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15 YEARS OF THE CFO ACT—WHAT IS THE

CURRENT STATE OF FEDERAL FINANCIAL MANAGEMENT?

HEARING

BEFORE THE

SUBCOMMITTEE ON GOVERNMENT MANAGEMENT,

FINANCE, AND ACCOUNTABILITY

OF THE

COMMITTEE ON

GOVERNMENT REFORM

HOUSE OF REPRESENTATIVES

ONE HUNDRED NINTH CONGRESS

FIRST SESSION

NOVEMBER 17, 2005

Serial No. 109–121

Printed for the use of the Committee on Government Reform

(

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

http://www.house.gov/reform

(II)

COMMITTEE ON GOVERNMENT REFORM

TOM DAVIS, Virginia, Chairman

CHRISTOPHER SHAYS, Connecticut

DAN BURTON, Indiana

ILEANA ROS-LEHTINEN, Florida

JOHN M. MCHUGH, New York

JOHN L. MICA, Florida

GIL GUTKNECHT, Minnesota

MARK E. SOUDER, Indiana

STEVEN C. LATOURETTE, Ohio

TODD RUSSELL PLATTS, Pennsylvania

CHRIS CANNON, Utah

JOHN J. DUNCAN, JR., Tennessee

CANDICE S. MILLER, Michigan

MICHAEL R. TURNER, Ohio

DARRELL E. ISSA, California

JON C. PORTER, Nevada

KENNY MARCHANT, Texas

LYNN A. WESTMORELAND, Georgia

PATRICK T. MCHENRY, North Carolina

CHARLES W. DENT, Pennsylvania

VIRGINIA FOXX, North Carolina

JEAN SCHMIDT, Ohio

——— ———

HENRY A. WAXMAN, California

TOM LANTOS, California

MAJOR R. OWENS, New York

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

WM. LACY CLAY, Missouri

DIANE E. WATSON, California

STEPHEN F. LYNCH, Massachusetts

CHRIS VAN HOLLEN, Maryland

LINDA T. SANCHEZ, California

C.A. DUTCH RUPPERSBERGER, Maryland

BRIAN HIGGINS, New York

ELEANOR HOLMES NORTON, District of

Columbia

———

BERNARD SANDERS, Vermont

(Independent)

MELISSA WOJCIAK, Staff Director

DAVID MARIN, Deputy Staff Director

ROB BORDEN, Parliamentarian

TERESA AUSTIN, Chief Clerk

PHIL BARNETT, Minority Chief of Staff/Chief Counsel

SUBCOMMITTEE ON GOVERNMENT MANAGEMENT, FINANCE, AND ACCOUNTABILITY

TODD RUSSELL PLATTS, Pennsylvania, Chairman

VIRGINIA FOXX, North Carolina

TOM DAVIS, Virginia

GIL GUTKNECHT, Minnesota

MARK E. SOUDER, Indiana

JOHN J. DUNCAN, JR., Tennessee

EDOLPHUS TOWNS, New York

MAJOR R. OWENS, New York

PAUL E. KANJORSKI, Pennsylvania

CAROLYN B. MALONEY, New York

EX OFFICIO

HENRY A. WAXMAN, CALIFORNIA

MIKE HETTINGER, Staff Director

TABETHA MUELLER, Professional Staff Member

ERIN PHILLIPS, Clerk

ADAM BORDES, Minority Professional Staff Member

(III)

C O N T E N T S

Page

Hearing held on November 17, 2005 ...................................................................... 1

Statement of:

Combs, Dr. Linda, Controller, Office of Federal Financial Management,

Office of Management and Budget .............................................................. 3

Steinhoff, Jeffrey C., Managing Director, Financial Management and Assurance, Government Accountability Office ................................................ 10

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

Combs, Dr. Linda, Controller, Office of Federal Financial Management,

Office of Management and Budget .............................................................. 5

Steinhoff, Jeffrey C., Managing Director, Financial Management and Assurance, Government Accountability Office, prepared statement of ........ 13

(1)

15 YEARS OF THE CFO ACT—WHAT IS THE

CURRENT STATE OF FEDERAL FINANCIAL

MANAGEMENT?

THURSDAY, NOVEMBER 17, 2005

HOUSE OF REPRESENTATIVES,

SUBCOMMITTEE ON GOVERNMENT MANAGEMENT,

FINANCE, AND ACCOUNTABILITY,

COMMITTEE ON GOVERNMENT REFORM,

Washington, DC.

The subcommittee met, pursuant to notice, at 2:40 p.m., in room

2247, Rayburn House Office Building, Hon. Todd Russell Platts

(chairman of the subcommittee) presiding.

Present: Representative Platts.

Staff present: Mike Hettinger, staff director; Tabetha Mueller,

professional staff member; Dan Daly, counsel; Erin Phillips, clerk;

Adam Bordes, minority professional staff member; and Cecelia

Morton, minority office manager.

Mr. PLATTS. This hearing of the Government Reform Subcommittee on Government Management, Finance, and Accountability will

come to order.

As stewards of the taxpayers’ money, we in Congress have perhaps no greater responsibility than to ensure that every dollar is

spent wisely. Regardless of party affiliation or ideological bent, all

of us entrusted with public resources agree that they must be managed effectively and safeguarded from fraud or misuse.

Toward that end, President George Herbert Walker Bush signed

the Chief Financial Officers Act on November 15, 1990. The CFO

Act was heralded as the beginning of a new era not only in Federal

management and accountability but also in efforts to improve government operations. The law laid a foundation for comprehensive

reform, establishing Chief Financial Officers in all major executive

agencies as well as a Deputy Director for Management and a Controller in the Office of Management and Budget.

With the understanding that transparency brings accountability,

the CFO Act also instituted the requirement for Federal agencies

to submit audited financial statements, begun on a piloted basis

and eventually extended to all agencies.

In 1996, when the first year audits were performed governmentwide, agencies took 5 months to close their books. Only six were

able to earn a clean opinion. Fifteen years later, we have seen

progress. Instead of 5 months, agencies now have only 45 days to

submit audited statements. As opposed to only a handful of agencies, the majority of Federal departments now earn clean opinions

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on a regular basis. Two days ago, all agencies were required to submit their statements for fiscal year 2005, and we will discuss the

results of those audits here today.

It is important to note that sound financial management does not

end with a clean opinion. In fact, clean audits are merely a starting

point. What we need is timely, accurate, useful financial data to

manage programs effectively, to shift resources if necessary, and to

make informed decisions. This was a need that was highlighted by

the response to this year’s devastating hurricane season.

