, which last year had disclaimers, because their accounts were in such shape that their auditors couldn’t express an

opinion at all, this year got a clean opinion. The FAA got a clean

opinion. The Departments of Health and Human Services, Energy,

Veterans Affairs, and the Health Care Financing Administration

within the Department of Health and Human Services moved from

qualified opinions to clean opinions. This is real progress, Mr.

Chairman.

Now, we should also be frank that we had hoped to do better.

Even as late as January of this year, all of the 24 CFO Act agencies expected that they would be able to meet the March 1 deadline

and 18 of them expected that they would be able to achieve clean

opinions. Over the course of the first several months of this year

14

as those agencies worked with their own financial information and

worked with their auditors, a number of them found that their accounts did not meet standards. In some cases they could not reconcile new systems with old systems or they could not reconcile accounts from one part of their agency with accounts from another

part of an agency. For a variety of different reasons, they discovered issues that made their financial reports incapable of meeting

these standards. In some of those cases those issues could not be

resolved by the March 1 deadline. In two of those cases the agencies slipped from last year.

What are we going to do about it? We’re going to do what we

have been doing: OMB, the Treasury, and GAO are jointly working

with all of those agencies that are not clean, with all of those agencies that are not timely. We are working on both their statements

and their systems to make sure that they continue to progress and

that next year we see continued progress.

I want to make a second point: despite the fact there has been

undeniable progress, there’s a lot to do. This committee, Mr. Chairman, was intimately involved in the Government’s involvements in

Y2K. You know the level of effort, the difficulty, and the complexity

that is involved any time you talk about changing a system. Upgrading and improving the Federal Government’s financial systems

is, if anything, an even more complicated task. There are hundreds

of computer systems in the Federal Government. Many of them

were designed before there were financial standards. Many of them

were designed without financial accountability in mind. As a result

the task of upgrading them, modernizing them, improving them,

which is absolutely essential as General Walker said, to being able

to produce reliable timely statements, it’s a huge and enormous

task. Congress helped by passing the Federal Financial Management Improvement Act and giving the force of law to this obvious

and clear need, and we are working to do so.

The only thing I want to say beyond that on this subject, Mr.

Chairman, is that as in Y2K, we think it is quite important that

there be a recognition of the difficulty of the task and continued

pressure as to the importance of the task.

I realize time is short but I did not want to pass by, since I know

this committee has a range of concerns about financial management, without at least mentioning some of the other financial management issues that we do pay attention to, that we are working

on. I will leave it to you as to whether you want to deal with them

in questions, but we are working to implement the Debt Collection

Improvement Act and improve the way the Federal Government

handles its financial portfolios.

We’ve set up a priority management objective—I know you’re familiar with the PMOs—to work on this issue. We’ve set up a priority management objective to deal with the issue of verifying that

the right person gets the right benefit, to deal with these issues of

reducing erroneous or improper payments. We have set up a priority management objective to deal with the issues in computer security and we have done one as well for capital planning and systems

because we think the mandate that the Congress laid out in

Clinger-Cohen is essential to be implemented and to be implemented assiduously.

15

In closing, Mr. Chairman, I just want to lay out a comparison.

We think this job is important and difficult and I think it’s important to recognize that the progress is very real. It might be useful

for the committee to consider a comparison, which is State governments.

State governments, as General Walker mentioned, were ahead of

the Federal Government in developing modern financial reporting.

They began in the 1970’s to develop audited financial statements.

In 1980, Standard & Poors—you’ll forgive me, Mr. Chairman, I’m

a former investment banker so as a result, I look to the Standard

& Poors for some benchmark. In 1980, Standard & Poors said to

the States, ‘‘if you don’t have financial statements audited in accordance with GAAP on a timely basis, we are going to downgrade

you. We are going to affect your rating.’’ So that was 1980. Ten years later, Mr. Chairman, 10 years later,

43 States of the 50 issued GAAP based statements, and half of

them had clean opinions, half. The Federal Government has been

issuing agency financial statements for 4 years and this year, Mr.

Chairman, fiscal year 1999, more than half of them will be clean.

So we have in the Federal Government done in 4 years what State

governments took more than a decade to do.

We’re going to continue these efforts. We think they are extremely important. We think the continued support and sponsorship of the Congress is essential and the reason we’re going to do

so again, to take a lead from my colleague and friend General

Walker, is because we view these financial reports as an essential

tool in implementing GPRA, in integrating management and resource decisions to financial information and, taking a lead from

my friend again, to provide accountability people expect and deserve from their government.

Thank you.

[The prepared statement of Mr. Gotbaum follows:]

16

17

18

19

20

21

22

Mr. HORN. Thank you. I just have one question before I call on

Mr. Hammond, but that relates directly to OMB. Last year the administration set a goal of receiving a clean audit on the Government’s 1999 consolidated financial statements. Now, in July 1999,

you projected that 21 agencies would receive clean opinions but last

month you revised the number to 18. Now we have 13 with clean

opinions. What’s the story on that?

Mr. GOTBAUM. As I mentioned in my testimony, Mr. Chairman,

we think it’s important to set goals and to be ambitious in our expectations for the agencies. This is an important effort and it’s one

we take very seriously. The agencies have been working and we,

all of us, GAO, Treasury, and OMB, have been working with them

to get their financial accounts in order. As recently as early January, all of the agencies thought they could meet the March 1 deadline and 18 of them thought they would be able to produce financial reports on which they would be able to get a clean opinion in

some cases their auditors are GAO, in some cases their auditors

are IGs, and in some cases they are private financial firms. In the

process of developing their financial reports, a number of agencies

found that they could not get clean opinions for a range of reasons.

