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37–001 PDF 2007

FEDERAL FINANCIAL STATEMENTS FOR FISCAL

YEAR 2006: FISCAL OUTLOOK, MANAGEMENT

WEAKNESSES AND CONSEQUENCES

HEARING

BEFORE THE

SUBCOMMITTEE ON GOVERNMENT MANAGEMENT,

ORGANIZATION, AND PROCUREMENT

OF THE

COMMITTEE ON OVERSIGHT

AND GOVERNMENT REFORM

HOUSE OF REPRESENTATIVES

ONE HUNDRED TENTH CONGRESS

FIRST SESSION

MARCH 20, 2007

Serial No. 110–15

Printed for the use of the Committee on Oversight and Government Reform

(

Available via the World Wide Web: http://www.gpoaccess.gov/congress/index.html

http://www.oversight.house.gov

(II)

COMMITTEE ON OVERSIGHT AND GOVERNMENT REFORM

HENRY A. WAXMAN, California, Chairman

TOM LANTOS, California

EDOLPHUS TOWNS, New York

PAUL E. KANJORSKI, Pennsylvania

CAROLYN B. MALONEY, New York

ELIJAH E. CUMMINGS, Maryland

DENNIS J. KUCINICH, Ohio

DANNY K. DAVIS, Illinois

JOHN F. TIERNEY, Massachusetts

WM. LACY CLAY, Missouri

DIANE E. WATSON, California

STEPHEN F. LYNCH, Massachusetts

BRIAN HIGGINS, New York

JOHN A. YARMUTH, Kentucky

BRUCE L. BRALEY, Iowa

ELEANOR HOLMES NORTON, District of

Columbia

BETTY MCCOLLUM, Minnesota

JIM COOPER, Tennessee

CHRIS VAN HOLLEN, Maryland

PAUL W. HODES, New Hampshire

CHRISTOPHER S. MURPHY, Connecticut

JOHN P. SARBANES, Maryland

PETER WELCH, Vermont

TOM DAVIS, Virginia

DAN BURTON, Indiana

CHRISTOPHER SHAYS, Connecticut

JOHN M. MCHUGH, New York

JOHN L. MICA, Florida

MARK E. SOUDER, Indiana

TODD RUSSELL PLATTS, Pennsylvania

CHRIS CANNON, Utah

JOHN J. DUNCAN, JR., Tennessee

MICHAEL R. TURNER, Ohio

DARRELL E. ISSA, California

KENNY MARCHANT, Texas

LYNN A. WESTMORELAND, Georgia

PATRICK T. MCHENRY, North Carolina

VIRGINIA FOXX, North Carolina

BRIAN P. BILBRAY, California

BILL SALI, Idaho

——— ———

PHIL SCHILIRO, Chief of Staff

PHIL BARNETT, Staff Director

EARLEY GREEN, Chief Clerk

DAVID MARIN, Minority Staff Director

SUBCOMMITTEE ON GOVERNMENT MANAGEMENT, ORGANIZATION, AND PROCUREMENT

EDOLPHUS TOWNS, New York, Chairman

PAUL E. KANJORSKI, Pennsylvania

CHRISTOPHER S. MURPHY, Connecticut

PETER WELCH, Vermont

CAROLYN B. MALONEY, New York

BRIAN P. BILBRAY, California

TODD RUSSELL PLATTS, Pennsylvania,

JOHN J. DUNCAN, JR., Tennessee

MICHAEL MCCARTHY, Staff Director

(III)

C O N T E N T S

Page

Hearing held on March 20, 2007 ............................................................................ 1

Statement of:

Campbell, James T., Acting Chief Financial Officer, U.S. Department

of Energy; William Maharay, Deputy Inspector General of Audit Services, U.S. Department of Energy; David Norquist, Chief Financial Officer, U.S. Department of Homeland Security; and James L. Taylor,

Deputy Inspector General, U.S. Department of Homeland Security ........ 65

Campbell, James T. ................................................................................... 65

Maharay, William ...................................................................................... 73

Norquist, David ......................................................................................... 83

Taylor, James L. ........................................................................................ 91

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

Accountability Office; and Linda Combs, Controller, Office of Management and Budget, Executive Office of the President ................................. 4

Combs, Linda ............................................................................................. 47

Walker, David M. ...................................................................................... 4

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

Campbell, James T., Acting Chief Financial Officer, U.S. Department

of Energy, prepared statement of ................................................................ 69

Combs, Linda, Controller, Office of Management and Budget, Executive

Office of the President, prepared statement of ........................................... 49

Maharay, William, Deputy Inspector General of Audit Services, U.S. Department of Energy, prepared statement of ............................................... 75

Norquist, David, Chief Financial Officer, U.S. Department of Homeland

Security:

Followup questions and responses ........................................................... 113

Prepared statement of ............................................................................... 85

Taylor, James L., Deputy Inspector General, U.S. Department of Homeland Security, prepared statement of .......................................................... 94

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

Accountability Office, prepared statement of ............................................. 6

(1)

FEDERAL FINANCIAL STATEMENTS FOR FISCAL YEAR 2006: FISCAL OUTLOOK, MANAGEMENT WEAKNESSES AND CONSEQUENCES

TUESDAY, MARCH 20, 2007

HOUSE OF REPRESENTATIVES,

SUBCOMMITTEE ON GOVERNMENT MANAGEMENT,

ORGANIZATION, AND PROCUREMENT,

COMMITTEE ON OVERSIGHT AND GOVERNMENT REFORM,

Washington, DC.

The subcommittee met, pursuant to notice, at 2:55 p.m. in room

2154, Rayburn House Office Building, Hon. Edolphus Towns (chairman of the subcommittee) presiding.

Present: Representatives Towns, Murphy, Welch, Platts, and

Bilbray.

Staff present: Michael McCarthy, staff director; Rick Blake, professional staff member; Velvet Johnson, counsel; Cecelia Morton,

clerk; Kristina Husar and Alex Cooper, minority professional staff

members; and Larry Brady, minority senior investigator and policy

advisor.

Mr. TOWNS. The subcommittee will come to order.

Welcome to today’s hearing on the Federal Government’s fiscal

year 2006 consolidated financial statement. This hearing addresses

a very important issue for the Congress and the Oversight Committee. As stewards of taxpayers’ dollars, we owe American citizens no

less than full transparency and accountability over the Federal

Government’s operations and fiscal condition. We need to be certain that Federal assets are protected from loss or misuse. It is imperative that we fully understand the cost of the Government’s operations and the implications of our financial commitments.

I am pleased that the Government is continuing to make

progress on improving financial management. For the second consecutive year, every major Federal agency issued their audited financial statements within 45 days of the end of the fiscal year. Of

the 24 CFO agencies, 19 received a clean audit opinion. In addition,

OMB reported improper payments were reduced by $9 billion over

the past 2 years.

However, as in previous years, the 2006 audit demonstrates that,

although many agencies have improved their financial management practices, there is still much work to be done.

This marks the 10th consecutive year that GAO was unable to

render an opinion on the Government’s consolidated financial statements. This situation is due to longstanding financial management

issues at the Department of Defense, the Government’s inability to

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reconcile accounting between agencies, and the Government’s ineffective process for preparing its financial statements.

Good financial management is more than just a paperwork exercise. Weak financial management can directly impact Government

operations and security.

Last year financial problems at the Defense Security Service

caused that agency to abruptly stop processing security clearances

for Government contractor employees. Because of this, thousands of

employees were at risk of losing their jobs because their clearances

were expiring and contractors had to increase salaries to retain employees with clearances, costs that were eventually passed along to

the taxpayers.

Similarly, problems with finances at the Federal Protective Services are threatening the security of our Federal buildings. Government departments failed to properly reimburse FPS for guarding

the buildings, which caused FPS to delay payments to contract

guards and pay millions of dollars in interest. Now, FPS is cutting

back the number of officers and security coverages at Federal

buildings, and it can be traced back to breakdowns in the financial

accounting and funds transfer between departments.

Today’s hearing will look at the progress that has been made in

improving financial management and the challenges that remain.

We will examine the problems that some agencies have experienced

to see how to solve them and how other agencies can avoid the

same problems. Specifically, we will explore problems with installing new financial systems, and with interdepartmental accounting,

and we will look at the bigger picture of how the Government

measures its long-term assets and obligations.

I look forward to hearing from our witnesses and gaining their

perspectives for making our Government a more effective and accountable institution.

I now yield to Mr. Platts on the minority side.

Mr. PLATTS. Thank you, Mr. Chairman. I would just like to say,

one, thank you for holding the hearing and continuing the important work of this committee and oversight responsibilities with our

Federal Government’s financial management practices and the

well-being of our finances, and in advance thank our witnesses,

both this and the following panel, for their day-in and day-out work

on this very important issue that, as you and I have joked, I think,

in the past that we were going to have our witnesses admit to steroid use, because if we did we would have the room filled with cameras, as it should be, because the financial well-being of our Nation

and the impact on the daily lives of our citizens is, to me, one of

the most important issues here in Washington. Certainly those who

are going to testify before us today understand that. Again, I appreciate their great work.

I do apologize. Because of trying to be in several places at once,

I will be here for the opening statements and then try to return

for the Q and A and the second panel.

Thank you, Mr. Chairman.

Mr. TOWNS. Thank you very much.

Congressman Murphy.

Mr. MURPHY. Thank you, Mr. Chairman.

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Often the repeated phrase that Government should work more

like a business doesn’t exactly prove an apt analogy, but when it

comes to issues of financial management, when it comes to making

sure that we have good audited financial statements, it certainly

is an apt analogy, and I am very thankful to the chairman again

for being able to be a member of this subcommittee, a new member

of this subcommittee.

I thank the witnesses for being here to shed some light on a very

important issue to the new constituents in my District who care

deeply about how their taxes are spent by this Government, and

taxpayers across the country.

Thank you, Mr. Chairman.

Mr. TOWNS. Thank you very much.

At this time I yield to the ranking member of the subcommittee

for his opening statement, Mr. Bilbray of California.

Mr. BILBRAY. Mr. Chairman, I apologize for my tardiness.