Despite progress in a general sense, the audits reveal a troubling

picture at some of our most important departments. As a nation at

war and under the threat of terrorism, management at the Department of Defense and Homeland Security should be top-notch. Yet

these two departments have never been able to earn a clean opinion, a trend that unfortunately continues this year. It is dangerous

to assume that an important front-line mission should relegate

management to the back burner. On the contrary, sound financial

management can only enhance mission performance. This is why it

must be a priority at every department. This level of transformation can only occur with the commitment of top leadership.

We are honored to have two influential leaders in financial management before us today. The Honorable Dr. Linda Combs is the

Controller for the Office of Federal Financial Management at OMB,

one of the key positions established by the CFO Act. Dr. Combs has

served as CFO at the Department of Transportation and the Environmental Protection Agency and brings an important perspective

as she guides CFOs governmentwide.

Mr. Jeffrey Steinhoff is the Director of Financial Management

and Assurance at the Government Accountability Office. He was

part of the team that was instrumental in drafting and enacting

the CFO Act.

We thank both of you for being here today and for your continued work with the subcommittee. We will look forward to your testimonies. As a practice, we will have both of you stand and be

sworn in. If Mr. Towns joins us during your testimony, we will see

if he has a statement that he would like to offer before we then

go into questions, depending on his interest.

If you would both raise your right hand, and any staff that will

be guiding you today, if they would stand and be sworn in as well.

[Witnesses sworn.]

Mr. PLATTS. Thank you. The clerk will note all witnesses affirmed the oath.

We appreciate, as always, your substantive written testimonies

and allowing us to be well prepared for a good dialog here today.

We are going to set the clock for 8 minutes, but we really do appreciate both your time and efforts, and that is a guide. But don’t

worry, if you need more time to complete your statements, please

take the time. We really want to hear what you have to say.

Dr. Combs.

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STATEMENT OF DR. LINDA COMBS, CONTROLLER, OFFICE OF

FEDERAL FINANCIAL MANAGEMENT, OFFICE OF MANAGEMENT AND BUDGET

Ms. COMBS. Thank you, Chairman Platts, and we welcome the

opportunity to be with you today. It is a great opportunity to appear before this committee and discuss the CFO Act and the overall state of financial management in the Federal Government.

When the CFO Act was passed in 1990, I was the Assistant Secretary for Management at the Department of the Treasury. So for

those of us who have worked on the CFO Act from its initial passage and have been passionate about financial management in the

Federal Government for all these years, it is indeed a welcomed opportunity to have a 15-year reflection and to remind ourselves of

how far we have actually come thanks to the committed efforts of

people sitting here at this table and people behind the bench where

you sit as well. So I thank you again for this opportunity and for

the financial management support that you give in the Federal

Government.

I think there has been tremendous, strong progress in Federal financial management, and recognizing the accomplishments of hard

working financial managers across the Federal Government is a

tremendous, wonderful way to celebrate the 15 years that we are

here to talk about today.

When the CFO Act was signed 15 years ago, the Federal Government was responding to many financial management challenges.

And in responding to these challenges, the act, as you pointed out,

set forth many ways in which financial management should be

strengthened. One of those ways was in the leadership. Another

was in implementing more disciplined financial controls and producing more timely and reliable financial information for day-today decisionmaking.

I am proud to share that today. Here 15 years later, we do have

the CFO community that’s committed to very, very strong financial

leadership, committed to transparency in financial reporting, and

committed to meeting the very highest standards in reporting, and

that we are reporting on those highest standards to be the highest

in our modern memory.

The administration monitors our financial goals using the improved financial performance initiative under the President’s management agenda. We are definitely looking for results in financial

management. We believe that what gets measured gets done.

The improving financial performance initiative, as part of the

President’s management agenda, includes a very detailed set of financial standards that every Federal agency is accountable for

meeting. As the Controller in the Office of Management and Budget, I work very closely with each of our agencies’ CFOs to develop

financial management improvement plans and to monitor those results.

I want to say that I am very, very proud of our CFOs. I am proud

of their hard work, diligent efforts, and continuing efforts to improve Federal financial management. We in the administration

know that money we spend is indeed the taxpayers’ money. Therefore, we must be good stewards of the people’s money. And over the

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past few years, we have made tremendous strides in accelerating,

improving, and streamlining financial management processes.

Timely audits are vital for ensuring that taxpayer money is spent

honestly and wisely. When the CFO Act was passed in 1990, as I

recall there were only five agencies at that time that were participating in a pilot to see if they could even produce auditable financial statements. As I recall, the result of that was that one of those

pilots actually attained a clean audit.

Moving forward to 10 years later, in 2000, when we came into

this administration, the CFO Act agencies were taking as long as

5 months still at that time to complete their financial statements.

And now we have Federal agencies that are reporting 45 days after

the end of the fiscal year. And this year, just 2 days ago, we

reached a remarkable milestone in regard to that 45-day reporting

deadline. On Tuesday, November 15, every major Federal agency

completed its performance and accountability report just 45 days

after year end of the 2005 fiscal year. This is the first time every

audit was completed since that deadline was set in 2001. That is,

in and of itself, a remarkable success story.

As a result of the accelerated reporting process and the expectations of high standards, the overall quality of financial reporting at

Federal agencies has consistently produced clean audits. For 3 consecutive years the number of unqualified opinions has remained

relatively stable. Additionally, I believe our steps to bring about

stronger internal controls, which are emphasized in the revisions

to Circular A–123, represent tremendous advances toward timely

and reliable financial information.

Beginning with this fiscal year, and already in progress, agency

managers are required to undertake a strengthened internal control assessment process. Key milestones from these plans are being

incorporated into the improved financial performance initiative

scorecard to ensure that agencies are accountable for meeting their

goals. These efforts will culminate in the agencies’ first management assurance statement for internal controls over financial reporting on June 30, 2006.

In closing, I continue to believe that the President’s management

agenda is one of the most effective tools we have in promoting financial improvement and excellence to hold agencies accountable

for good, positive results. The administration remains dedicated to

being a good steward of taxpayer dollars through strong financial

management. Specifically, we hope to accomplish this through continued good leadership, our dedication to transparency, and our adherence to the highest standards possible.

I look forward to continuing to work with this subcommittee on

the overall financial management of the Federal Government.

Thank you, Mr. Chairman, for the opportunity to be here with you

today. I will be pleased to address at the appropriate time any

questions that you may have. Thank you.