I’ll give you just some examples so you get a sense of this, sir.

One agency did something that we think is absolutely essential:

they installed a new financial management system. We think automated reports matter. One of the things that you must do when

you install a new financial management system is you need to reconcile it to your old one. You need to transfer your data and make

sure your accounts reconcile. That proved to be an enormous task

and they couldn’t finish it by March 1. They asked their auditor if

they could keep going and their auditor said ‘‘no, I don’t think this

is something that can be resolved in a couple of weeks,’’ and so that

agency got a disclaimer whereas before they had gotten a clean

opinion.

Other agencies found that when they were trying to reconcile information from their bureaus, that they didn’t match the central

accounts. This is again a little like Y2K, Mr. Chairman. When you

find something that doesn’t match, you then need to go back and

figure out why these two things don’t reconcile. And what happened is a number of agencies just couldn’t do so.

We think two things are important. One is that we encourage

progress and we continue to encourage progress and we continue

to hold people accountable, to steal a phrase from my friend here

again. We also think it’s important to recognize when there is

progress. My message here, Mr. Chairman, is that although we are

a long way from the promised land, we’ve made very real progress.

Mr. HORN. Well, let me just followup with that. I noted in the

earlier data that in 1999, July 1999, you projected 21 agencies that

would receive clean opinions. Then last month you revised that

number to 18 and now we presumably have 13 clean opinions; is

that right?

Mr. GOTBAUM. We have 13 so far, Mr. Chairman.

Mr. HORN. As I understand it, when you released some data from

your office on March 27, that was 18 agencies met your goal of receiving clean opinions. So I’m just trying to get it straight as to

23

what your goals are going to be in a number next year. Are you

saying everybody or are we saying 20. Are we saying 30, what?

Mr. GOTBAUM. In the budget, Mr. Chairman, when we put it together last fall we canvassed the agencies and even as late as January when we published the budget, 18 thought they could get

clean opinions and we listed that as a goal. It is a goal. And for

the reasons that I described, not all the agencies met their goal.

We intend to keep pushing both to get clean opinions and to follow

on the other point that both you and General Walker made, which

is to make sure that we have the basis, we have the financial systems, et cetera, to continue to meet these goals on a reliable basis.

That’s really how we view our job.

Mr. HORN. Thank you.

Mr. Hammond, you have a rich background in government.

When did you join the Treasury?

Mr. HAMMOND. 1980. February 1980.

Mr. HORN. I remember when I first came to this town as a young

congressional fellow in 1950’s the regard for Treasury and its career service there was the highest of any government agency and

department. So I thought you might well have come up through

that route and I noticed you now have a very awesome job, which

is to be the Fiscal Assistant Secretary, and we welcome you and

I know you’ve been before us before on loans and other things dear

to my heart.

Thank you. We’re glad to have you here.

Mr. HAMMOND. It’s my pleasure.

Mr. Chairman, I’m pleased to appear today to discuss the matters involving the third annual financial report of the U.S. Government that we’ve issued in accordance with the Government Management and Reform Act. First, I’d like to thank you, Mr. Chairman, for your continued focus on the priority need to improve financial accountability and reporting in the Federal Government.

And on a more personal note, I want to express my sincere appreciation for the outstanding effort and long hours of countless members of Treasury staff, especially at the Financial Management

Service, GAO, and OMB, in making this report possible. A large

number of the audience today is made up with professionals from

Treasury and Financial Management Service who literally have

spent an incredible couple of weeks making sure we met our timeliness objective, and I want to thank them very much.

While we have made steady progress and improvements over the

last few years, significant challenges must be met before we can

produce entirely reliable financial statements of the highest quality

for the U.S. Government. The Department of the Treasury has

been and continues to be a strong proponent of the development of

financial statements for government agencies and for consolidated

financial statements for the Government as a whole. Timeliness of

reporting is an important first step in this process and it’s one we

always intend to meet.

The financial report is prepared based on the accrual basis of accounting as promulgated by the FASAB, which was this year designated as generally accepted accounting principles by the American Institute of Certified Public Accountants. We are extremely

pleased and proud of this accomplishment and believe that GAAP

24

recognition will improve the professionalism and public perception

of our reports.

I think it’s also interesting to note that the Federal Accounting

Standards Advisory Board was formed, as my colleagues have

pointed out, in 1980 through the joint efforts of GAO, OMB, and

Treasury. I think what you’ve seen is 10 years of three agencies

working hard together for a common purpose and that’s a great example of the type of work that’s been done.

Given the daunting challenges that faced us when we began this

process just over 3 years ago, we have made substantial incremental progress this year. The preparation and audit processes are a

rigorous one which must be completed subject to severe time constraints. It involves collecting and analyzing data from over 70

Federal entities. Since issuing the first consolidated financial statements, we have been working in close cooperation with OMB, GAO,

and the program agencies to improve the quality of the report.

This past year we continued to focus much of our attention in

three critically important areas: Consistency of financial information, elimination of intergovernmental transactions, and reconciliation of fund balances. I am pleased to report that we have made

substantial progress in each of these three areas, because it is essential that the information provided by the agencies to Treasury

for inclusion in the financial report be consistent with the information in the individual agency level financial statements. The agency

level financial statements are audited separately and the audit of

the governmentwide financial statements relies in large measure

on the audits conducted of the agency level financial reports.