I appreciate the witnesses here today. Mr. Chairman, I just appreciate the ability to participate in this hearing. As somebody who

spent 18 years in local government, from being a mayor to a chairman of a county of 3 million, I am obviously very interested in that

huge leap between the theory of how we want to spend our money

and the reality of what really does happen with those funds.

With no other ado, Mr. Chairman, I yield back and thank you

again for the participation.

Mr. TOWNS. Thank you.

I yield to Mr. Welch.

Mr. WELCH. I want to thank you for holding this hearing. I look

forward to serving with you on this subcommittee. My colleague,

Mr. Murphy, said better than I can say everything I would have

said, so I am going to ask to have his remarks re-recorded in my

name. [Laughter.]

Mr. TOWNS. You are going to do very well on this subcommittee.

Thank you very much.

Actually, the first panel, of course, is already at the table. It is

our longstanding policy, as you know, to swear the witnesses in.

[Witnesses sworn.]

Mr. TOWNS. Let the record reflect they have spoken in the affirmative.

Our first panel features two leaders in advancing Federal financial management and promoting Government accountability. David

Walker is the Comptroller General of the United States and leads

the Government Accountability Office, the investigative and auditing agency for the U.S. Congress. Mr. Walker is a certified public

accountant and has extensive executive level experience in both

Government and private industry financial management.

Linda Combs is the Controller in the Office of Management and

Budget in the Executive Office of the President. As Controller, Dr.

Combs oversees Government-wide financial management policies

and requirements. She also has extensive experience in Federal financial management and has served as a leader in several Federal

agencies.

Your entire statement is in the record, and I will ask that each

witness summarize your testimony in the time provided, and, of

course, that is 5 minutes.

4

Please proceed, Mr. Walker.

STATEMENTS OF DAVID M. WALKER, COMPTROLLER GENERAL OF THE UNITED STATES, GOVERNMENT ACCOUNTABILITY OFFICE; AND LINDA COMBS, CONTROLLER, OFFICE

OF MANAGEMENT AND BUDGET, EXECUTIVE OFFICE OF THE

PRESIDENT

STATEMENT OF DAVID M. WALKER

Mr. WALKER. Chairman Towns, members of the subcommittee, it

is a pleasure to be here today to report on the U.S. Government’s

consolidated financial statements for the years 2006 and 2005.

Since enactment of key financial reforms in the 1990’s, the Federal Government has made substantial progress in improving financial management activities and practices; however, the Federal

Government still has a long way to go in order to address several

principal challenges to fully realizing strong Federal financial management.

As you mentioned, Mr. Chairman, for the 10th consecutive year,

certain material weaknesses in financial reporting and other limitations in the scope of our work resulted in conditions that prevented the GAO from being able to provide the Congress and the

American people with an opinion as to whether the consolidated financial statements of their Government was fairly stated in conformity with generally accepted accounting principles.

Furthermore, we also reported that the Federal Government did

not maintain effective internal control over financial reporting and

compliance with certain significant laws and regulations.

For the third consecutive year the GAO included an emphasis

paragraph in our audit report noting that our current fiscal path

is unsustainable and that tough choices by the President and the

Congress are necessary in order to restore our Nation’s long-term

fiscal sustainability.

Currently, our Nation’s financial condition is worse than advertised. From a broad financial management perspective, the Federal

Government’s deteriorating long-range financial condition and fiscal imbalance are matters of increasing concern. The fiscal year

2006 financial report disclosed that, despite a reported increase in

revenues for fiscal year 2006 of about $255 billion, the Federal

Government’s cost exceeded its revenues by $450 billion, the net

operating cost.

Furthermore, the total of reported liabilities, contingencies, and

unfunded commitments for things like Social Security and Medicare rose from about $20 trillion in 2000 to about $50 trillion in

2006. That is a 147 percent increase in 6 short years.

To put things in perspective, $50 trillion amounts to $440,000

per American household, and median household income in America

is less than $50,000.

Table two on page 6 of my testimony I would commend to you,

because that takes these huge numbers and puts it in terms that

I think you and others can fully appreciate.

At some point we are going to have to start making some tough

choices in order to put us in a more prudent and sustainable path.

That will include, among other things, increasing transparency and

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enhancing the relevancy of key financial, performance, and budget

reporting; reinstituting and strengthening budget controls;

strengthening oversight of programs and activities; and re-engineering, reprioritizing the entire base of the Federal Government.

The Federal Government restated certain of its fiscal year 2005

consolidated financial statements as part of this year financial reports to correct certain errors. Since fiscal year 2004, we, at GAO,

have reported our concerns about restatements to Federal agencies’

previously issued financial statements. Frequent restatements to

correct errors can serve to undermine public trust and confidence

in both the entity and the responsible parties. As has been the case

for 9 previous fiscal years, the Federal Government did not maintain an effective system on total controls.

But on the positive side of the ledger, for fiscal year 2006, 24 of

24 CFO Act agencies reported within 45 days, and 19 of 24 CFO

Act agencies were able to obtain a clean opinion on their consolidated financial statements, up considerably from where we were a

few short years ago.

The three primary impediments to an opinion on the financial

statements are: the Department of Defense, intergovernmental activity, and preparing the consolidated financial statements.

In summary, the Federal Government’s financial management is

much improved since the CFO Act and FMMIA were enacted in the

1990’s, but we still have a ways to go, and the tail on the dog is

the Department of Defense.

Thank you, Mr. Chairman. I would be happy to answer any questions you might have.

[The prepared statement of Mr. Walker follows:]

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

Dr. Combs.

STATEMENT OF LINDA COMBS

Ms. COMBS. Thank you, Congressman Towns, Congressman

Bilbray and other distinguished members of the subcommittee. I

thank you for providing us an opportunity to be with you today to

discuss with you OMB’s vision for strengthening Federal financial

management in the coming years.

Improving financial management is one of this administration’s

top management priorities. With the launch of the President’s management agenda in 2001, the President issued a call to action for

Federal managers to achieve a series of critical financial management goals that, if attained, would help American citizens gauge

whether the people’s money is being properly accounted for and

wisely spent, increase transparency into the fiscal health of the

Federal Government, and provide reliable financial information to

be used by Federal leaders so they can mange their day-to-day operations of their Government and ours more efficiently.

I am pleased to report that the Federal financial community is

positioned to meet those challenges. We have, indeed, achieved significant forward progress on all the key indicators of the President’s management agenda, and specifically, as you and Mr. Walker have just pointed out, 19 major agencies that represent 75 percent of all Federal outlays achieved a clean audit opinion last year.

The number of auditor reported material weaknesses has reduced

approximately 15 percent from just the past year. And, for the second consecutive year, as has already been pointed out, every major

Federal agency issued their audited financial statement within 45

days of the previous year. Just to put that in a tiny bit of perspective for us, it was taking as long as 5 months to complete financial

reports in 2001. Improper payments has declined to $36.3 billion

from $45.1 billion in 2004, so in those 2 short years we have taken

improper payment improvements down by $9 billion. We have disposed of more than $4.2 billion in excess real property since 2004.

It is now incumbent upon the Federal financial community to

build on this foundation of progress so that we are prepared to address the fiscal challenges that lie ahead. Federal managers must

continue to mobilize resources, rededicate efforts, and strengthen

our accounting practices. We have to implement stronger internal

controls, issue financial reports more timely, eliminate instances of

error and waste, and use financial data on a day-to-day basis to

manage cost. Also, we must approach these management improvement activities with an eye toward balancing the cost of our efforts

against the benefits that they ultimately derive for the taxpayer.

As we set out to achieve new and better levels of financial performance and do so in a cost-effective manner, it is critical that the

Federal community orient itself around a common set of priorities

and a clear and consistent road map for improvement. Therefore,

pursuant to the CFO Act of 1990, my office, the Office of Federal

Financial Management within OMB, issues an annual plan to Congress that highlights our key financial management goals, how we

measure them, our expected performance over the next 5 years,

and the steps we will take to ensure their success.

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To achieve these important objectives described in our report, the

Federal financial community has undertaken a series of reforms intended to strengthen key areas of financial management. These activities include improving and/or strengthening areas such as internal controls, financial systems, payment accuracy, real property

management, grants management, financial reporting of the Government, as a whole.

Our recently issued annual report describes in great detail our

planned actions in these areas and how we are going to measure

our progress over time. The Federal financial community undertakes a myriad of day-to-day activities, as well, so that we can comply with the CFO Act of 1990.

We believe in transparency and we believe that the CFO Council,

along with the President’s Council on Integrity and Efficiency,

which is comprised of our IGs throughout Government, is currently

joining forces to improve both the cost effectiveness of how we go

about producing our audited financial statements and how we

present this information so that it is understandable and so that

excessive costs are not taken to drain on agency resources.

Every tax dollar is far too precious for us not to make well-informed decisions. This administration looks forward to continuing

our partnership with Congress, with GAO to address these specific

problems that we have. We have a long way to go. We need to be

stronger. We need to be smarter. And we need to, indeed, have

more sustainable accountability.

We will build on our successes.

Thank you for your continuing support and effort. I look forward

to answering your questions.

[The prepared statement of Ms. Combs follows:]

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Mr. TOWNS. Thank you very much.

Let me thank both of you for your testimony.

Let me begin, Mr. Walker, with you. You know, DOD always appears to be the problem. Is there any reasonable possibility of DOD

getting a clean audit in the next few years?

Mr. WALKER. I would sure like, Chairman Towns, for the Department of Defense to be able to achieve a clean audit opinion before

I leave office, which is October 25, 2013, but I wouldn’t bet a lot

of money on it. I believe that their current approach to trying to

improve their financial management systems and controls and

their plan to try to achieve, you know, an audit opinion is vastly

superior to their prior one, but I think most likely we are going to

be at a point where there are several major entities within the Department of Defense will be in a position to have a clean audit

opinion before the end of my term, and possibly several line items

across the agency. We are going to try to make sure that more than

that gets done, but I am not that optimistic as of this point.

Mr. TOWNS. What about the new DOD plan for better financial

management? Will that help?

Mr. WALKER. The so-called FIAR plan, F-I-A-R——

Mr. TOWNS. Yes.