[The prepared statement of Ms. Combs follows:]

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Mr. PLATTS. Thank you, Dr. Combs. We appreciate your testimony. Mr. Steinhoff.

STATEMENT OF JEFFREY C. STEINHOFF, MANAGING DIRECTOR, FINANCIAL MANAGEMENT AND ASSURANCE, GOVERNMENT ACCOUNTABILITY OFFICE

Mr. STEINHOFF. Chairman Platts, it is a special privilege to be

here today on the 15th anniversary of the passage of the CFO Act,

widely heralded as the most far-reaching financial management reform legislation in 40 years. A decade and a half later, the act has

clearly stood the test of time and is the foundation of efforts to

strengthen financial accountability.

Today, I would like to do three things: Provide a quick historical

perspective of what the framers of this act were trying to achieve;

second, share my thoughts on the impact of the act to date; and,

finally, to talk about some of the challenges going forward, as we

are not yet at the finish line.

Let me quickly touch on the historical perspective. In 1990, the

environment was one where financial systems and controls were

abysmal and there was hardly any good year-end financial reporting. Clearly, financial management was not a high priority and the

CFO job was typically part of a broader range of duties and received short shrift. The CFO Act was directed at establishing financial accountability and managing the cost of government. It was

even recognized back then that we did face serious financial challenges and we had to manage our costs much better.

While understandably there is a lot of focus on the audited financial statements, the end game has always been the establishment

of a fully functioning CFO operation that includes a cadre of highly

qualified CFOs and supporting staff, modern financial management

systems that provide reliable, timely, and useful information to

support day-to-day decisionmaking and that enable the systematic

measure of performance—this is not about accounting, it is about

accountability—and, finally, sound internal controls that safeguard

assets and ensure accountability.

Regarding the impact of the act 15 years later, I would like to

answer a few questions tied directly back to the act’s objectives.

Has the quality of financial management leadership been

strengthened? The answer is an emphatic yes. The CFO position

has moved from the back room to the board room. Dr. Combs, who

came to this job with a proven track record in financial management, not in something else, exemplifies today’s CFO.

Have financial management systems improved? Again, yes.

While systems continue to be the most difficult challenge by far, we

are not close to the finish line there. There has been important

progress, people have come a long way, whether it be standardization, core systems, or better defining what is required and needed.

And for most agencies the problems are not nearly on the order of

magnitude they were in 1990. There are, nevertheless, very difficult challenges ahead, and they fall mainly in the area of systems.

Have there been improvements in internal control? Again, yes,

but it is with financial management systems that additional improvements are needed. Importantly, recent revisions to a 123 that

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you and Dr. Combs referred to, which GAO fully supports, have

bolstered the emphasis in this important area.

Has financial reporting improved? As you pointed out in your

opening statement, 18 clean opinions versus 6. In 1990, no one

even imagined we would have a requirement for audited financial

statements. There were pilots. They weren’t expected to go too far.

No one would have ever imagined one clean opinion versus 18,

much less in 45 days. Where the law gives folks 5 months, the fact

of the matter is in some of those earlier years, there were some

agencies that took up to 13 and 14 months. So this is a major

achievement.

Most importantly, we have witnessed a culture transformation.

In 1990, not everyone in the CFO community was supportive of the

CFO Act. Some believed the demand for reform would simply run

its course and fade away. Well, that has not been the case. We

have seen strong support from the past three administrations.

From the outset of the current administration, improved financial

management has been one of the cornerstones of the President’s

management agenda. We have seen strong support and continuous

oversight by the Congress. Especially important has been this subcommittee’s strong leadership.

As Dr. Combs mentioned, you get what you measure. And one

measure, a very important measure, is whether Congress really

cares.

Fifteen years later, people no longer question the value of the

concepts in the CFO Act. Today, the question is no longer why do

I have to do these things, but rather how can I do them better?

While I have spoken about the positive impact of the act, the

journey to excellence in financial management is far from over. I

see five principal challenges for the future.

First and foremost, agencies must take full advantage of modern

technology and develop financial management systems that are integrated with a range of other business systems. This is a key requirement of the CFO Act.

The past is littered with far too many failed systems initiatives

and/or projects that simply perpetuated stovepipe systems. One

need only look at the Department of Defense. Despite spending

tens of billions of dollars, and at last count having over 4,200 business systems, DOD remains high risk in every primary business

area and cannot produce auditable financial information. Today, we

see strong commitment in DOD to transform its business operations and to overhaul financial management. But it will take

many years under the best of circumstances to address deeply rooted problems.

Second, the financial management work force of the future will

have to be able to provide even greater strategic decision support

in order to add value to program managers. The goal is to move

primary focus from transaction processing and reconciliation and

cleaning up of errors to the systematic measurement of performance and the development of cost information, as called for in the

CFO Act. This will require a different skill set.

Third, addressing internal control weaknesses will be an ongoing

challenge. Good internal control requires constant vigilance. It is

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proper payments and computer security are two cross-cutting

issues that are now being addressed.

Fourth, we must continue to refine financial reporting so that

there is better transparency regarding our Nation’s fiscal condition.

A summary consolidated financial report and different ways of recognizing the range of Federal commitments are two areas on the

radar screen.

Finally, we must deal with the long-term nature of reform and

provide for continuity in an environment where leadership changes

are a way of life. The President’s management agenda has provided

a sound framework for reform. It fully supports the concepts of the

CFO Act and has been very important in what we have seen in the

last 5 years. The job, though, will not be complete at the end of this

administration and continuity will be critical going forward.

In closing, I want to thank this subcommittee and its predecessors who had the vision to enact the CFO Act and for the positive continuous support and oversight over the past 15 years. Your

continued attention has been instrumental to the very positive results we have seen to date and will be essential in reaching the

goals of the CFO Act going forward.

This completes my summary statement. I will be pleased to answer any questions that you may have at this time.

[The prepared statement of Mr. Steinhoff follows:]

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Mr. PLATTS. Thank you, Mr. Steinhoff. Again, both of you, we appreciate your testimony here today and your written testimonies.

I think both of you well captured where we are today with some

great successes, all major agencies reporting in 45 days versus

months and months and months in the past.

Mr. Steinhoff, your statement about the importance that this is

about accountability, not simply accounting, and what are the taxpayers getting for their money that is being expended, at the end

of the day is it a good investment? And you mentioned the challenges that still lie ahead. But the team effort that has transpired

in the last 15 years from those who were behind the legislation,

and you certainly played a direct role in writing that legislation,

and then everybody since, the Department CFOs in your past positions and now in your current positions, the GAO continuing to be

very engaged, OMB, and that Congress needs to stay part of the

effort. If we continue as a team in that fine-tuning and strengthening, whoever is sitting in this chair 15 years from now will hopefully, though there is always going to be room for improvement, but

hopefully there will be less room for improvement.