During the past year, OMB, Treasury, and GAO have worked

diligently to dramatically improve the consistency of the financial

information. We convened an interagency working group to identify

barriers to consistency and to recommend solutions which resulted

in a new verification process. This procedure I might point out is

based on the U.S. Government’s Standard General ledger, or SGL,

which is required to be used in all agency financial systems by

FFMIA. In addition, Treasury worked with each agency to reconcile

their fiscal year 1998 ending net position. This reconciliation effort

has improved significantly the opening balances for this year’s report with the ultimate goal of having Treasury’s opening balance

agree with each of the agencies’ opening balances.

The new process we’re using to ensure consistency is a considerably more rigorous one. We are now in a position to review the

data and do analyses to improve its consistency. However, this

process is constrained by tight timeframes, dictated by the report’s

due date. We expect continued improvement in this area as the

agencies become more comfortable with the reporting requirements.

We feel comfortable that progress is being made although the consistency problem has not yet been resolved.

The audits have also disclosed that the agencies continue to be

ineffective in identifying transactions with each other so that transactions can be reconciled or eliminated in the preparation of the

governmentwide statements. If these transactions are not properly

eliminated, total government assets, liabilities, revenues and expenses will be misstated by the net amount of these transactions.

Starting 2 years ago, we provided two-digit identification codes for

25

agencies to use in identifying their governmental transaction partners. The consistent use of these codes is critical to our ability to

eliminate these intragovernmental transactions. During fiscal year

1999, trading partner data was distributed to agencies so that they

could review and analyze the information and I might note that

this year we received over 99 percent of the financial dollar value

of transactions identified with those codes.

This past year we continued to focus also on resolving the intergovernmental elimination areas for the transactions between program agencies in either the Bureau or the Public Debt of the Federal Financing Bank, both Treasury entities. We instituted a new

policy requiring program agencies to confirm and reconcile their

end of fiscal year investment and borrowing balances with these

entities. I can report for this year’s activity the unexplained difference issue for these types of transactions has been resolved. Our

progress in this area is evident when one recognizes that gross

intragovernmental investments and borrowings not including annual activity amount to more than $2 trillion.

During fiscal year 1999, Treasury also put in place new procedures for reconciling transactions with the Department of Labor relating to the Federal Employees Compensation Act and transactions with the Office of Personnel Management relating to employee benefits.

Regarding buying and selling transactions between Federal agencies, we issued elimination guidance to all agencies covering accounting and reconciling procedures for fiscal year 1999 reporting.

The requirements for reconciliation with agency trading partners

on a regular basis are more detailed and formalized than in previous years and are designed to create a disciplined routine approach to these transactions.

Treasury has also made significant efforts to assist agencies in

reconciling their fund balance amount with the amount reported to

them by Treasury. The fund balance amount is an agency level

asset account and it reflects the available budget spending authority for that agency. We regularly notify agencies of their discrepancies in their fund balances and work with them to help them resolve them in a timely fashion.

During this past year, Treasury issued policy and detailed procedural guidelines for reconciling the fund balances and offered numerous education programs. These differences are for the most part

timing differences and most are now quickly resolved. As an example of that, when you review those differences greater than 5

months old, in explanation, in three key areas, deposits, disbursements, and checks issued, the differences governmentwide are $91

million, $58 million, and $251 million respectively. We do, however,

agree that further improvements in this area need to be made. Reconciliation of fund balances needs to be a routine, ongoing accounting function that is done on a timely basis. Agencies have made

significant strides to institutionalize the process and we expect

more progress this year.

Despite the substantial progress in the past year, the current

state of Federal financial reporting requires significant improvements in a number of areas. I am confident that with the coordinated, committed effort of Treasury, OMB, the CFO council, and

26

the GAO these improvements will be achieved. In the short term,

we will continue to make those changes necessary to improve the

preparation of our report. In the long term, as I announced last

year, we are embarking on a project to make fundamental changes

in the way we do Federal accounting.

Our most significant short-term challenges in addition to fund

balance reconciliations continue to be in three specific areas and

they come as no surprise: Consistency of agency data, eliminating

intragovernmental transactions, and providing a complete reconciliation of the budget results with the financial statements. Regarding consistency in April we will meet with GAO and OMB to jointly

evaluate the new process that we just implemented and formulate

further improvements in procedures, guidance, and analysis.

Regarding the elimination of intragovernmental transactions,

most of our efforts will be to identify and put in place additional

processes to improve reconciliations with Labor and OPM as well

as to reconcile buying and selling transactions between Federal

agencies. We will be successful when we have accomplished this

completely.

Regarding reconciliation of the budget results, we have developed

a data model to systematically reconcile the majority of the necessary transactions. We will be testing this model this summer. We

have pilot agencies and, working with GAO, we hope to be able to

make significant progress in this area this year.

A further challenge for us in improving the reliability and accuracy of financial information is the need to increase the use of the

SGL in agency accounting systems. As agencies move closer to full

compliance with FFMIA and more importantly use SGL base data

as the basis for statements, financial reporting at every level will

be considerably improved.

For the future, I’d like to close with just a couple of thoughts of

where we’re going. The preparation of this report has highlighted

that our current systems for reporting budget execution information also need to be improved. In conjunction with the changes

being made, Treasury working through its governmentwide accounting modernization initiative at the Financial Management

Service will improve the processes associated with the reporting of

budget information as well as associated with maintaining each

fund account balance with Treasury. This project will fundamentally change the processes that program agencies use to report financial data to the central agencies and provide program agencies

with more useful and timely presentation also of their data and improve the reliability of governmentwide totals published by OMB

and Treasury.