Mr. WALKER [continuing]. I believe it is clearly superior to their

past plan. As you may recall, their past plan called for them to

have a clean audit opinion for the entire Department of Defense by

fiscal year 2007. It was totally unrealistic. Their new plan takes

the entities that they hope to be able to achieve an opinion on and

the line items that cross the different silos within the Department

of Defense and talks about making progress on an installment

basis toward ultimately achieving an opinion on the overall Department. Clearly superior but, frankly, they are really just getting

started within the last year or so.

Mr. TOWNS. Do you want to comment on that?

Ms. COMBS. I would totally agree with what Mr. Walker has had

to say about that. I would just add that I think also the effort that

is underway, in terms of their A–123, their administrative order

123, internal controls effort, will probably help to accelerate some

of the difficulties that they have had in the past. They are working

very, very hard to try to correct deficiencies.

Mr. TOWNS. All right.

Mr. Walker, you paint a very sobering portrait of the long-term

fiscal outlook for the Federal Government. I want to ask you about

private sector liabilities and whether they are accounted for.

As you know, when the Federal Government had to spend hundreds of millions of dollars to bail out failing savings and loans in

the 1980’s, it created a real financial shock. Today the Federal Government acts as a guarantor for a lot of private debt by law for

things like student loans, pension benefits, publicly chartered companies like Fannie Mae. Are these potential liabilities accounted for

in the Government’s balance sheet? And how do we know if the

Federal Government is properly managing the risk for these private sector liabilities? How do we know?

Mr. WALKER. Well, first, as you note, Chairman Towns, on one

hand you have traditional liabilities, which would be for things like

debt held by the public, which would be for unfunded pension and

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health care to military and civilians that are Government employees. You have certain commitments and contingencies. For example, to the extent that the Government, you know, might guarantee

certain debt, to the extent that the Government might step up if

certain entities fail, then those are various contingencies. And then

we have certain unfunded commitments, the difference between

what we have promised with Social Security and Medicare and the

dedicated payroll tax revenues and premiums that we have available to meet those promises.

The answer is: if it is a firm commitment of the U.S. Government, if we have identified the likely event, if it is probable that

it will occur, and if we can estimate within a reasonable degree of

certainty the amounts of money involved, then under that circumstance it would be booked as a liability. Unless and until all

three of those conditions exist, it would not be.

Let me give you an example. The Pension Benefit Guarantee

Corporation is a U.S. Government corporation. Technically, the

United States is not liable for its obligations. Technically the PBGC

can borrow, I believe, up to $100 million. Its assets, however, are

far less than its liabilities. It is in the hole about $20 billion. There

is not a liability on the Government’s financial statements for the

PBGC, but we do disclose that contingency. We do note that it is

under-funded by about $20 billion and what the nature and extent

of the Government’s obligations might be with regard to that.

Mr. TOWNS. Right. Thank you very much.

I yield to the ranking member, Congressman Bilbray.

Mr. BILBRAY. Thank you.

Mr. Walker, I want to just tell you I am very impressed with

your commitment to fiscal sanity. I know there is not a lot of fans

for you around this Hill, but I want you to know that you have one

here. I appreciate your straight talk on the issues.

Department of Homeland Security has been put together by

those of us in Congress trying to organize something, a whole lot

of loose pieces that were thrown together under the crisis of 9/11,

and is now struggling to try to be an organized strategy. Is there

any light at the end of the tunnel that this agency is actually going

to be able to function as hoped for, from the fiscal point of view?

Mr. WALKER. Yes. Absolutely. I think, frankly, DHS will probably

get there before DOD will get there. The fundamental difference is

the Department of Homeland Security represented 22 different departments and agencies that had different cultures, different systems, different structures, and, frankly, until September 11, 2001,

most of them weren’t even focused on homeland security. Their

missions were fundamentally changed.

In contrast, take the Department of Defense, which was created

in 1947. This is the 60th anniversary of the creation of the Department of Defense. They were all in the defense business. There

weren’t as many entities involved. Yet, here 60 years later they are

still in last place in financial management.

So yes, we can be successful. We will be successful.

Mr. BILBRAY. I appreciate that. And, for the record, I opposed the

Department of Defense. I think we ought to be up front and call

it the Department of War, exactly what it is. I think that the politiVerDate 11-MAY-2000 10:39 Aug 16, 2007 Jkt 000000 PO 00000 Frm 00060 Fmt 6633 Sfmt 6633 C:\DOCS\37001.TXT HGOVREF1 PsN: HGOVREF1
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cal correctness changing terminologies, we spend more time talking

about terminology rather than getting the job done.

Department of War, Department of Defense, has there ever been

a time in our history where they have been not the problem child

with this kind of stuff? I am a history major. I go back and remember having issues such as Stewart raiding Union wagons and sending a telegram back saying you guys ought to all be thrown in prison because the mules aren’t worth pulling the wagons because you

guys are cutting deals on the purchase of equipment for the Army.

Has there been any time that we can really show that the Army,

the Navy, or—we won’t mention the Marine Corps. We don’t want

to get in trouble here—but that the Department of War, Department of Defense has been a good player in this, or has it all historically been the problem that most of us perceive it to be?

Mr. WALKER. I am also a student of history and I also have responsibilities for auditor generals around the world, and so it is not

just the United States but it is also looking at other countries. Defense Departments, War Departments, whatever you want to call

it—by the way, we used to call it War in the past—have always

been challenged from a financial and fiscal standpoint, and frankly

in part because, in general, they are not held as accountable as

other departments and agencies are.

I will tell you that one of the things that I have done in recent

years is I have looked to some of the other countries to find out

what their experiences have been and they typically are about the

last one to get their financial act together, the Department of Defense or War or whatever you want to call it in other countries, but

most of them have.

For example, the United Kingdom has been able to achieve a

clean opinion on its financial statements for several years in a row.

That was not the case until recent years. So they typically are a

lag indicator and they have been a problem for a long time.

Mr. BILBRAY. Yes. Just an editorial note: they also at almost exactly at that time abandoned their carrier and their task force and

their ability to project their military force overseas extensively, but

that does have an overall impact.

You know, Ms. Combs, OMB is talking about that they found over $45 billion in 2004 in improper payments. What do you think

we can do to reduce those improper payments?

Ms. COMBS. Well, we are currently involved in a number of ways

of reducing those improper payments already. One of the things

that we used the President’s management agenda score card for

and we used the process of the score card is to hold agencies accountable for reductions in these key strategic areas that we know

are going to make the biggest difference in how successful their entire financial operations are.

One of the things that we are very, very pleased with is the improper payments initiative. I think the improper payments initiative starts out by looking at risk-susceptible programs, and in this

way we are able to take the highest-risk programs in each of the

departments and agencies and target those. So we used some strategic ways of looking at who has the highest levels of improper payments and what are some things we can do within each one of

those programs within each department.

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We meet with those folks frequently. We have a lot of engagement with our departments and agencies from the financial management side of OMB. One of the things that we have found that

helps in eliminating improper payments is extra verifications. I

know Mr. Walker and I have talked about this. We were able to

talk about it earlier today, how pleased we are with some of the

various programs. HUD, for example, this year just got off the

high-risk list for two of their programs that had been on the highrisk list since 1994. A lot of what goes on in getting agencies off

that high-risk list and reducing improper payments is being sure

that payments are going to the right individuals and that payments to individuals where they don’t belong are removed. We find

extra verification to be one of the key elements that we use in reducing improper payments.

Mr. BILBRAY. Thank you, Mr. Chairman. I know my time has expired. I would like a followup question whenever it is possible.

Mr. TOWNS. Thank you very much.

I now yield to the gentleman from Connecticut, Mr. Murphy.

Mr. MURPHY. Thank you, Mr. Chairman.

I wanted to go back to the DOD for a moment. It is hard not to,

given the amount of time this subcommittee and full committee has

spent overseeing a lot of the funds spent through DOD and I think

have raised awareness in the public over the money being spent

through the DOD and State Department.

Mr. Walker, help me maybe zero in on the issue a little bit. Are

the issues within DOD system-wide, or are we talking about specific departments, agencies, pieces of DOD that raise greater issues

than others?

Mr. WALKER. Some entities are better than others in DOD, but

it is a department-wide problem. Just to put a little meat on the

bones, the Department has about 2,000 legacy non-integrated information systems that have financial and other management information in them that were created independently by the different

services, by the different DOD offices that exist. They don’t talk to

each other. In many cases you have to enter a 16-digit code for

each transaction. It has to be entered into multiple systems. That

is just an example of the problem.

One of the things that we are recommending is that, since DOD

has 15 of 26 high-risk areas on GAO’s high-risk list of which financial management is but one, we are recommending that the Department create a new chief management official, a level two official

with a proven track record of success with a term appointment to

focus full-time on these longstanding and systemic management

problems.

Mr. MURPHY. The FAIR plan, does that address some of these

questions of lack of interoperability?

Mr. WALKER. That plan, along with their business systems information plan, which is—you know, they have a business transformation unit that is focusing more on the information technology

and the enterprise architecture. That, in conjunction with that

plan, is trying to take a look at these systems.

Mr. MURPHY. Mr. Chairman, just one last question.

Mr. Walker, I just want to point to one interesting piece within

your written testimony where you made a comment and said that

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‘‘The managers within DOD lack access to the full range of information—’’ this is directly from your statement—‘‘to the full range

of information needed to effectively manage day-to-day operations.’’

Just talk a little bit about what is behind that concern.

Mr. WALKER. Well, what is important to keep in mind is the objective here is not just to get a clean opinion on your financial

statements, because all that says is that the numbers are fairly

presented in all material respects.

Mr. MURPHY. Right.

Mr. WALKER. You could have all kinds of economy, efficiency, effectiveness problems and still get a clean opinion on your financial

statements. Ultimately what has to happen is that you need systems and controls that will provide timely, accurate, and useful financial and management information to be able to make informed

decisions day to day. They don’t even have systems and controls

that will allow them to be able to get an audit opinion once a year,

much less systems and controls that will allow them to have information.

For example, inventory. They don’t know how much inventory

they have, nor necessarily what condition it is in or where it is,

which can cause them to continue to buy things where they already

have plenty of it.