And who knows, maybe even DOD will have had a clean opinion,

or actually have an opinion. Maybe not clean, but we will take just

an opinion.

One of the examples I think that is very relevant, Dr. Combs,

that you highlight in your written testimony is the financial management community working closely with each other. The CFO Act

in creating the CFO Council, I imagine there was some interaction

either informal or formal, but having a formal structure for CFOs

to work together and share best practices.

And as we talked earlier this week, the example with Katrina

and how your twice-a-week meetings with all the relevant CFOs is

a perfect example of that structure being in place to ensure that

we are kind of all on the same page and working ahead.

With all the advancements that have occurred, and now in my

third year as chair of the subcommittee, I am looking at where we

came from and where we are. And when I look at the numbers, despite great advancement, at least 11 different major agencies have

received less than unqualified opinions. And as we saw last year,

our number of restatements rose from five in 2003 to 11 in 2004.

This year, when we look at the numbers, we kind of held even in

unqualified opinions at 18 and we dropped from 4 to 3 on those

with no material weaknesses, no evidence of noncompliance.

It seems we have kind of leveled off. Is there anything that kind

of explains that or that we need to be conscious of to not just stay

at this level but to keep pushing? And why are we seeing those

numbers where they are; somewhat kind of leveling off? We have

seen great gains, but then hit a plateau. We don’t seem to be able

to continue the path upward.

Ms. COMBS. I think that one of the major situations we are dealing with here relates to the move forward and where we are right

now with our internal controls. I think the 45-day deadline has

given us a tremendous opportunity to cause quarterly statements

to have to be issued during the year to provide a tremendous

amount of stability during the year. But I think where we have to

go henceforth is continuing to work through those material weakVerDate 11-MAY-2000 11:59 Apr 26, 2006 Jkt 000000 PO 00000 Frm 00047 Fmt 6633 Sfmt 6633 D:\DOCS\26239.TXT HGOVREF1 PsN: HGOVREF1
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nesses, reportable conditions, and our internal controls governmentwide.

Because in each and every department, it’s extremely important

to do that day-to-day work and to get it done right all during the

year and not to wait until year end. I think, if anything, the 45-

day time limit has forced agencies to be more aggressive, more determined at each quarter, at each month in presenting their statements. And I think that has had a tremendous impact on where

we are right now.

In order to continue to strengthen that base and in order to add

two or three or four or more departments to the clean audit rank

up for next year, I think we have to work very, very hard this year

to certify these internal controls, and I think that will add as much

stability as anything that we can do.

I also think Jeff hit it exactly right in terms of the technology

and the systems integration that we have to continue to work toward in these departments. It cannot be manual and heroic efforts.

It has to be sustained through these diligent internal control efforts

and having the right technology and processes in place in order to

get continuous improvement.

Mr. PLATTS. The focus on the internal control initiative, I would

agree and hope that is kind of the impetus that gets us off the plateau; that initially it could even have us off the plateau in a regressive way. But long term it has to be key to getting not only just

18 but 19, 20, and continue chipping away at a complete success.

So we will be anxious as we move forward with that to see how

that plays out.

Mr. Steinhoff.

Mr. STEINHOFF. If you look at 2005, you have three agencies that

went down from the previous year. And in looking at the type of

problems they cited for two of those three it directly related to putting up a new system, and that’s a risky proposition.

We audit the IRS, and they were going to roll out the first module of their system about a year and a half before they did. And

as the auditor, we said, ‘‘Well, gee, are you really ready to turn

that thing on October 1st?’’ And there was a little bit of a pause

there. Well, that’s the date. We said, ‘‘You’re taking a big, big risk

here. That’s a date driven decision and if you don’t do it right, you

will probably lose your opinion and you may lose it for several

years.’’

So they stepped back and made sure that disciplined processes

were followed. I give Mark Everson a lot of credit for that, and they

rolled that system out this year and it worked fine.

But for two of those three that went down, it was a result of having a new system in place. I think people are learning more. There

were perhaps problems in previous years that management just

was not aware of. There might have been a roll-out in a new site

where certain things were not picked up. I think the auditors are

becoming more savvy and they have a better understanding of the

risk of some of these entities.

When entities have a lot of adjusting entries at year end, it’s not

what you want to see. Maybe if you have four or five of them, but

not thousands of them. And I think some of it is the fact that you

have had heroic efforts in the past. And as people become more soVerDate 11-MAY-2000 11:59 Apr 26, 2006 Jkt 000000 PO 00000 Frm 00048 Fmt 6633 Sfmt 6633 D:\DOCS\26239.TXT HGOVREF1 PsN: HGOVREF1
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phisticated, they can get down underneath the numbers a little better.

The other area which I think has driven some of the going back

and forth on agencies from clean to a disclaimer or a qualified opinion are some of the unique financial statements, the statement of

budgetary resources. Some of these have become somewhat confusing to some. I do not think they’re rocket science, I do not think

the problem is the lack of guidance from OMB, which some have

claimed, but I think it’s the lack of familiarity. And I think some

of the auditors had to learn what those statements really were.

They were signing off on them with gigantic errors that were fairly

easy to find.

So I think it’s a learning process. The two you mentioned in your

opening remarks, DOD and Homeland Security, are the ones that

face the biggest problems, biggest challenges. I wouldn’t see them

on the radar screen for a thumb up or two in the next couple of

years.

Mr. PLATTS. Hopefully not my 15-year prediction.

Mr. STEINHOFF. It shouldn’t be 15 years. It shouldn’t be 15 years.

Mr. PLATTS. Mr. Steinhoff, you touched there and in your written

testimony on the system issue.

Mr. STEINHOFF. Yes.

Mr. PLATTS. And in your statement you reference about NASA

and DOD not following the necessary disciplined processes for developing the systems. We have seen that earlier in your statement

where you referenced the billion dollars the Navy had spent on the

four enterprise resource planning systems, and currently underway

with a new program, $800 million, what is the best thing we can

do, either as a subcommittee with oversight or OMB in their coordination with all these, to try to ensure that type of up-front

preparation is occurring?

Because I would think that after the number of failings in DOD

alone or elsewhere, anybody out there looking to do one of these

systems saying, ‘‘All right, what are these disciplines, what are the

steps we want to make sure we follow,’’ but that doesn’t seem to

be the case. So what do we need to do different to ensure that does

happen?