On a short term basis we intend to make improvements using

Web based technology to allow information from our Legacy systems to be accessed. In the longer term, we intend to make fundamental changes to the overall processes to streamline reporting,

eliminate reconciliation burdens and further improve access to accounting data. The major objectives are to provide program agencies with one stop shopping using Internet technology to retrieve

information provided to Treasury and to greatly reduce the reporting and reconciliation burdens on the agencies.

27

In closing, improving financial management and accountability

has been and remains an important Treasury priority. We have

taken and will continue to take actions to correct weaknesses and

address problems in the preparation of the governmentwide financial statements and will continue to take a leadership role in providing guidance and assistance and support to agencies in their ongoing efforts. Our ultimate success will be achieved when we can

reliably report on the disparate financial activities of the many

components of government seamlessly, as if they were a single entity.

Thank you, Mr. Chairman. That concludes my formal remarks

this morning.

Mr. HORN. I thank you. We appreciate the complexity to which

you went.

[The prepared statement of Mr. Hammond follows:]

28

29

30

31

32

33

34

35

Mr. HORN. Let me ask you this question.

Under the Government Management Reform Act, agencies are

required to submit audited financial statements by March 1 following the end of the fiscal year. In your testimony, a number of you

have noted that five agencies did not meet the March 1 deadline,

and OMB noted two still have not reported. Social Security, on the

other hand, managed to have audited financial statements 6 weeks

after the end of fiscal year. Obviously, my query to the administration is, why is there a disparity in agency reporting performance

and what prevented the five agencies from meeting the March 1

deadline?

Mr. GOTBAUM. Probably I should take a crack at that, Mr. Chairman.

Mr. HORN. Yes.

Mr. GOTBAUM. The reason that different agencies have different

performance is because some agencies started earlier than others.

The Social Security Administration, for example, very admirably

a long time ago instituted the requirement that they report and

began developing the automated computer systems that permit

them to do so reliably and quickly. That is precisely the goal Don

talked about that we aim for for the government as a whole.

Most other Federal agencies are in a different circumstance.

They are simultaneously having to develop the account structure,

because they don’t all use the standard general ledger, and develop

the computer systems to use that account structure, to integrate

their various enterprises. And different agencies are at different

levels of the process.

Mr. HORN. Is there a penalty that the executive branch has on

any of the agencies that are laggards?

Mr. GOTBAUM. We are active with the agencies and as a group— GAO, Treasury, and OMB—we meet with the agencies. We met

with them in the fall. We have talked with them continually during

the audit process, and we will continue doing that.

Mr. HORN. The answer to the question is—the penalty is talking

to GAO, OMB, and Treasury? What do you do? If you have constantly some agencies that don’t get it, what can you do with them?

Mr. GOTBAUM. Mr. Chairman, when we both testified before

House Rules a week or so ago, I made a point that some of the activities that we do in the course of management internally at the

executive branch are what I will characterize as ‘‘private criticism.’’ I think it behooves us not to say we affected people’s budgets, affected personnel decisions, etc. But I think it is important and entirely appropriate for the committee to ask.

I think it is important that the committee should know that

OMB is involved in the budgetmaking process actively for each of

these agencies. And we are—courtesy of you, we are also involved

in the personnel decisions. Without getting into individual cases, I

wanted to say that we work on it case by case, agency by agency,

and their circumstances are different.

Mr. HAMMOND. If I might add, as we focus more and more on resolving the issues on a governmentwide basis, timeliness has a key

factor in playing into that. So it receives a lot of attention with regard to their individual statements but also in solving the governmentwide reporting issues.

36

Mr. WALKER. Mr. Chairman, if I can reiterate a couple of things.

First, Social Security, as an example, voluntarily prepared financial statements, voluntarily decided to have an external audit before it was required to do so; and I think Social Security in many

ways has been a model in a variety of ways with regard to management. They had commitment from the top and got their systems together, and the result of that is that they have not only gotten

clean opinions for a number of years, but they have been able to

issue their financial statements 6 weeks after the end of the year.

Just to reiterate what I said before, it is important to get these

clean opinions. That is an objective milestone, but in many cases

I think too much emphasis gets placed on that such that people

think that after they have gotten a clean opinion the ball game is

over. They have won. They have hit the milestone. And, in many

cases, they are just getting started.

Mr. GOTBAUM. Mr. Chairman, one further point. General Walker

is exactly right. We put a lot of emphasis on the fact that we are

getting an increasing number of clean reports, but, frankly, I take

as much pride from that last set of lines on the chart, which is that

the number of agencies whose accounts were in such shape that no

opinion could be expressed at all, disclaimers, has gone from 13 in

fiscal year 1996 to 5 in fiscal year 1999. So General Walker is exactly right. There is more to this game than just clean opinions,

but we think that we are working agency by agency and making

very real progress.

Mr. HORN. I am delighted to have Mr. Kanjorski for the ranking

member today. He may take such time as he wishes to ask all of

the questions that he wants.

Mr. KANJORSKI. Thank you, Mr. Chairman.

Mr. Walker, when they arrive with that clean bill of health, they

do not carry on and keep an accounting system ongoing, is that the

problem that you are facing?

Mr. WALKER. The issue really is that it is not just getting a clean

opinion on your financial statements as of a date, 6 months after

the end of the year. It is making sure that you have sound internal

controls throughout the year, and it is making sure that you have

timely, accurate financial and management information throughout

the year such that you can make informed decisions to maximize

performance and ensure accountability.