They also can have a circumstance which we have reported on

where they are selling excess inventory for cents on the dollar

when they are buying it for a dollar.

Mr. MURPHY. And obviously an inventory system, you know, if

you are in the business world, is one of the first things you are

going to invest in. On that example, what are the barriers in DOD

to having a basic system of inventory cataloging?

Mr. WALKER. A lot of it has to do with outdated systems, information systems, all independent systems—everybody has got their

own system—and ineffective controls. So that is illustrative of the

problem that they have in many areas.

Mr. MURPHY. Good.

Thank you, Mr. Chairman.

Mr. TOWNS. Thank you very much.

Let me just come back to you, Mr. Walker, and actually, you too,

Dr. Combs. Each of you in your testimony mentioned possible

changes to the way the Government measures and audits its assets

and liabilities. We often hear questions about whether we measure

the right things and whether the auditing method we use now

matches the risk involved. Are we spending too much money auditing low-risk items and not paying enough attention to higher-risk

items?

Mr. WALKER. Well, let me, if I can, Mr. Chairman, address two

elements. One deals with financial reporting and the other deals

with auditing. I think my statement talks about both.

On financial reporting, I think we have to recognize that we are

not a private sector business. We are a sovereign Nation. Therefore, we need to make sure that our financial reporting recognizes

that reality and that we are providing financial information that is

useful and relevant for the type of entity that we are.

In some cases I think we need to think about whether or not a

traditional balance sheet makes sense for the Federal Government.

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On the other hand, we need more fiscal sustainability in

intergenerational equity reporting, which is not something you

would see in the private sector, because if we don’t end up mending

our ways we are going to mortgage the future of our kids and

grandkids something terrible. We need to recognize that and we

need to show that.

We also need more performance reporting. We don’t have a stock

price. The U.S. Government doesn’t have a stock price. We don’t

have certain market proxies that can say how well we are doing.

So we need key national indicators and indicators that can help us

see how we are doing for a variety of reasons.

Now on the audit, audits by definition are supposed to be focused

on materiality. Materiality is both quantitative and qualitative.

You are supposed to focus your energy and efforts based upon risk

and based upon relevant materiality. So some of that is already

considered in how you are going about the audit.

I do, however, think it is relevant, including for the Department

of Defense, to decide how many entities should they seek to obtain

an audit opinion on, because the more entities you seek to obtain

an audit opinion on, the more money it is going to cost you, and

therefore I think they need to step back and say how many different entities should end up receiving an audit opinion so that we

can go about this in a way that will achieve better transparency

and accountability, but in a cost-effective manner.

Ms. COMBS. You know, I think one of the reasons we selected the

45 day reporting time table was so that some day when we have

a consolidated audit for the Federal Government we could do that

within, let’s say, 60 days, and that would be consistent with what

the private sector offers.

I think in order to think toward the future along those lines, I

know Mr. Walker and I agree that we have to be very, very careful

on how we use these reporting models, and we have to recognize

that the Federal Government has some unique needs, and when we

start consolidating agency and financial reporting by agency into a

consolidated report, we need to be looking now at the current reporting model and to see if it really does provide for reliable, transparent, user friendly kind of financial statement.

Mr. Walker and I were talking right before the hearing how we

would very much like for the general public to know more and to

use more of the financial information that we provide.

Our office has fairly recently started what we call a smarter accountability work group. We are working with chief financial officers, along with members of the President’s Council on Integrity

and Efficiency, the IGs, and this work group is currently being

charged with producing a white paper on strategic directions that

we might look at to look at how we are actually doing our reporting. We look forward to sharing that with a greater financial community and seeing if there are some things that we can do that

are, indeed, smarter and lead to stronger and sustainable accountability for the Federal Government.

Mr. TOWNS. Thank you very much.

Just before I yield to the ranking member, the Sarbanes-Oxley

Act required better internal controls and financial reporting for

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public companies. Have the requirements of Sarbanes-Oxley had

any spill-over effect in the area of Government accounting?

Mr. WALKER. First, as you know, Mr. Chairman, Sarbanes-Oxley

applies to public companies. It doesn’t apply to closely held companies, it doesn’t apply to not-for-profit entities, and it certainly

doesn’t apply to the Federal Government, which is a lot more than

a not-for-profit. We are losing money big time. So it doesn’t apply.

One of the things that the JFMIP—the Joint Financial Management Improvement Program Principles—have looked at—and I am

chairman of that group. It is the Secretary of the Treasury, Director of OMB, Director of OPM, and myself as Comptroller General

of the United States—we have looked at whether and to what extent some of the concepts of Sarbanes-Oxley might make sense to

apply to the Federal Government.

In some cases the answer is yes, in some cases the answer is

clearly no. In some cases, quite frankly, the Federal Government

was already ahead of the private sector. For example, GAO has expressed opinions on the internal control systems and financial

management on the entities that we audit well before SarbanesOxley was passed. The independence requirements for auditors, we

had already modernized our independence requirements before

Sarbanes-Oxley was passed.

But there are still issues that we need to look at at the principal

level to determine whether or not they make sense for the Federal

Government.

Mr. TOWNS. OK. Thank you.

I yield to the ranking member, Congressman Bilbray.

Mr. BILBRAY. Thank you.

I am sure neither one of you are old enough to have been around

back when the savings and loan assets were liquidated by the

Trust, the Land Trust, but I will tell you one thing that really became obvious to somebody watching the people make money off of

the liquidation of the savings and loan assets was that the American taxpayer didn’t get their fair share out of that. I saw people

that were friends of mine making millions and millions of dollars

because the Federal Government basically liquidated assets at 10

cents on the dollar, and anybody that had enough money to be able

to put together those packages walked away with huge assets.

Why do I bring this up? I think that one of the biggest concerns

I have is I may not see those who are actually being hurt, but I

see money going or assets going to people who really shouldn’t be

getting those assets from the Federal Government. We don’t talk

too much about that. The guys, millionaires made big millions off

of savings and loan debacle.

Right now do we have any idea how much assets are going to illegal immigrants within this country right now?

Mr. WALKER. I don’t have a number that I can give you, Mr.

Bilbray. I will give you three examples of areas of concern that we

have at GAO along the lines of what you are talking about.

No. 1, I already mentioned where the Defense Department sells

things for cents on the dollar when it is buying it for a dollar on

a relative basis. Another example is we have huge excess facilities

in the Federal Government. It is on our high-risk list. We are going

to need to rationalize that and we are going to need to sell off a

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lot of that. We need to make sure we learn from the lessons of the

past and get a good deal for the taxpayers. The third example is

the Federal Government owns, for the benefit of American citizens,

a lot of mineral rights and a lot of lands. And in many cases we

are not getting fair value for those mineral rights.

Mr. BILBRAY. Again, I echo that, too.

Mr. Chairman, something to remember. I come from a Navy

town, but for lands that the U.S. Government has bought, we not

only have a right, we have a responsibility to put that back on the

fair market and get a fair return for it and not just make an inkind gift to whatever political subdivision is lined up to take it.

You know, in San Diego we had some unique situations where

the city had actually donated land for training facilities on the condition it be used for it, so that you should transfer back. But that

is so rare that it is astonishing that you have huge tracts of land

that are worth billions and billions of dollars. Monterey would be

a good example. Don’t tell Sam Farr I said this, but huge assets

being thrown away over there.

My concern, Ms. Combs, you were talking about identifications.

You know, I am looking at some of my colleagues talking about giving amnesty to 12 million illegals, and I don’t mean to hit on this,

but it is estimated that will be about 60 million people that will

be a $50 billion hit on our Treasury every year.

Your mention about documentation and issues like that, was that

referring only to contractors, or is that general for recipients across

the board?

Ms. COMBS. No, sir. I was also referring to recipients. Most Federal benefit programs, as I understand it, are required by statute

to verify the immigration status of non-citizens through SAVE, the

Save Program, under the U.S. Citizenship and Immigration Services. I understand this to be a Web-based system that allows agencies to electronically verify immigration status against USCIS data

bases to help ensure that only eligible non-citizens receive Federal,

State, or local benefits.

Now, I will say we also know that there are some benefit programs administered by State agencies, for example, that do permit

individuals to self-declare their citizenship status.

Mr. BILBRAY. Ms. Combs, let me interrupt. We have contracts.

We are giving grants to a group like Acorn that is actively recruiting people illegally in the country to get home loans based on the

fact that they are under-served, under their grant. So a lot of these

things I don’t think that we are being really open about the fact

that not only this is going on—and I appreciate the fact that you

are saying let’s recognize it—we are, be it for political or some

other reason, we are actively giving grants to groups that are openly, publicly telling the news media, yes, we are providing loans to

these people. They are here. We don’t care if they are illegal. We

are going to provide these services to them.

Go ahead, Mr. Walker.

Mr. WALKER. If I can, let me mention a couple of things.

One, on the immigration challenge, two dimensions. From a practical standpoint, I don’t think you are really going to get control of

the immigration problem until we start enforcing our labor laws.

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The fact is that the average daily wage in Mexico for an unskilled

worker is $4.50.

Mr. BILBRAY. Mr. Walker, I totally agree. That is why we have

Silvestre Reyes’ bill out there to make it simple so we can crack

down on employers.

Mr. WALKER. Right. I mean, you know, if you don’t do that you

are not going to choke it off. But let me mention a couple other

things.

No. 1, Social Security and Medicare, I get questions a lot saying,

gee, can’t we solve Social Security and Medicare’s problems by just

opening up immigration, allowing more immigration? The answer

is no, you can’t come close to doing that.

There is the key: when you are talking about immigration, you

are talking about economic growth, and if you are talking about the

fiscal impact on the Federal Government, just for that purpose, the

key is what are the average skills and knowledge of the individuals

involved. If the average skills and knowledge are above average for

our country, it will be a net plus over time. If they are below average, it will be a net minus over time. That is what we need to understand, because in our economy we have to compete based on

skills, knowledge, innovation, productivity, quality. We can’t compete on wages.

Mr. BILBRAY. So in other words, if it was such a great deal for

the economy and for the budget, you would be coming here and recommending that we, to create more poor people to help the economy, we would cut all our funding to these anti-poverty programs

so we can generate our own domestic supply, rather than have to

import.