Mr. STEINHOFF. I think it’s very important that when funding is

provided for these systems that the Congress has oversight directly

over those that represent a major investment. When you’re talking

$800 million, a billion, you are talking big dollars there. And it is

not uncommon in a large activity like defense to have development

projects of that size. They become unmanageable. You don’t have

any direct accountability over them, you have multiple project

managers. At the time it’s finished, someone is in charge that had

nothing to do with all the mistakes made along the way.

It is a matter of holding someone accountable along the way,

having regular oversight, making sure that the agencies and departments are following disciplined processes in practice. Many activities have a good set of rules. If someone wanted to look at a

leading organization in terms of written practices, DOD would have

those written practices. But these are very complex operations. You

have many, many stovepipes involved. You have many players. You

have numerous committees or jurisdictions on the Hill that have

46

responsibility. You’re going to have to have a way for the major

large dollar investments to have some kind of oversight mechanism

where they have to come back to the Congress or come back to

OMB or come back to someone and say we have achieved X, Y and

Z and here is the return on investment.

I remember a number of years ago looking at a system and the

return on investment at that time was projected to be 2 percent.

That was before they started. Well, no one would ever invest $1 billion, especially in the early years of computer technology, to get a

2 percent rate of return. Private sector wouldn’t invest unless it

was a large rate of return.

So systems, I think, are a real difficult issue. The disciplined

processes, the enterprise architectures, investment management,

concept of operations requirements, management, testing, they

can’t shortcut any of those things. And, typically, when one does a

postmortem when they go down, you will find some or all of those

things.

I would think right now, we just issued that Navy ERP report,

that some in the Navy would be asking some very tough questions.

How is that effort that has just started going to fit in with the

other 44 systems it is supposed to integrate with? I do not think

they have any idea. So I’m not sure I would invest that amount of

money in something until I knew. But it is really a lot of oversight

over that is needed.

Mr. PLATTS. Dr. Combs, is there any consideration at OMB to,

through executive action, put that type of threshold review in place

with OMB; that if it’s going to be—and I would probably start low,

low relative to DOD—say $10 million, if you are going to spend X

amount, whatever X is, on a new system, that it has to be presented to and reviewed maybe by OMB and GAO; that you have

dotted the I’s crossed the T’s before going forward?

Is that something you are doing or are willing to look at as a possible action?

Ms. COMBS. Mr. Chairman, we are already in the process of reviewing each and every financial system upgrade, each and every

financial systems change that is being presented. And the way we

do that is individually, department by department. It is amazing.

There is a considerable amount of knowledge out there about what

not to do, and it is quite amazing how much of that knowledge we

end up sharing with people who are either beginning the thoughts

of their business plan to eventually get into a new financial system.

But first and foremost we are requiring them to do a very detailed business plan for any kind of core financial system.

Mr. PLATTS. What’s the consequence if you review it and don’t

think that they are ready to move forward? How does that play

out?

Ms. COMBS. Well, I will give you an example. There was a department this past year, just a few months ago, that we worked

with them, they worked with us. It was a very collegial working

relationship, because no one wants to be written up as getting on

the front page of the Washington Post for wasting the taxpayers’

money. There is nobody out there that wants to do that. They all

want to do it right. So this department was actually seeking help.

47

We were able to work with them and show them where the high

risk areas were, where the pitfalls potentially could be if they

stayed on the same plan that they were on. And they, along with

our consultation, decided to do something very similar that Jeff

talked about with the IRS. They decided to delay their implementation for a year so that they could get on to a very good business

plan, get it broken up into very constructive pieces, and reduce

their risk of running into a problem.

Mr. STEINHOFF. One of the difficult challenges, and DOD is a bit

different, there is a little bit different kind of oversight in DOD,

and in DOD about 80 percent of the financial information comes

from nonaccounting systems, so these systems wouldn’t necessarily

go through that prism of the financial system prism. They would

go through a different set. So you have various sets of looking at

it and you have totally different, in the end, funding mechanisms

in DOD where they are dealing directly with the Congress verses

through OMB. They go through OMB but it’s different.

Mr. PLATTS. So if it’s a specific line item in approps for DOD for

this program, that is financial management related but it is specifically delineated in the appropriation, OMB, you are still going to

engage; right? Will you still review that type of program, even if

it is a specific line item for a program versus here are your funds

for financial management and they decide to use some of those

funds to upgrade?

Ms. COMBS. Well, I would say that our first and foremost priority

is looking at core financial systems. And quite frankly, Mr. Chairman, I’d be really, really in good shape if I think we have reviewed

all core financial systems and had them on the right track, not just

for the DOD that we are talking about, but for each one of the 24

act agencies as well.

In fact, there are people I have heard recently even stand up at

meetings and say, ‘‘Oh, I do not think there’s anybody out there

that has ever kept their clean opinion and done a core financial

systems change.’’ Well, I’m here to dispel that. We did it when I

was at DOT and the CFO there. So there is a way to do a core financial system, get it into an agency or department and do it right

and still keep your clean opinion. That’s what we’re seeking for all

of our agencies.

Mr. PLATTS. I want to make sure I understood you, Dr. Combs.

Do I take that to mean that while that review should happen with

all programs, it’s not necessarily happening?

Ms. COMBS. Well, are you talking about the core financial systems?

Mr. PLATTS. Yes, for the core systems.

Ms. COMBS. The core financial systems are being looked at individually by our division OFFM, the Office of Federal Financial

Management, each and every one of those individually, department

by department. We are reviewing their business plans, we are reviewing and having a great deal of oversight with anybody who

wants to make changes in their core financial system. That is ongoing.

Mr. PLATTS. So that is across the board?

48

Ms. COMBS. That is ongoing. We welcome transparency and continued good input from our colleagues in GAO as well as the Hill

on each and every one of those.

Mr. PLATTS. Mr. Steinhoff, your example in the ERP would be an

example in DOD where it is outside of that core financial huge

sum. It’s a system investment that perhaps doesn’t get the same

level of scrutiny that OMB is able to give to the core financials?

Mr. STEINHOFF. Yes. And the part of the real challenge is who

controls the money. Take, for example, the Navy system. That

money really wasn’t controlled by the Defense Controller, that was

controlled by the Navy.

And one of the things I think the Controller General has spoken

to at these hearings is who controls the money. And perhaps in Defense, as they are putting their architecture in place, they should

be looking from a corporate perspective. Is it worthwhile to spend

this money on this system in the Navy or this system in the Army?