I think what we are seeing, quite frankly, is that there has been

such a change in the world with the advent of technology that,

while getting clean opinions on historical financial statements is

important and it is something that ought to be demanded, the fact

of the matter is that of increasing importance are things about internal controls, things about basic systems, things about projections looking forward, things about results and what type of results

are generated for the dollars that have been provided. And so I

think we have to recognize that getting a clean opinion is important, but a lot of times these agencies will get clean opinions but

they don’t have their act together for day-to-day decisions.

Mr. KANJORSKI. Have we provided the funds consistent with getting their accounts together?

37

Mr. WALKER. There are circumstances under which we are going

to have additional targeted investments in order to get where we

need to be.

For example, if you look at the clean opinions, there is no doubt

that there has been progress, and if you look at the number of disclaimers, that is great, but if we look at compliance with the Federal Financial Management Improvement Act, an overwhelming

majority are not in compliance with the act and an overwhelming

majority are not in compliance with that act because of computer

security and other systems problems and because of these legacy

systems.

I think it is critically important that we recognize that not just

for financial management but for accountability and performance

management reasons we have to look at whether or not there is

being enough invested to get those to where they need to be to ensure that we have a results-oriented government.

Mr. KANJORSKI. There is a movement on the Hill among a lot of

Members seriously now looking at a 2-year budgeting cycle. Would

that be helpful in the process of management of the executive

branch of government?

Mr. GOTBAUM. Coming from the Office of Management and Budget, I should say that it is our view, Mr. Kanjorski, since we are intimately involved in the management and budgeting process, we

have thought that it did make sense to consider a 2-year budgeting

cycle for two separate reasons. One is that over the past several

years what we have found is that the decisionmaking process, both

internal to the executive branch and the appropriation and budgeting process in the Congress, has begun to overlap. It has become

more involved, it has become more time-consuming, and so we are

getting to the point where we are in the process of spending a lot

of time, sometimes in the same day, negotiating one fiscal year’s

budget while attempting to put together the next year’s. So we

think that there is some benefit from working on a 2-year process

rather than one.

The other reason is that it would also permit the opportunity for

both us and for the Congress in the off year, whatever it is, to focus

on oversight and management and to give a stage, if you will, for

these issues which we think are very important, but which necessarily compete in your decisionmaking and in our decisionmaking

for time. So we think that there is a benefit, and we hope the Congress will consider it.

Mr. HORN. I might add that we—at least I agree with you, and

I so testified before the Rules Committee, that the appropriations

subcommittees ought to do a better job, and we think that they

could with at least a pilot experiment and see what happens.

Mr. KANJORSKI. My experience in the last 15 years of Congress

is that the organizational structure is woefully inadequate in terms

of who has jurisdiction over what. For instance, I am involved in

examining new technology of—nanotechnology. I look through the

departments and bureaus, and there is no individual who has responsibility over that. It is scattered throughout. Four or five departments have programs in this. It seems to me that it is an extraordinary staffing cost, and it tends to be a jurisdictional dispute.

38

Who has more troops in the field and who has the largest segment

of the budget so they are bigger than the other guy?

Over the last several years I have been coming to the thought

that when the Congress tries to legitimately inquire into the functioning of the executive branch, we don’t do a very good job because

of the mismatch of jurisdiction and function within the government.

Now the question is, all of that is a prelude. Do you think that

it is time in the beginning of the 21st century with the advantage

of having five living Presidents as of January 21, former Presidents, to ask and maybe form on the executive branch something

similar to the Hoover Commission for reorganization of the executive branch but simultaneously to study and reorganize the legislative branch to make them more synergistic in relationship and jurisdiction?

If we did that, how long would it take to establish the plan and

how long would it take to implement the study?

Mr. WALKER. Mr. Kanjorski, 2 days ago, I testified before the

Senate Governmental Affairs Committee on the issue of management challenges in the 21st century. That testimony was directly

relevant to your question.

One of the things that we used as a basis for that testimony was

our new strategic plan which summarizes the major challenges facing our country and Nation for the next 6 years in accordance with

GPRA’s strategic planning horizon. It is clear when you look at

that plan that there are major challenges both in the legislative

branch as to how it is organized and whether it can effectively address those challenges as well as the executive branch. Because, in

many cases, what we find is that the organizational structure was

set up years ago, and that more and more we are having issues

that require a multiplicity of skills and entities to get involved in

order to solve it.

And so we do believe at the GAO that the time has come for government to step back and look forward rather than back and ask

ourselves about whether or not we are focusing on the right things

and whether we are organized in the right manner in order to

maximize performance and assure accountability.

We also issued a report 2 days ago at that same hearing noting

a tremendous number of duplications and overlaps in areas like

food safety, anti-terrorism, etc, where in food safety you have 6 different entities involved and anti-terrorism, you have 40, and in

some cases you don’t have anybody in charge. Yes, the time is

right. A commission is one possible option.

There were two Hoover commissions. One was more successful

than the other, and I think we ought to learn from the ones that

are more successful versus the ones that are not. We would be

happy to work with Congress to try to provide additional information as to what has and hasn’t worked in that regard.

Mr. KANJORSKI. Do you have any idea as to how long it would

take to draw the plan? If Congress were to act in the latter part

of this session, how long would it take to send something up on

how it would function?