Mr. WALKER. I will have to think about that, Mr. Bilbray.

Mr. BILBRAY. The point being is that entry level laborers do not

pay the expense of the minimum standard that we allow everyone

to live by in this country.

Mr. WALKER. And if you also look at the nature of Social Security

and Medicare, by definition they provide more and take less from

people who are less well off.

Mr. BILBRAY. Mr. Chairman, I only bring this up because California is at a crisis now to where even Governor Schwarzenegger, an

immigrant, who wants to provide health care to illegal immigrant

kids has said we have to cutoff welfare to the children of the people, U.S. citizens, at 5 years, cutoff welfare, because we can’t afford

to continue to pay people to stay here illegally just because their

children were born here. I mean, this is Schwarzenegger saying the

budget is forcing us to have to do things that we never thought we

would ever live to do.

Mr. WALKER. Can I piggyback real quick, Mr. Chairman, on

that? I apologize.

You know, we have a lot of policies that are based on the past,

and one of the policies that I think we need to reconsider is we

have a policy that says that if you are born in the United States

you are automatically a citizen. Now, when was that created? A

long time ago when it was a long journey where one risked life and

limb in order to come to the United States, and when we were

seeking actively to try to populate this great continent. Yet, we still

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haven’t looked to try to modernize that, and I think that is something that has to be on the table.

There is a difference between a pathway to citizenship and a

pathway to legal status.

Mr. BILBRAY. I appreciate it, Mr. Walker. Just to let you know,

it was late 1940’s that we allowed people who were not permanent

resident aliens to get that automatic citizenship. Guest workers

didn’t qualify in those days.

Mr. TOWNS. I am going to have to stop the citizenship debate and

move to my colleague from Vermont.

Mr. WELCH. Thank you, Mr. Chairman.

Mr. Walker, I want to ask about some accounting issues across

Federal departments and also between different agencies within

the same department. GAO, as you know, identified this as a material weakness, and on our second panel we are going to hear how

that problem has been for DHS.

From your perspective, what is the main problem that doesn’t

allow agencies to do what seems to be a straightforward thing;

namely, match up their accounts? Is that a use of different accounting definitions, technology, poor communication? What’s the deal?

Mr. WALKER. It is a combination of factors. Any time you deal

with, you know, an inter-entity transaction, it means that both

sides have to have their act together with regard to systems and

controls.

Mr. WELCH. So do you and OMB have any recommendations for

standardizing the transactions so that agencies can clear each other’s accounts better?

Mr. WALKER. Well, you know, one of the things that I think we

need to be thinking about is something that Brazil has already implemented, and that is Brazil had very similar problems to what

we had, and they ended up going to a standardized financial management system with standard definitions and specifications with

regard to information systems on financial management. I mean,

my gut feeling is that if Brazil can do it, we can do it, although

that is clearly a multi-year effort.

Mr. WELCH. Thank you.

Mr. TOWNS. Thank you very much. No further questions. The

first panel is actually being discharged at this time. Thank you

very much for your testimony. We really appreciate your coming

and sharing with us. We look forward to continuing to work with

you.

Mr. WALKER. Thank you.

Ms. COMBS. Thank you, Mr. Chairman.

Mr. WALKER. If I can say for the record, Mr. Chairman, believe

it or not, Mr. Bilbray, I have not had one complaint about stating

the facts and speaking the truth on financial and fiscal issues and

many, many compliments on both sides of the aisle. Thank you.

Mr. TOWNS. No doubt about it. You tell it like it is, and I like

that. We eventually will get the message. Sometimes, though, some

people catch on a lot faster than others. Sometimes it takes some

of us 21⁄2 hours to watch 60 Minutes. But that doesn’t mean we

can’t watch it; it just takes us longer.

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Mr. BILBRAY. Actually, Mr. Walker, after the testimony today, we

may give you an honorary membership in the Immigration Caucus.

OK?

Mr. TOWNS. I would like to welcome our second panel. As with

the first panel, it is our committee policy that witnesses are sworn

in, so please rise and raise your right hands.

[Witnesses sworn.]

Mr. TOWNS. Let the record reflect that they all answered in the

affirmative.

Let me briefly introduce each witness.

James Campbell is Acting Chief Financial Officer for the Department of Energy. He is a Certified Public Accountant and has over

30 years of financial management experience in both the private

sector and the Federal Government, with the last 28 years in the

Department of Energy in various financial management capacities.

William Maharay is Deputy Inspector General for the Office of

Audit Services at the Department of Energy. He has more than 25

years with the Department, and he oversees the financial statement audit at the Department of Energy.

David L. Norquist is Chief Financial Officer at the Department

of Homeland Security. Mr. Norquist was leader in the financial

management at the Department of Defense and served as a professional staff member here on Capitol Hill with the House Appropriations Committee.

Mr. James Taylor is Deputy Inspector General at the Department of Homeland Security. He, too, has extensive experience as a

Federal financial manager, and in his current position oversees financial auditing at DHS.

Your entire statement, gentlemen, will be in the record. I would

like to ask you to try to summarize within the period of 5 minutes

to allow time for our questions from the panel.

Why don’t we start with you, Mr. Campbell, and come right down

the line.

STATEMENTS OF JAMES T. CAMPBELL, ACTING CHIEF FINANCIAL OFFICER, U.S. DEPARTMENT OF ENERGY; WILLIAM

MAHARAY, DEPUTY INSPECTOR GENERAL OF AUDIT SERVICES, U.S. DEPARTMENT OF ENERGY; DAVID NORQUIST,

CHIEF FINANCIAL OFFICER, U.S. DEPARTMENT OF HOMELAND SECURITY; AND JAMES L. TAYLOR, DEPUTY INSPECTOR GENERAL, U.S. DEPARTMENT OF HOMELAND SECURITY

STATEMENT OF JAMES T. CAMPBELL

Mr. CAMPBELL. Thank you, Mr. Chairman and members of the

subcommittee. I appreciate the opportunity to address you today to

describe the progress we are making at the Department of Energy

in overcoming the financial management challenges that have

caused us to lose our unqualified audit opinion on the fiscal year

2005 and 2006 financial statements.

We are working hard to restore our financial management credibility, and we expect this progress to be reflected in the audit of

the fiscal year 2007 consolidated financial statements.

I understand the subcommittee is interested in the events and

conditions surrounding our fiscal year 2006 audit opinion, but I

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would not be forthright if I did not disclose the conditions that occurred in fiscal year 2005 that led to that 2006 audit opinion.

For the record, the Department received unqualified audit opinions on its financial statements for 6 consecutive years, from fiscal

years 1999 through 2004. However, in fiscal year 2005 the Department implemented two initiatives to achieve long-term benefits

that profoundly altered the accounting operating environment.

First, at the beginning of the fiscal year the Department consolidated and centralized its financial services operations to gain efficiencies that were identified through a competitive sourcing study

that was run by the in-house team.

Second, 6 months later we changed most of the Department’s accounting processes and deployed a non-customized, federally certified commercial off-the-shelf financial system. In hindsight, the

Department might have been better served by implementing these

business transformations sequentially.

Concurrent implementation presented short-term management

challenges which prevented the Department from producing timely,

auditable financial statements and, consequently, our auditors reported a material weakness in internal control related to financial

control and reporting and issued a disclaimer of opinion on the fiscal year 2005 financial statements.

This disclaimer led to the development and implementation of a

2-year plan for regaining our unqualified audit opinion. A 2-year

recovery was required since the disclaimer on the ending fiscal

year 2005 balances automatically became a disclaimer on the fiscal

year 2006 opening balances. Once the Department receives an unqualified opinion on its balance sheet, it will then have an auditacceptable opening balance on which to base the opinion on the

rest of the financial statements. The earliest this can be achieved

is on the fiscal year 2007 statements.

The Department’s senior leadership took the audit outcome very

seriously. The Secretary and the Deputy Secretary made it perfectly clear that the financial problems we experienced were not

solely owned by the Office of the Chief Financial Officer but rather

by every element of the Department, and called on the entire senior leadership team to engage in solving this serious management

challenge.

In October 2005 the chief financial officer established a multi-disciplinary team of financial professionals from both headquarters

and our field institutions to identify the root cause of these management challenges and to recommend a path for it. In December

of that year, the team presented its results to the Deputy Secretary, and he accepted the recommendations without modification.

In short, 30 issues were identified in 3 broad categories: people,

processes, and technology. It was originally assumed that the root

cause was the new accounting system, but the analysis revealed

most problems were related to people and processes.

The overriding recommendations centered on the need for clarifying financial management roles and responsibilities, redefining

business processes to reflect the Department’s new accounting environment, and gaining a greater understanding of the new system’s

functionality and reporting capabilities.

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From February to June 2006, the Office of Inspector General initiated a series of reviews to determine whether the Department’s

plan and completed corrective actions adequately addressed critical

control weaknesses in the financial management and reporting

process. While the reviews were substantially less in scope than

the financial statement audit, they provided a clear indication for

the Department’s senior leadership of the progress on our remediation.

Fiscal year 2006 was the first full year present with our new core

financial system, and the many issues and challenges contained in

our remediation plan commanded considerable attention and staff

resources throughout the year. While the financial statement audit

ORs were only engaged to issue an opinion on our 2006 balance

sheet because of the aforementioned opening balance issues, the

audit did cover the entire scope of our financial operations.

The audit opinion on the balance sheet was upgraded from a disclaimer opinion to a qualified opinion, which is a major step closer

to us achieving the goal of an unqualified opinion in 2007. The

qualification was due to concerns relating to the Department’s accounting and reporting for obligations and undelivered orders.

As we progressed into 2006, the senior leadership continued to

provide strong direction and support for addressing these issues

preventing us from reaching our goals. A task force was established, a plan was developed and executed to correct the problems

with obligations and undelivered orders. The planned actions included: correcting abnormal balances, clarifying procedures, and

performing a comprehensive reconciliation of about 1,200 contracts

comprising over 95 percent of our September 30, 2006, undelivered

orders balance.