Right now these individual services get their own money for their

own systems for their own committees. And, again, when it’s part

of a broader array of systems that feed into a financial system, you

need to look even harder at it.

So you don’t have the same degree of control when you don’t control the funding. To the extent one controls the funding, if the Controller controlled the funding, that would be different. They can

provide advice, they can suggest some things. But to the extent

whoever controls the funding or oversees the funding makes the ultimate decision.

Mr. PLATTS. With DOD, and this kind of leads to the next question I was going to touch on, is that easy one of what is it going

to take at DOD and DHS, and maybe specifically starting with this

issue of oversight of these systems investments.

I apologize, my staff maybe can remind me of the name, but with

the recent announcement with Acting Deputy Secretary England

and taking the lead role on the business modernization—I forget

the exact title—the Business Transformation Agency, yes. I was

close. Do you see that helping to change the culture there, the environment, to have a more coordinated oversight? Or, again, not

when we get into things like this.

Mr. STEINHOFF. OK, yes. First of all, I want to say that I have

nothing but admiration for the capability of the defense managers.

This is a unique, highly different environment they are in. It is the

biggest entity in the world, really. They run cities, towns, school

systems, hospitals. You name it, they do it. Seventy-five percent of

the procurement dollars, most is discretionary spending. So they

have a complex set of issues and have a lot of very highly capable

people.

The concern that we have raised is that, yes, we have certainly

seen a change at the top in DOD. There were many years of denial

or of, well, these rules don’t really apply to us. You have now a

very concerted commitment from the Secretary on down. You have

the deputy, who is involved personally. And I have observed it,

having attended some of these Defense business board meetings.

He is personally engaged. He’s a highly knowledgeable person.

Very, very capable. If someone is going to achieve reform and get

it done, you would have to do it at that level.

49

The issue that GAO and the Controller General have raised is

the duration of the time it will take for this reform to take place.

A Deputy Secretary does not have a span of control or a span of

office that is going to be sufficient to complete the task. And one

of the proposals that we have made for consideration is to have a

chief management official, or chief operating officer.

And what one would do is just really have two deputies. You

would have one deputy for the policy or the warfighting side that

would be engaged in that, and a separate deputy in charge of business operations, and that person would be empowered to make

those decisions across the department. The CFOs from the various

services have a very strong dotted line relationship, almost a solid

line—which is what the CFO Act envisioned—back to that deputy.

That deputy would control the money for business operations.

Granted, you would have to have the logistics heads and all

those groups. I mean, they have their needs to carry out their missions. But it would not be the stovepiped type of approaches they

have today. Today, it’s stovepipe within systems, and that’s what

they’re trying to break down. And we’re very supportive of what

they are doing, but the real tough question is how far do they get

before another group is there, and what kind of staying power do

you have?

They have had initiatives before where they have had systems

czars and what not, and it is a very difficult cultural type of barrier

to break through. So you have to have a very strong person. They

have to have unequivocal backing on high, probably some kind of

contract or term, and it has to be someone who has done this before and who is going to be there for, let’s say, 7 to 10 years to do

it.

Mr. PLATTS. That authority over all of those entities, a CFOs

analogy on a much smaller scale, is with NASA.

Mr. STEINHOFF. Much smaller.

Mr. PLATTS. And giving the CFO authority over all the center

CFOs, so that they really have authority but one-thirtieth or so of

the budget.

Mr. STEINHOFF. Yes, much, much smaller. And DHS, which you

mentioned before, that’s a different situation somewhat.

Mr. PLATTS. I was going to ask you to expand, because, again,

a very important department, important mission, with obviously

very significant challenges. Is there anything that you want to

highlight regarding DHS?

Mr. STEINHOFF. I thought you might ask something about it

today, so I gave it some thought. One day they did not exist, the

next day they did. And you took a lot of entities, put them all together. They came from disparate agencies, and they all had different systems. Many of them came in there without the best systems in town and they had to operate. And it is probably a work

in process in terms of how do you manage and how do you establish a culture.

They say it takes 7 years to make cultural changes, 7 to 10

years. Well, they have been in business a couple of years and they

had maybe 10 or 12 cultures when they started. And they just don’t

have a cohesive set of business systems and they have certainly

50

had some difficulty getting started because they had a whole host

of other things they were trying to deal with.

I remember having meetings there shortly after they set up shop

and most people didn’t have phones or offices or didn’t know who

their staff were. So you have a basic startup operation. I think

their problems can be resolved much more easily than Defense’s,

but they do have serious problems. And I think you’re going to

have to have a very committed vision toward what those business

systems are. You’re going to have to consider that it won’t get done

in, let’s say, the 3 years remaining in this administration. So you

might have to have somebody that can sustain it from one administration to the next. But this is a very difficult challenge. It’s not

going to be easy.

Mr. PLATTS. Dr. Combs, did you want to add anything on either

DOD or DHS?

Ms. COMBS. Well, I think Jeff has hit on the high points. I think

one of the real critical elements, whether it’s these departments

that you have just discussed with him or whether it’s any of our

other departments, top-level leadership is extremely critical. I

think there are some committed people there who are committed

to doing the right thing with the management of those departments.

I think the other critical aspect is to have some very, very clear

action plans, hold people accountable for those plans of action, and

keep breaking those things down into manageable entities so that

they can be worked on and people can see some success.

Mr. PLATTS. Actually, before I move on, I want to go back to one followup, Mr. Steinhoff. On those Navy systems that were the $1

billion and the four systems, I expect I know the answer, but to the

best of your knowledge was anyone demoted, fired, or any funds recovered regarding the billion dollars that were spent that proved

not worthwhile; that they had to start over?

Mr. STEINHOFF. I do not know if there were any personnel actions taken or anything along those lines. In terms of the money

spent, the money was spent. There were certainly some lessons

learned. There was probably some things they gained they could

take to the new project, but certainly not $1 billion worth.

And we felt at the end of the day that the effort was largely a

waste. It just shouldn’t have started and it really was not a return

on investment.

Mr. PLATTS. When I look at those numbers, and having just come

to the hearing from the appropriations vote where I voted no on an

appropriations bill that failed, the Education-Labor-HHS, and specific things I looked at in this bill, Special Ed funding, an increase,

but minimal increase, and proven programs like Even Start that

was cut by 67 percent, that have proven successes out there. Then

I see us turn around and spend $1 billion on things that really in

the end didn’t help anyone. It just really makes me more certain

that the vote I just cast was the right one.