Mr. WALKER. Senator Thompson and Senator Lieberman introduced a bill which focused more on the executive branch. The legisVerDate 11-MAY-2000 09:36 Feb 16, 2001 Jkt 000000 PO 00000 Frm 00042 Fmt 6633 Sfmt 6633 C:\DOCS\69820.TXT HGOVREF1 PsN: HGOVREF1
39

lative branch issue did come up in the hearing, but I don’t think

that it is the subject of the bill. I think they were talking about

a period of 11⁄2 to 2 years. I wouldn’t want to comment whether

that is adequate or not.

Mr. KANJORSKI. Is that a defined plan or was it to go through

the study?

Mr. WALKER. That would be for the commission to report. That

is, I think, potentially ambitious. I think their thought was to try

to get it authorized and get it—the commission started and to end

within one Congress. Now that is ideal. It may or may not be possible.

Mr. KANJORSKI. We have been working diligently for the last 25

years on campaign finance reform and have a tendency to run into

difficulties. One of the thought processes I have been going through

is that seems to me to be as a result of its immediate effect on the

political advantages or disadvantages of the majority, the minority,

and the various party structure.

Would it be possible to do executive reorganization and legislative reorganization and take maybe 8 or 10 years for it to be actually triggered so that those of us who make the decision will not

be interfering with whatever our relative positions are in government and will probably be out of government by the time it is implemented and, therefore, it is not a threat to the personalities involved, either in the executive branch or the legislative branch?

Mr. WALKER. It is not uncommon when one is engaging in a

major restructuring that there be a phase-in with regard to those

restructurings. From a practical standpoint, for a commission to be

successful, part of the issue is that it has to be focused on what

I would call a theme of good government which inherently is nonpartisan or nontheological. It is not what government is going to

do, per se, but how can government best go about attacking the

issues, that there has already been decisions regarding what government ought to be doing, so how best can we go about it.

I think that has the greatest degree of hope of being able to accomplish and being done on a bipartisan basis. When you get into

the issue of what government ought to be doing, and there is a legitimate need to talk about that, too, at the dawn of the 21st century, that is inherently important, but it is inherently more difficult.

Mr. KANJORSKI. The financial statements and the progress that

you have made over the last several years, are they structured in

such a way that they would be helpful in that process so there is

better understanding and accountability? Is this system able to be

utilized for the next step, if you will?

Mr. HAMMOND. I will take a stab at that.

I think the governmentwide financial statement, as it is currently organized, does allow you to get—once the data behind it is

reliable, to get an accurate picture of the scope of government operations in a nonagency-specific fashion. It tends to present the information by program or core function of government and consolidates

and brings in the pieces from each of the agencies that would flow

into those various components. That is one of the reasons that it

is so difficult to put it together, is to try to piece the pieces out of

40

this agency and that agency that flow together in a particular format.

I think it would be somewhat helpful in giving at least the financial understanding of the scope of the government’s operations and

where its resources are most heavily devoted, but sometimes that

can be deceptive. Certainly Social Security payments are a huge

portion of the government’s outlays but as a practical matter represent a very small portion of the government’s operations from a

personnel standpoint, for example.

Mr. KANJORSKI. You can say off accounting and off the organizational structure. Even though there are large segments, we are

talking about the operating portion of government?

Mr. HAMMOND. Right.

Mr. WALKER. Mr. Kanjorski, for the record, I think it is important to note that we at GAO, which is an entity, as you know, that

has a broad view of the government, we get involved in everything

that the government is doing. We are using the strategic plan that

I mentioned earlier as a basis to reorganize and realign ourselves

to be better positioned for the future. And I might commend to you

and the chairman this accountability report that we just issued last

week, which is our accountability report for fiscal year 1999 which

includes our financial statements and our performance report but

also a one-pager on our strategic plan which, frankly, might be

helpful with regard to the issue that you are talking about.

Mr. KANJORSKI. I don’t know whether I should ask you a real

subjective question, but we used to have an office around the Hill

that served the Congress with technical assistance. I think the

Contract with America shot that down, and we seem less prepared

than ever to have an understanding of the technical side of what

government is dealing with. Is there any way that we can find a

new institution of that nature to substitute for the role that it used

to play?

Mr. WALKER. Mr. Kanjorski, I don’t have intimate familiarity

with what happened to that entity, but you have the General Accounting Office. I think the amount of knowledge that exists within

that agency——

Mr. KANJORSKI. Mr. Walker, I appreciate your agency; but, quite

frankly, the time between the question and the answer, three wars

could be fought and resolved. Our problem is for Members, when

we get things that are far out of our realm of understanding, to act

and decide intelligently, we need a faster response than is generally available.

Mr. WALKER. I am glad you mentioned that. Because one of the

things that we are doing right now is looking forward and trying

to reinvent ourselves. We are looking at our portfolio of products

and services, and you are probably talking about our blue cover reports, and it does take a considerable amount of time to get those

out. We will always do those, but it is clear to me that our products

and services need to be modified in the future in order to provide

more technical assistance and quick turnaround assistance. There

needs to be a more strategic partnership between the committees

and the GAO to really focus on the most important issues where

we can make a difference, and I think the Government Reform

41

Committee is uniquely positioned in the House to deal with the

range of cross-cutting issues that have to be focused on.

Mr. KANJORSKI. Let me give you an example.

We had a hearing in the Banking Committee last week on reexamining the nature of regulation of government service enterprises.

There was suggested new ways of doing things. One thing involved

a very small authority that the Congress had given to the Federal

Home Loan Banks, the right to have a super-lien capacity. It is in

order to save time of placing liens in the Federal Home Loan Bank

system that they always have a priority and they don’t have to go

through the normal processes in the 50 States to perfect their liens.