This phase of the remediation is now complete. The auditors are

currently retesting the ending fiscal year 2006 balances, and we

are optimistic, based on the work we have performed, that this

audit will confirm the propriety of our undelivered orders balance,

clear the qualification on the ending fiscal year 2006 balances, setting the stage for regaining an unqualified audit opinion on all financial statements this fiscal year.

In summary, implementing a core financial system, establishing

and operating under a new chart of accounts, and reorganizing financial services operations are never easy undertakings. Doing

them in the same fiscal year created a major management challenge for the Department. Decisions to implement these initiatives

were made with the best of intentions, and, while we did not fully

anticipate all the challenges that we encountered, the Department’s response to these challenges has been aggressive, effective,

and has positioned us for improved financial management.

Successful completion of these actions would not have been possible without a strong partnership with the Office of Inspector General and without the outstanding dedication and professionalism of

the entire CFO community.

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We look forward to regaining our unqualified audit opinion this

fiscal year and restoring financial management credibility with our

customers and our stakeholders.

This concludes my opening statement, and I would be pleased to

respond to any questions you or the subcommittee may have, sir.

[The prepared statement of Mr. Campbell follows:]

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

STATEMENT OF WILLIAM MAHARAY

Mr. MAHARAY. Mr. Chairman and members of the subcommittee,

I am pleased to be here at your request to testify on issues associated with the 2005 and 2006 audits of the Department of Energy’s

financial statements. Over the years, the Office of Inspector General has conducted and overseen a number of reviews of the accounting and financial operations of the Department, addressing

issues such as accounting information systems, financial statement

reporting, and remediation efforts.

Prior to 2005, as Mr. Campbell has indicated, the agency received unqualified audit opinions on its financial statements. This

changed when the Department embarked on a mid-year implementation of a new accounting system known as STARS. The Department undertook the system development effort during a time when

it was also reorganizing its financial services organization. The reorganization resulted in the consolidation of financial recording and

reporting processes previously performed at many separate locations. The centralization caused a significant loss of skilled personnel and changed the manner in which the Department’s accounting

system interfaced with its major contractors and ancillary systems.

Because of concerns with completing these major initiatives simultaneously, my office performed two pre-implementation reviews

of STARS. The first of these reviews identified a number of personnel and internal control issues that increased the likelihood the Department would not be prepared to launch a fully capable system

as scheduled in October 2004. Based upon our review and other

factors, the Department decided to delay implementation until midyear April 2005.

The second pre-implementation review completed by my office in

January 2005 cautioned, ‘‘the planned mid-year implementation of

STARS poses special challenges that could impact successful deployment of the system.’’ In particular, we noted: one, two separate

accounting systems would have to be used to produce the consolidated financial systems; two, accelerated reporting schedule would

provide only a limited time to correct implementation problems;

and, three, the burden of auditing two separate systems would severely stress both accounting and auditing resources.

The Department decided to move forward with the mid-year implementation in April 2005. Soon thereafter, our audit work revealed a significant number of issues in the new system and accounting operations. In particular, the audit identified issues with

data conversion and with developing new accounting processes and

reports. These problems detracted from the ability of the accounting staff to complete routine accounting reconciliations and impacted the ability of Department officials to monitor and control

their budgets.

Despite significant effort by senior leadership, financial managers, and staff, the Department was unable to correct many of

these problems by year-end. Consequently, the independent public

accounting firm employed by the Office of the Inspector General

issued a disclaimer of opinion on the Department’s 2005 financial

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statements and reported a material weakness in financial management and reporting controls.

A previously identified reportable condition on unclassified information and security systems continued from prior years.

Given the extent and significance of the problems identified, we

initiated a series of reviews in January 2006, to determine whether

the Department’s planned corrective action would address critical

financial management weaknesses. Our review found problems

with timing and completeness to plan corrective actions, recording

of obligations, and completing key reconciliations.

The Office of Chief Financial Officer agreed with our suggestion

of realigning resources and refocused its efforts on financial management issues.

When conducting our 2006 audit of the agency’s balance sheet,

we found the Department had made significant progress in addressing deficiencies that surfaced in the prior year. However, actions needed on a number of issues associated with obligations and

undelivered orders had not been completed, leading to a material

weakness in internal controls and a qualified opinion on the 2006

audit.

Additionally, problems with unclassified system security continued, and a new reportable condition related to performance measure was identified.

Since the issuance of our 2006 financial statement audit, we

have coordinated with the Department and have begun another focused review on actions to remediate problems associated with obligation on undelivered orders. Should this effort be successful and

no new material weaknesses emerge, the Department would be in

a position to obtain an unqualified opinion on the 2007 audit.

In summary, we believe that strong financial management is essential to the Department. Based upon our experience, the Department’s senior leadership, to include both the Secretary and the

Deputy Secretary, is committed to maintaining strong controls and

has been fully invested in resolving weaknesses. We will continue

to assist in that effort, as we have in the past, by devoting a significant portion of our resources to providing independent assessments of the accounting and financial management operation of the

Department.

Thank you, Mr. Chairman and members of the subcommittee.

That concludes my statement.

[The prepared statement of Mr. Maharay follows:]

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Mr. TOWNS. Thank you very much.

Mr. Norquist.

STATEMENT OF DAVID NORQUIST

Mr. NORQUIST. Thank you, Chairman Towns, Ranking Member

Bilbray, and members of the subcommittee for this opportunity to

testify before you today on the results of the fiscal year 2006 financial audit of the Department of Homeland Security.

I also want to thank you for House Resolution 134. Your statement of support and recognition for the DHS work force is greatly

appreciated.

Regarding the audit, DHS received a disclaimer of opinion on its

fiscal year 2005 and 2006 financial statement. Secretary Chertoff

and I are committed to correcting this and to achieving the intended outcome of the Department of Homeland Security Financial

Accountability Act. To this end, the Department has put into place

corrective action plans to improve our financial management process and to address material weakness conditions such as those involving inter-agency and inter-departmental balances.

Looking back, substantial progress was achieved in our 2006 financial statement audit. Two components, U.S. Customs and Border Protection and the Federal Law Enforcement Training Center,

received favorable audit outcomes. CBP obtained an unqualified

opinion on its financial statement, and FLETC obtained an unqualified opinion on its first ever balance sheet audit.

Significant progress has also been made in reducing conditions

that comprise the Department’s material weakness structure. For

example, most significantly, U.S. Immigration and Customs Enforcement eliminated five of its seven component level material

weakness conditions.

In 2005, our auditors had identified inter-agency and inter-departmental accounting as a material weakness condition. The Department made progress on this front in 2006, eliminating interagency balances as an auditor-identified weakness.

We are proud of this progress, but much remains to be done.

When I testified before this committee in September, I outlined a

series of initiatives I intended to implement over the next year. I

am pleased to report to you today that these efforts are well underway. I will focus on one that is of particular relevance to the audit.

We discussed creating a Department-wide corrective action plan

to address the material weaknesses. That is done. Mr. Chairman,

I brought you a copy of it, as well. This is the Internal Control

Over Financial Reporting Playbook that outlines our strategy and

process to resolve material weaknesses and build management assurances. Many of our material weaknesses were inherited and

they are longstanding challenges. These challenges will not be

solved in a single step, but the ICOFR Playbook details the path

forward through near and long-term fixes.

But we are not stopping at simply fixing what the auditor finds.

Our Playbook has two tracks. The first track includes corrective actions for weaknesses identified by the auditors, such as fund balance with Treasury or inter-governmental balances. But the Playbook also includes a second track, where we examine and test processes where no weakness was identified—this is often called the A–

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123 process—because our management needs to make affirmative

assurances that the controls are effective, not simply noting that

the auditors couldn’t find anything.

I appreciate the support we have received from our Office of the

Inspector General as we developed the Playbook. Through performance audits, they have provided timely feedback on our corrective

action plans, and I look forward to their continued independent advice and essential cooperation.

DHS has made progress since our last hearing, and we are on

track to make more progress this year, as well.

I appreciate the support we have received from the Congress,

and particularly this subcommittee. Thank you for your leadership

and your continued support for the Department of Homeland Security.

[The prepared statement of Mr. Norquist follows:]

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

Mr. Taylor.

STATEMENT OF JAMES TAYLOR

Mr. TAYLOR. Thank you, Chairman Towns, Mr. Bilbray, I am Jim

Taylor. I am the Deputy IG at Homeland Security, and I appreciate

the opportunity to discuss today the status of financial management at DHS and efforts to implement the Department of Homeland Security Financial Accountability Act.

The Office of the Inspector General partners with the Secretary

of Homeland Security and his executive staff to ensure that the Department accomplishes its mission in the most effective, efficient,

and economic manner possible. Our goal is to provide independent,

objective information and identify issues and opportunities for improvements in financial management and other areas.

Strong financial management and accountability are essential to

the achievement of DHS’ mission. The Accountability Act recognizes this and has very specific requirements with respect to internal controls over financial reporting, by requiring the Secretary to

include in DHS’ performance and accountability report an assertion

of internal control over financial reporting.

DHS met this requirement in both 2005 and 2006, with the Secretary asserting that the Department was unable to provide reasonable assurance that internal control over financial reporting

was effective.

The act further requires the Secretary to include an audit opinion on the Department’s internal controls over financial reporting

in DHS’ accountability report beginning in fiscal year 2006. The

Department met this requirement, as well, with the Inspector General issuing a disclaimer opinion on the audit of the Department’s

internal control of financial reporting.

To promote internal control improvements, the Office of the Inspector General has gone beyond simply issuing these opinions.

Working closely with the CFO Office, we have conducted a series

of performance audits that focus on the Department’s corrective action plans to address internal control weaknesses. Our objective

was to measure the Department’s progress in preparing well-developed corrective action plans to support internal control improvements.

We provided recommendations to the CFO to strengthen these

plans as they were being developed. We will continue with this effort in 2007.