Dr. Combs, in your position, you have some unique perspective,

having been CFO in two agencies and now as Controller. How do

you see your role in interacting with those agency CFOs in the environment that you are able to kind of establish the culture out

there?

51

And then what is your read of the major department agencies of

the environment for the individual agency CFOs who are trying to

really get their financial houses in order?

Ms. COMBS. Well, I’m very, very proud to serve with the cadre

of CFOs that I serve with and have served with in the CFO role.

I think we have some very hard working, determined, and committed managers out there who have taken very strong leadership

roles in each of their respective departments and agencies.

One of the things that I look back on that I think has helped us

tremendously in the CFO Act of 1990 was turning financial management into a leadership role. It brought it out of the back room,

as Jeff reminded us a bit earlier, and brought it to the front table.

And I think of all the things that the CFOs have to work with, the

top leadership in their own respective departments and agencies

and having that top-level support has given all of us an opportunity to do the right thing and to establish the right processes and

know that we are going to be respected for who we are and what

we do in each and every one of those departments.

I have been extremely fortunate to always have the senior leadership behind me. The commitments that I have been able to make

and the things that I have been able to personally do have all been

sustained by upper-level leadership. I think you have to have that

in each and every one of these departments.

Mr. PLATTS. Without needing to know specifics of a certain Secretary or department in mind, are there instances in the time you

have been Controller that you have seen or are aware of where a

certain department or agency is just not responding well to what

OMB expects of them from a financial management point; that you

or any of your predecessors in going to Director Bolten, or whoever

the Director of OMB is, that the financial management issue kind

of comes up to the top level at OMB and then to the top level in

whatever department or agencies to the Secretary? So rather than

your working with a CFO without success, does it then get up kind

of to the top boxes of the department in OMB?

Ms. COMBS. Well, I am certain that could happen if it needed to

happen. There is no question in my mind that not only do I have

that availability to make that happen through my Director or

through the Deputy Director, if I needed to utilize that mechanism

I could and would do that. Fortunately, as I said earlier, I have a

very wonderful cadre of CFOs that have previously been my peers

and who are now either ascending into a new CFO role, because

we do have some new CFOs, that I have been able to establish a

very good working relationship with. And because I have been

there and have done this job in so many different departments, I

think a lot of people rely and depend on my consultation early in

the process, and that’s what I want. I want to be a colleague as

well as an energizer and someone who does indeed hold them accountable when they need to be held accountable.

I think the issues that I have seen thus far relative to departments that have needed some special help, we talked about the

three departments that in essence regained their clean opinion this

year. Obviously, they lost it last year. Those were three departments that we came in with and tried to work collegially with them

to say, ‘‘have you done this, have you done this?’’ And there are cerVerDate 11-MAY-2000 11:59 Apr 26, 2006 Jkt 000000 PO 00000 Frm 00055 Fmt 6633 Sfmt 6633 D:\DOCS\26239.TXT HGOVREF1 PsN: HGOVREF1
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tain things that you do as a day-to-day management requirement

in these departments and agencies that make all the difference in

the world relative to quarterly statements, and, consequently, your

audited opinion for the year.

So I think it’s important to know that top level leadership is behind you and you can utilize it. It’s important for your peers and

the departments and agencies to know that. And quite often, because of the President’s management agenda, everybody is speaking off the same page, so it doesn’t matter if the Deputy Secretaries

are meeting or if the Secretaries are meeting, which occasionally

the President might say to them, how are you doing in your financial management, and they always know that might be a possibility.

So having the President’s management agenda is a wonderful

tool at all levels. There is no level that is immune from being

asked, how are you doing on financial management, and I think

that is a great tool, and one we utilize very effectively.

Mr. PLATTS. And I think the importance of that senior leadership

cannot be understated, I think it’s one of the aspects of President

Bush’s administration that this issue has not really been, in a

broad sense, highlighted as it should be. The administration really

has been diligent and very determined in trying to have good financial management be instilled and lasting. And I think that’s reflected—DOD has worked with Secretary England in a number of

positions, with Navy, or as Navy. Now Deputy Secretary of DOD

as well, that sent a very strong message and one that the new

agency effort was being kind of rolled out said, ‘‘Well, I’ve got to

really learn more about it.’’ But one thing that did give me good

confidence was the fact that Deputy Secretary England was going

to be there, personally involved, and that was both going to send

a very important message out throughout the Department and

would provide truly a very good leadership at that senior level.

So the relationship—we’ve kind of been internally in the financial community, but when we’re talking about the financial systems, we get into the Chief Information Officer and the interaction

between CIO and CFO and how that impacts the system, the investments that are made.

Could the two of you expand on your view of how that is occurring within agencies, and then specifically with OMB. What, if any,

level of intensity or interaction between OMB and CIOs, where it

is relating to financial management systems?

Ms. COMBS. I’ll speak first within the agencies, because as a CFO

in an agency, if you are adopting new financial management systems or any systems that you’re working on, maybe it’s some enhancements to your system, you really need a very strong partner

in your CIO. And both of those positions report directly to the Secretaries or the heads of each of the agencies. So it’s very, very important for the CFOs to understand the complete CIO level of involvement as well as you, the CIO, has an expanded level, looking

at the entire enterprise, the financial management needs to be a

part of that.

And it has always served me very well as a CFO to work very,

very closely with the CIO and developing any business plans—of

course those are all presented each and every year through the

53

CIO and through my counterpart, who deals with the CFOs at

OMB. She and I have a very close working relationship as well as

we’re dealing with financial management matters and financial

systems that relate to the CIOs in these departments and agencies

as well.

So I think the close working relationship is there, both at the

OMB level, and it must be there at the departments and agencies

for them to be successful.

Mr. PLATTS. Mr. Steinhoff, what do you see as far as good or bad

in departments and agencies?

Mr. STEINHOFF. I agree fully with what Linda Combs just said.

You have to have a partnership. It has to go both ways. We’re really looking here at business systems, business modernization. And

there is a fine line between the CIO role, CFO role, program role.

You have to have a partnership between all the parties moving toward a common goal of providing business support. That’s really

what the CFO is doing, providing strategic business information to

top management, year-end reporting, stewardship-type of functions,

paying bills, etc. And they are doing that on behalf of the programs

that are there.

So you have to have people in these roles who can work with

other people, have the proper kind of interpersonal abilities, and

can see things from multiple sides. You have to look at what the

enterprise needs. And for those entities that are most successful,

they will have developed these kinds of personal partnerships that

Linda Combs spoke to.