It was thought that would be done away with, and they would have

to follow the same order to perfect their liens.

Just a brief analysis. It seemed to suggest that it would cost something like $50 million to implement that little process, when

in fact all of the regulators’ costs, looking at the new mission, was $46 million.

I know—it was an unintended consequence. We are often coming

up with what we think are smart solutions but are terribly expensive and, quite frankly, reregulating to an extent and not taking

advantage of modern technology. That would be less apt to follow,

but the result of that hearing was very interesting, too.

Just by raising the question, it affected the markets to the extent

that the securities being sold that day went up about 14 basis

points; and on one small issue of $5 million of certificates, it cost

the agency or the GSE $50 million of additional cost and, as a result, drove up the interest rate on mortgages from that agency long

term for all consumers in America a 16th of a point or something

like that. We have a tendency to do these things all of the time and

don’t realize that tipping the ship or standing up in the boat can

be very dangerous if you don’t know the unintended consequences.

Mr. WALKER. I am somewhat familiar with those issues because

in a prior life I was head of the Pension Benefit Guaranty Corporation, and there are certain statutory liens associated with that.

That is an example. You are obviously dealing with a quick timeframe. I think that is why you and we and other government agencies need to think about what can we do to make sure that you

have the ability to draw upon the knowledge that we have in a

timely manner, rather than having to wait on blue cover reports

or whatever else. It is so-called technical assistance, if you will. I

expect a much higher percentage of our resources at GAO will be

dedicated to those types of activities because that is what is needed.

Mr. KANJORSKI. Very good. From everything that I hear with regard to the financial system that you are structuring, it is better

than it has ever been, and it is moving forward. I want to compliment all of the individuals who have been involved with it. We

have not reached nirvana, but we are still striving. Thank you.

Mr. HORN. I thank the gentleman for his wise words, and I agree

with you on what you are trying to do with GAO with almost strike

squads, because we have a difference of time without question

here, as opposed to, let’s say, to the executive branch. You have

fundamental documents of state such as the budget and the economic adviser’s report and that type of thing, and they come at cerVerDate 11-MAY-2000 09:36 Feb 16, 2001 Jkt 000000 PO 00000 Frm 00045 Fmt 6633 Sfmt 6633 C:\DOCS\69820.TXT HGOVREF1 PsN: HGOVREF1
42

tain times and their budget process is at certain times in relation

to us, but we haven’t changed much in Congress over time, as you

know. We didn’t have an executive budget until President Harding

was finally able to get it through Congress. Before that, the Secretary of the Treasury simply took everybody’s estimates, shipped

it up here and everybody tore that apart in 13 subcommittees, and

the House did abolish the whole appropriations committee in the

late 19th century, and then they found money was going everywhere, and then they put the appropriations committee, which they

started in 1865, they started over again with the appropriations

committee.

Of course, with the Hoover Commission, you had two people that

clicked, and that was President Truman and President Hoover.

Franklin Roosevelt never even sent a postcard to Herbert Hoover.

Truman was wiser and knew that there was a lot of experience

that Mr. Hoover had done. He had been Wilson’s food administrator in the First World War. He was Secretary of Commerce

when it reflected every regulatory agency in this town. Hoover did

that.

So what happens, I find, if you are going to get reform in Washington, it happens with a change of party. In 1946, they did a

splendid job in terms of the Legislative Reorganization Act, the La

Follette Act, and the Republicans could implement most of it. The

Democrats would not implement it. Now that is not that there is

something wrong with them. It is the fact that people are dug in

in this place, more so in the Senate, by seniority.

I guess the prize example is little things like railways. It should

have been with Transportation for the last 40 years. It hasn’t been.

Why? Because the long-serving Member and chairman from then

West Virginia said, hey, I will only be around another couple of

terms. Let’s leave it with me. So the change came, and the gentleman who was next in line was told by the Speaker, Tip O’Neill,

I think, that we would like to move it. And he said, over my dead

body. You didn’t make the deal with me.

So we didn’t get those changed until 1995 when Speaker Gingrich started doing all sorts of things around here. And, guess what,

railroads went with what was then Public Works and Transportation, now Transportation and Infrastructure. It was just a matter

of major barons, be they Republican or Democrat, didn’t want to

change.

We spent $1 million when I came here in the 103d Congress on

reform of the House in certain ways. That was a very distinguished

group. That was Lee Hamilton on the Democratic side, David

Dreier on the Republican side. They did an excellent job. Guess

what? It never came to the floor. They didn’t want reform or

change.

Mr. WALKER. Mr. Chairman, two comments.

One, inside the same report talking about reform, reform can

take time. There is a quote from Thomas Jefferson in 1802 where

he is talking about the need for financial management reform in

the U.S. Government. So let’s hope on some of these things we can

be on a little more timely basis.

Mr. KANJORSKI. 198 years ago.

Mr. WALKER. We didn’t rush into it, Mr. Kanjorski.

43

Second, I would like to add for the record my thanks to the GAO

team that was involved in this as well as others. Because I know,

as one example, there were many people involved over many

months, but I know a lot of people, including a number of our people and Treasury people, pulled an all-nighter on Wednesday in

order to make sure that we hit this deadline, and I think everyone

should be complimented for that.