For 2006, the financial management within the Department continued to falter, however. The department was, again, able to receive an opinion on its financial statements, and 10 material weaknesses were recorded for the 3rd straight year. KPMG, under contract with the Office of the Inspector General, issued a disclaimer

of opinion. The reasons for this disclaimer included management at

the Coast Guard and TSA were unable to represent that their balance sheets, as of September 30, 2006, were fairly stated in conformity with U.S. generally accepted accounting principles. The office of the CFO, ICE, and FEMA were unable to support the accuracy of certain accounts, and the DHS’ Office of Financial Management was unable to reconcile inter-governmental transactions and

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balances with other Federal trading partners totaling approximately $3.5 billion in 2006 and $1.5 billion in 2005.

The Department’s 10 material weaknesses ranged from financial

management oversight and reporting at the Department level to

controls surrounding the recording of individual account balances

within DHS bureaus.

Our four performance audits reports issued between July 2006,

and February 2007, assessed the effectiveness of DHS’ corrective

action plans to address internal controls weaknesses. These audits

focused on the corrective action plans at Department level, as well

as at the Coast Guard and ICE, given their importance to the overall success of the Department.

We identified weaknesses related to financial management oversight and financial reporting relating primarily to resource capabilities within the Office of the CFO at Coast Guard, whose activities impact virtually every one of DHS’ material weaknesses. Our

primary recommendations are for the Coast Guard to improve its

corrective action plans by performing a thorough root cause analysis of weaknesses and develop a detailed list of tasks and milestones based upon this analysis.

A positive development in 2006 was at the Immigration and Customs Enforcement. ICE began its corrective action planning process

early and was able to close out 37 of 49 weaknesses identified during the 2005 financial statement audit, including material weaknesses relating to fund balance at Treasury. It is also evident that

senior leadership at ICE are actively engaged in developing overall

financial management strategy, corrective action plans, and developing systems to monitor overall internal control improvements.

Additionally, ICE senior leadership has set a positive tone for financial management improvements and actively monitors progress.

However, the Federal Protection Service and ICE have encountered

problems during the financial management transition that they are

still working to resolve. In addition to inadequate funding, poor administrative support for FPS has been a transition to DHS.

In October 2006, it was reported the FPS was not paying invoices

for its contract guard services nationwide in a timely manner resulted in a violation of the Prompt Payment Act, largely due to systems problems. Of the 25,557 invoices paid between October 1,

2004, and November 2005, 88 percent were not paid within 30

days, as required by the Prompt Payment Act. This resulted in over

$1.2 million in interest penalties. This is largely due to problems

of transition from the GSA financial management system to the

ICE Federal financial management system.

In conclusion, Mr. Chairman, we feel that there has recently

been significant progress at DHS under the CFO’s leadership, particularly in developing strategies and the Playbook with specific

milestones to improve financial management throughout the Department. The CFO has initiated efforts to address staffing and

skills limitations and identified a process to maintain senior management focus on achieving the milestones identified. However, the

Department has not realized the fruits of these efforts to date, and

it remains largely at the same place in terms of financial management as it was when it was first created, with financial systems

and processes so in need of corrective actions that we cannot rely

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on the information they produce. It will take years of focused effort

and committed resources to successfully address these issues.

We intend to continue taking a corrective and engaged approach

in collaboration with the CFO to monitor the financial management

improvement efforts, and we look forward to working with the Department and the Secretary, as well as with Congress.

Mr. Chairman, this concludes my prepared remarks. I would be

happy to answer any questions you or the subcommittee may have.

Thank you.

[The prepared statement of Mr. Taylor follows:]

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

Let me begin. I pose this question to both DOE and DHS. After

DOE received a disclaimer of opinion in its 2005 financial statements, the Secretary and Deputy Secretary noted that the agency’s

financial problems were not solely related to the inefficiencies at

the CFO level, but rather it resulted from the Department-wide inefficiencies. Would you both agree with that assessment? In other

words, would you agree that a system-wide effort is necessary to

direct the financial management?

Mr. CAMPBELL. Sir, I think, as I recall, the Secretary said that

it was the responsibility of the entire leadership team to participate in the resolution of this significant management challenge

that was presented as a result of audited financial statements, and

we have been doing that religiously for the last year and a half.

This is a subject at the Secretary’s leadership meetings every other

week in terms of briefing the senior leadership team on our

progress.

Part of the reason why this is a broader responsibility than just

the CFOs is the resources across the Department of Energy report

through the Assistant Secretarial organizations, and therefore

there is a line responsibility from the Assistant Secretaries to those

field offices and those resources, and, if you will, a dotted line from

the CFO to the field CFOs.

I think that the reason we have been as successful in making the

progress we have is because everyone has participated in their various roles in our remediation efforts.

Mr. MAHARAY. I don’t disagree with a thing Mr. Campbell said,

but let me give some background information. When we issued our

disclaimer, we indicated that the reporting system the Department

used to consolidate information was not sufficient to allow us to

state the accounts were properly stated; however, historically the

Department has had a strong financial management system, particularly using contractors reporting into the Department’s system.

Throughout our audit work those accounting system contractor systems reporting into the Department’s general ledger system, we

have found basically no problems with those.

So it is basically a top level reporting problem that needs to be

solved, and I believe the Department is presently doing that.

Mr. NORQUIST. Mr. Chairman, I completely agree that this is not

solely at the CFO level. In fact, if you attempt to only address it

at that level you won’t be successful.

Our experience has been, for example, that ICE, which was very

successful last year, Assistant Secretary Julie Myers, the head of

the entire organization, took a very active leadership role, supported her CFO, but recognized that to eliminate the weaknesses

she needed the participation of all of the different parts.

Likewise, as we put together our corrective action plans, we

reached out to have all the components put together. I mean, there

are assets in here. It is not simply reporting financial transactions

handled by a CFO. There is the value of assets, there is operations,

supplies, things that are managed and run by other parts of the

Department. It is, after all, the Department’s financial statement,

not simply the CFO’s. So only by reaching out and including that

broader organization and getting that strong senior leadership supVerDate 11-MAY-2000 10:39 Aug 16, 2007 Jkt 000000 PO 00000 Frm 00112 Fmt 6633 Sfmt 6633 C:\DOCS\37001.TXT HGOVREF1 PsN: HGOVREF1
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port can you be successful in this area, so I think you are exactly

right on this.

Mr. TAYLOR. Mr. Chairman, I have been on both sides of this. I

spent most of my career on the CFO side at different departments

and agencies. The places where you are most successful, the leadership is at the top. The CFO cannot succeed in making the changes

required to get clean audit opinions, to implement financial systems, without the direct support and very vocal support of senior

management, so I totally agree.

Mr. TOWNS. Mr. Norquist, you mentioned the corrective action

plan. What does that really entail?

Mr. NORQUIST. The corrective action plan, to begin with an effective corrective action plan you go back to identify what is the root

cause. One of the signs of an ineffective corrective action plan is

they simply take the specific incident the auditor found and said

we are going to fix that. So what we did to build it was we had

workshops and we said what is the underlying reason. You know,

it is like if you find that someone comes in and says there are bees

in your attic and you just kill the 10 bees, you are not going to be

surprised that they are back. You have to find the nest. You have

to go after the root cause of the problem.

So you go through that, and then you say what do we need to

fix. Are there policies that are missing? Do people need to be hired

and trained? Does the system not record the data at the right

level? In order to be effective, the corrective action plan has to

clearly lay out who is going to do what by when, and so you have

milestones, you have accountable officials, and then behind it you

have a senior leader who expects to know on a regular basis where

you stand on that corrective action plan so they can help by holding people accountable.

I think those are the key components. What we have is we have

laid out our corrective action plan to address the material weaknesses identified by the auditors, laid out the milestones we intend

to follow, as well as the actions we are going to take where they

are beyond where the material weaknesses are to be able to satisfy

that requirement for management assurance that the controls are

effective.

Mr. TOWNS. Thank you very much.

I yield to Mr. Bilbray.

Mr. BILBRAY. Thank you, Mr. Chairman.

Mr. Chairman, I think the one thing we can work together on

this issue, and it is huge, but we can agree that this is a problem

that has been around a long time. It seems like no matter what the

party affiliation of the executive branch, it is a problem that we

confront.

Gentlemen, in all fairness, you know, as a former mayor I look

at this and pretty well figure people would be going to jail in California with the kind of reports I have seen come down, but then,

again, as a mayor I didn’t have 500 prima donnas running around

Capital Hill worried more about votes than balancing the budget,

and we weren’t exchanging the executive branch every few years

just to keep the system moving.

In all fairness, I think that the challenge really runs a lot deeper

than any of us really understand. The Founding Fathers developed

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a separate and conflicting process, and now we start understanding

more why they didn’t want us to have a whole lot of money to shift

around. I think it has become obvious.

How long have you guys been with your departments?

Mr. CAMPBELL. I have been with the Department of Energy for

29 years, sir.

Mr. MAHARAY. For 28 years, sir.

Mr. NORQUIST. I was confirmed in June of last year.

Mr. TAYLOR. I have been Deputy IG at DHS for a year and a

half. I spent 20 years at FEMA earlier in my career.

Mr. BILBRAY. OK. Well, you are on the borderline. You and

Norquist get over. The rest of you are going to line up on the gallows.

Mr. NORQUIST. In that case, I just got there, sir. [Laughter.]

Mr. BILBRAY. The issue really comes down to a little word that

you use, and that is accountability. Raising degree of concern, raising the urgency, holding people accountable, that really does matter. I guess it really starts with us here on this subcommittee to

get to the committee and take it to Congress. It matters. It damn

well matters.

I think that we all agree that we don’t want to go around the

world setting the rest of the world free and then enslaving our children to a debt. We don’t want to ask our children to have to decide

between feeding their children or throwing us out into the cold

when we are senior citizens.

How do we make the system more accountable, though, under

the Civil Service structure that we have? What is the ability at

your level or below you, let alone above you, to make people more

accountable? Let’s just say how do we initiate a sensitivity program

to the fact that the budget really does matter and expenditure accountability really is an important thing?

Mr. NORQUIST. I think there are a number of ways——

Mr. BILBRAY. The guy who doesn’t have job security yet.

Mr. NORQUIST. A couple of ways. The first is in performance

standards. One of the effective things to do is put specific accomplishments in people’s performance standards so when their job is

up for review, when they are looking at what sort of bonus or

whether rewards or compensations, it is specifically addressed. Did

they, in fact, accomplish the goals that were laid out for them? I

think that is absolutely essential.

The other one is people have to be trained to understand what

they are accountable for. In DHS, for example, one of the initiatives we started was a training program for every new hire there

in financial management, so whether you are hired by ICE or CVP

or the Coast Guard, we had a class this week—it was the first

one—where we are going to take all those new hires in DC and we

are training them this week, and one of the things we are covering

is fiscal law and internal controls. Everyone out there who calls

themselves a member of the financial community should recognize

a potential Anti-Deficiency Act violation, should recognize a breakdown in controls, internal controls, and should understand it is up

to them to stand up and flag it.

Often the types of weaknesses you are after is because somebody

who came in who was properly trained looks at a process and says

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this doesn’t seem to match with what I was trained to do and

raises the alarm. That is what we need to make sure. And by training the right folks that we have to look for that, we can increase

our ability to enforce the rules and to make sure people are accountable for how they spend taxpayers’ money.

Mr. BILBRAY. Does that accountability have the ability to go

down through the system? I know the Commandant, we can nail

the Commandant of the Coast Guard, but when it comes down to

it, how far down can he then make accountability and is everyone

down the line basically vulnerable to repercussions? Or is there a

threshold we would reach at mid-management that the defense system, basically the Civil Service system, is protecting not just good,

hard-working people, but also those that should be held accountable?

Mr. TAYLOR. There is absolutely some of that, but there is the

ability, if you have defined the requirements, to hold people accountable at much lower levels, rather than saying the accountability is only at the Commandant level or at the Secretarial level or

the CFO level, that you have components and you have managers

who need to accept responsibility for their piece of the activity.

I think it goes beyond that, though, sir. I think that management

has to recognize that financial management, itself, and managing

the fiduciary, taking care of your fiduciary responsibilities is not a

CFO function. It is a management function. Every manager who

runs every program should be directly responsible and accountable.

That is when things start changing.

Mr. BILBRAY. I appreciate that. You guys know where the term

decimation came from?

Mr. NORQUIST. No, sir.

Mr. MAHARAY. No, sir.

Mr. BILBRAY. Anybody a history major?

Mr. NORQUIST. Kill off 1 in 10? Is that it?

Mr. BILBRAY. That is it.

Mr. NORQUIST. If they lose a battle?

Mr. BILBRAY. Actually, if they turn it around or if they didn’t

show bravery, if they did not do their job, 1 in 10 was chosen by

lot and then the other 9 beat him to death. I am not proposing that

for bureaucracy, but, looking at this debt, it may be one of those

things. Rome had to do it to save themselves from the invasion by

Hannibal.

We may be wanting to save our grandchildren from the debt. I

will just tell you that we really need to have a degree of urgency

brought right down to the rank and file troops to understand they

have a vested interest in this.

In city government and county government you tend to start laying people off when you reach these kind of reports. We haven’t

done that at the Federal Government, and maybe that is one of

those things we need to talk about is actually a fiscal decimation,

1 in 10 down the line.

Thank you very much. On that bright subject, I will yield back.

Mr. TOWNS. Let me talk about information security then. Last

year we saw in the Department of Veteran Affairs where a laptop

computer and hard drive containing sensitive data was stolen from

an employee’s home. Security is also a financial management issue,

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because you need to guarantee that your systems are protected

against tampering and limit access to financial records. You know,

from a financial management perspective, what steps have been

taken to advance security, data security?

Mr. MAHARAY. Let me talk from the Department of Energy’s

standpoint about what the Office of the Inspector General has reported on. We have identified information security as a continuing,

reportable condition or weakness at the Department of Energy. We

have found problems in terms of passwords being easily guessed,

we found problems in terms of patchwork, in terms of security

patchworks not being installed, we have found problems in terms

of contingent planning and access.

The Department is moving forward, from what we can see, in

terms of strengthening its process, but it is a long way. As it implements enhanced controls, people get smarter and smarter on how

to thwart those controls, so this is a continuing challenge for the

Department of Energy.

Mr. CAMPBELL. I would agree with that.

Mr. NORQUIST. I don’t have the percentages, but I will provide

them for the record, but our CIO Committee has done a strong job

in improving the certification of our systems. We also have regular

meetings where I and the CIO for the Department will get together

with the components’ CFO and CIO and discuss the audit findings,

what their corrective actions are. The Under Secretary for Management attends and helps emphasize the importance of resolving this.

One of the points that Mr. Walker raised and I think is correct,

as well, here is that we have to be aware of the differences between

ourselves and the private sector. Well, the auditors may latch on

to the ability of whether or not you have a weakness to somebody

affecting your financial statement, no one is going to doctor our financial statements so they can sell our stock short on the market.

That is not why they are going to try and break in. So we

shouldn’t just fix a weakness with that label on it, because, while

that is a symptom of the problem, that is not the underlying root

cause and that is not the weakness we are trying to prevent. We

are trying to prevent fraud, we are trying to prevent waste, prevent

abuse. There are other systems they would want to get to.

So the solution has to address the overall control and the different systems they can get to, not simply the ones the auditor

found, so we are making that a priority as we go through these,

to make sure we are getting to the root cause and addressing the

potential implications of any weakness in addressing those.

I will provide you the percentage for the record, but our CIO has

made a strong emphasis on this area and in strengthening system

security.

[The information referred to follows:]

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Mr. TOWNS. Any additional steps?

Mr. MAHARAY. Additional steps? There is a process in terms of

the IT security called C and A, creditation and accountability. This

is a systematic process by which you go and you evaluate your IT

systems, and we have found deficiencies in the way the Department of Energy has implemented, and I suspect that all agencies

need to go through the systematic process to enhance its IT security.

Mr. TOWNS. Any other comments?

Mr. TAYLOR. Yes, Mr. Chairman. At DHS our Inspector General

considers information security so seriously that we have an office

under the Assistant IG just for IT audits, so we have 35 people.

Their only function is to do IT reviews within the Department.

Information technology is a material weakness throughout the

Department, not just for financial management, but across the

board. We do think that certification and accreditation process at

DHS has taken strides forward and we think they are making

progress, but to date we think there is a lot of vulnerability within

the Department that we need to address.

Mr. CAMPBELL. I would just add that the certification and accreditation process that we have employed in our CFO systems has

been strong. We have put in a tremendous amount of work to make

sure that those systems are secure, and we have reported to our

CIO that we have completed all of that effort as it relates to the

CFO systems.

Mr. TOWNS. What steps can be taken by the Department to reduce the amount of interest that the Government pays on delinquent payments?

Mr. CAMPBELL. Let me try first. Actually, our experience there

has been pretty good. We are pretty close to what OMB’s metric is,

which is 98 percent of payments on time. With every metric we

have to be careful to make sure that, in achieving the metric, we

haven’t spent more money to get payments made on time than the

benefit of getting payments made on time. That said, I think the

answer is more effective systems, more effective approval of invoices by the contracting officers. It is an area where we struggled

initially when we implemented our new system, and we have made

monumental improvement from that point forward. So I think it is

a combination of good systems and a good system of approvals and

good coordination back and forth between the contracting organizations and the financial management organizations and program organizations.

Mr. TOWNS. Any other comments?

Mr. NORQUIST. One of the things that is happening during that

time window is the contracting officer technical representative is

validating, before you make the payment, that the Government did,

in fact, get the services that it ordered in order to make sure that

we are only paying the contractor what they are entitled to.

So part of making sure you are not late on the payment is having

a well-defined process that moves efficiently so that you don’t want

to end up telling the contracting officer to hurry it up, because

their job is to protect the taxpayer. That is an important internal

control. You want to give them enough time to do it, but have an

efficient enough process that once they are done you can still make

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the payment on time. So it is a balance you are trying to strike,

and the only way to effectively do that is try and automate or make

a more standardized process.

You will see, when an organization goes through change, they

will frequently have a problem in this area because they won’t

want to make a payment necessarily improperly if they can avoid

it, and they take more of an interest payment penalty. When they

have the process down, you should see that decline, you should see

the timeliness of the payments improve and the penalties decline,

as well.

Mr. BILBRAY. But don’t we have a problem with Homeland Security of not being reimbursed by our own people?

Mr. NORQUIST. There was some challenge. I believe this related

to——

Mr. BILBRAY. Security.

Mr. NORQUIST [continuing]. The Federal Protective Service,

which works on a reimbursable basis.

Mr. BILBRAY. Yes.

Mr. NORQUIST. So it depends on payments from others. If they

don’t have the documentation that the other organization has ordered and paid for the service, they can’t easily go ahead and make

payment. I don’t know that they were late on making payments to

DHS. I am not familiar with——

Mr. BILBRAY. I heard they were late and that was causing them

to be then having to pay interest, and it was all basically within

our internal operations, though I know you guys are all separate.

But the problem was that Homeland Security wasn’t getting paid

by the other guys for services provided, and then have to basically

hang out, pay interest based on the fact that somebody else wasn’t

reimbursing them for the services provided.

Mr. NORQUIST. I am not familiar with that, Mr. Chairman. What

I do know is that when they changed the business process, trying

to make sure you have all the documentation to validate, yes, we

reserved the service, yes, this is in accordance with the contract,

and yes, the customer has the money, they moved slower than we

would like them to. They have improved that.

They have taken steps, for example, centralized the receipt of

contractor invoices so all the bills coming in for payment come in

to one control place, which makes it much more efficient in paying

them, and to handle things electronically rather than moving

stacks of paper. So I know ICE is working to make progress and

to centralize those things, but the transition was a challenge.

I think one of the things you will find from the testimony is organizations going through changes, reorganizations, new financial

systems, run into a challenge, and it is the matter of addressing

and implementing corrective actions to fix those that right the ship.

But those are always a point of risk, and so you have to be attentive when you have an organization either being transferred or

going through a change, to look for these types of problems.

Mr. BILBRAY. I appreciate your effort to save trees.

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Mr. TOWNS. Thank you very much.

Let me thank all the witnesses for coming today and sharing

with us. We appreciate that.

At this point this subcommittee is adjourned.

[Whereupon, at 4:35 p.m., the subcommittee was adjourned.]

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