Mr. HORN. My last substantive question relates to human capital. Are we getting the type of people that can help us in the new

Civil Service in the next century that relate to fiscal resources and

are we losing people? We know on the Y2K thing that a lot of fine

people in the Federal Government were bought off by industry, and

localities did the same thing. What are we doing to reach out and

get top-flight people to help with this financial resource problem?

Mr. GOTBAUM. This is an extremely important issue. It is one

which we in the executive branch look at and take seriously.

If I may talk about a couple of things that we are doing, and

then I think it is important to let David talk about the long-term

view.

Within the Chief Financial Officers’ Council for the last several

years, there has been a concerted effort both to assess what our

needs are and how we can address them, and they have done a variety of things. This is under the leadership of the CFO of the Department of Labor. One is, change job descriptions to take advantage of the flexibility that we do have but we don’t always use.

Second, joint recruiting. Agencies’ CFO shops didn’t go to three

or four or five schools to get the best and brightest, nor did they

develop joint recruiting materials.

So what we are beginning to do—and this is not to say that we

have a solution or that we know that this is done, I don’t want to

mislead the committee in that regard—but what we are working on

now is a variety of fronts to use the skills and the people we have

and the flexibility we do have to bring in the talent we have, bring

in the talent we need.

We are looking at other questions like, do you need job designations? Do you need changes in pay scales, etc? And we are not at

the point where we can say definitely that we don’t have the current flexibility within the Civil Service system to meet this challenge. So I don’t want to mislead you and say that we don’t think

that there is an issue there. We think that there is an issue there,

and it is an issue that we are working on using the current authorities and asking whether or not we need to come to you for additional authorities.

Mr. WALKER. Mr. Chairman, as I have said on more than one occasion, while there have been a number of management reforms

throughout the 1990’s—GPRA, CFO Act, FFMIA, Clinger-Cohen,

etc—the missing link in performance- oriented government is the

people link, the human capital link.

The Federal Government faces an emerging human capital crisis

of significant proportion. It is smaller. Our human capital profile

is that we are smaller and we are out of shape, and there are

major succession planning challenges. This is an area likely to be

on our high-risk list in January 2000. We are placing a lot of time

and attention not only within GAO but governmentwide.

44

I know that the President has made this a PMO, the area of

human capital. And I also would note for the record that we have

published at least two recent blue cover documents that were done

on a much more timely basis, I might add, talking about privatesector best practices and human capital as well as a self-assessment guide to try to help department agency heads help themselves deal with these challenges; and I think it is a major issue

that this committee needs to be involved with.

Mr. HORN. I agree with you completely. We have a separate Civil

Service Subcommittee, and that is one situation, but this is, as you

say, a real crisis as people are starting to retire that were hired

in, say, the 1960’s and 1970’s.

The same with universities across the country. One of my reforms, which took me 5 years to persuade various trustees, was the

flexible pay in the university system for administrators. Overnight,

it changed things. Because you worked out a contract. What are

you going to do for the next 6 months? What goals are you going

to achieve? We had flexibility, $10,000, got rid of all of the Civil

Service bit, this little bit; and if you didn’t say the magic word like

Groucho Marx hanging up there, you didn’t get an improvement

and better pay.

Focus in on the ones where you really need people. Acquisition

and purchasing, people bought off by private industry, what can we

do to keep them in the Civil Service?

Mr. WALKER. We need to focus on key skills and competency,

critical occupations; and we have to end up linking performance

management systems, meaning performance award systems, with

strategic plans and performance plans. That’s when you’ll get a situation where you are maximizing performance and ensuring accountability, and I think it means in time more flexibility in compensation so you can pay people for skills and performance.

Frankly, the American people should support that. If they are

getting—if they are critical skills and they are getting performance,

they are getting return on their investment, and that is what they

care about.

Mr. HORN. Absolutely.

Mr. KANJORSKI. We may need to study how we can provide some

educational programs for our staff so they don’t have to leave to go

to graduate school. I probably have lost 10, 15 excellent staffers

that would have remained for 4 or 5 years more, but they had to

leave to get a graduate degree and could not come back to government because of the cost involved.

Mr. HORN. We did have a group in the early 1960’s, four of us

that were assistants to the Democratic and Republican Whips in

both Senate and House, we had money through the American Political Science Association to send them off to major institutions in

the East and West to build their resources, and we were able to

keep most of those people.

Mr. KANJORSKI. Does that slush fund still exist?

Mr. HORN. No. But our basic question was, how many books have

you read recently? And I would hate to say that the committee

didn’t do that well in answering it. We have tried to invest in people here, and that is obviously needed, and you can at least get

them away for 6 months or so. If we went to the 2-year cycle, we

45

could help do that in both the executive branch and the legislative

branch.

Well, any other questions you would like to ask your colleagues

for the good of the order since you are all under oath? Don’t say

it is a pleasure to be here either, since you are under oath.

We really appreciate your coming, and we are glad to see

progress, and we hope our little grading system will get on a few

Cabinet office doors so they can get the machinery moving.

I want to thank the legislative people that put this hearing together: J. Russell George, staff director and chief counsel, on my

left, your right; Louise DiBenedetto, GAO detailee to us; Bonnie

Heald, director of communications; Bryan Sisk, clerk; Ryan McKee,

staff assistant.

For Mr. Kanjorski, the minority staff, Trey Henderson, counsel,

and Jean Gosa, minority clerk.

And we have had two people as court reporters, and that is Laurie Harris and Doreen Dotzler.

With that, we thank you for the help, and we thank you for the

testimony.

[Whereupon, at 11:41 a.m., the subcommittee was adjourned.]

Æ