If it be that the CFO says I have these powers, I’m going to do

this regardless of what you say, and the CIO says I control the system, I’m going to do X, Y and Z, and then the program manager

on the other side says well, I want it another way, there has to be

a partnership and there has to be a very clear plan in a department that deals with its range of business systems of which the accounting or financial is part of it.

Mr. PLATTS. Is there any department that you’re seeing where

that type of relationship is not occurring, that interaction, that

partnership, that concerns you?

Mr. STEINHOFF. It’s not something that I could really address

across government. I can say that in the experiences I’ve had in

DOD they seem to be trying to establish that partnership between

these various units. There are problems and their systems are

huge, but I can’t really speak to any—I can get back to you if we

have issued any reports out of our IT team that’s spoken to that.

I’m sure from just a common sense view there probably are some

that don’t work well together, but those are the kind of things that

the head of the agency, head of the department should be aware

of. And the head of the department should make sure that’s really

what their job is, they and the deputy, to make sure these business

partners are working together. Because if they’re not working together you will suboptimize the results, and you will find yourself

in the same position year after year.

Ms. COMBS. And I will just add to that. I think if Jeff and I probably went back and looked at the lessons learned from some of the

failed areas, we probably would find that at least one of the top

three areas were considered to be some of the causes for it.

54

Mr. PLATTS. That partnership broke down and didn’t occur?

Ms. COMBS. Correct.

Mr. PLATTS. On DHS in specific, Dr. Combs, when we passed the

Financial Accountability Act, DHS Financial Accountability Act, we

tried to place greater emphasis on financial accountability to bring

it in compliance with the CFO Act, to move forward so that this

major agency is on the same plane as all the others.

In your initial review of their end of the year 2005 statement, do

you see progress being made in DHS this year versus last year?

And Mr. Steinhoff’s highlighted what the challenge is as a new

agency, 22 agencies come together inheriting multiple material

weaknesses, it’s a pretty staggering assignment, but do you see

progress being made there?

Ms. COMBS. Well, I think the mere fact that they presented on

time is certainly something to applaud them over.

I think there is tremendous hard work going on, and we’ve

talked about in the past some heroic efforts. I think that—because

of what Mr. Steinhoff had to say earlier about the way this department came together, that it is a major, major task to have come

as far as they have actually come over the last couple of years for

the very same reasons he referred to.

I think that the progress is continuous, and I think that it will

continue to be toward the positive.

Mr. PLATTS. You mentioned about past heroic efforts and not just

at DHS, but in your assessment with all of them making the 45

days. I agree, it’s a great step to get that information now and be

able to review and act on it rather than waiting another several

months. What is your read on how their role, the heroic effort

played into the 24 agencies and departments in getting that done

versus the quarterly statements happen to guard against that or

negate the necessity of that type of heroic effort?

Ms. COMBS. I’ve talked with a number of CFOs over the course

of the last couple of weeks, and I’ve also talked with some IGs as

well to get their sense of whether or not they think things are better or, ‘‘less heroic’’ than they have been in the past, and I think

100 percent of those have indicated to me that it gets better and

better every year, and that this year is better than last. But it is

because of those monthly and quarterly statements, it’s because of

that discipline that has had to be interjected in each and every department each and every month along the way. And that discipline

is serving us all well. And one of the ways that discipline continues

to serve us there is that fewer and fewer heroic efforts are having

to be engaged in at year end in order to get the clean audit.

Mr. PLATTS. Mr. Steinhoff, your assessment on the heroic effort

issue?

Mr. STEINHOFF. I would basically agree. I think that when we

went from 5 months to 11⁄2 months, that wasn’t nibbling at the

edges. And someone couldn’t just throw five more people at it. They

had to fundamentally change the processes that they used to prepare financial statements, they had to step back. It wasn’t a matter

of telling the auditor to work harder or faster, it was a matter of

being able to project information forward, to prepare quarterly

statements, and to organize materials. And we find every year in

our audit of the IRS—we are the auditors of IRS—it’s a very large

55

audit. It’s a very large entity. It’s got a lot of complex issues that

are involved there. They do have a lot of systems challenges, a lot

of control challenges, but they made fundamental changes in their

processes for preparing statements. They took the various business

owners, people who have owned the inventory or whatever it might

be, they forced them to the table to change their processes. So they

were routinely doing certain things like reconciling each month,

taking fiscal inventories if that was part of the job, it was built into

what people would do day to day, and therefore it wouldn’t be an

add-on at the end of the year.

We have found that the audit, the preparation has gone smoother in the last few years. Auditors will always find some transactions they question. There is always a degree of those. The question is, do they break the threshold for materiality? We find fewer

and fewer errors, they correct the errors we find, but fewer and

fewer, not material in any way, but fewer and fewer. They’ve improved at doing that. The fact that they had to accelerate, the fact

that one time they had a business there like Charles Rossetti, they

changed their personnel, that was extended, and they’ve got people

that know what they’re doing. And I have just seen a marketed improvement on their side, having been the auditor up close and personal for years and years. And I would say that is across the board.

Is it difficult? Do they work real hard at it? Do they spend nights

and weekends on it? Yes. Do the auditors spend nights and weekends on it? Yes, whether they be private sector or government

auditors, so this is a big effort. I remember in the early years one

of the agencies I think it took 14 months that 1 year and had something like 3,300 spread sheets, these big spread sheets. So they

were taking vouchers and recording numbers on these sheets, and

that’s how they prepared the statements.

Mr. PLATTS. I’m glad they didn’t come and have to present all

that before the committee.

Mr. STEINHOFF. Well, they were in this room, I actually saw it.

And people were sitting there for 14 months doing that. You just

don’t see that.

There are a lot of real challenges and a lot of hard work, and

there are numbers that must be derived through statistical samples or special analyses which you would like to routinely come

from the system, but if they work toward that—in theory, the ultimate is you push the button, your numbers come out, and you

would just have the normal things you have to accrue. I think

they’re all moving in that direction, and they certainly understand

what to do. When they first started, they didn’t each know how to

prepare these things or what to do.

Mr. PLATTS. We will have one heck of a celebration when we get

all the departments, agencies to be able to push the button and

have them just appear. It will really be something to continue

working for because if we get to that with any department, agency,

that really is going to get what we’re after—that day-to-day, reliable substantive information with which to make informed decisions.

As we go forward, and with the A–123 requirements, you talked

about in the short term, there is likely to be some additional weaknesses uncovered because we’re kind of digging a little deeper, a

56

little more thoroughly. In the short term we will have some additional weaknesses which in the end will have long-term benefits.

In light of that prediction or belief, which I think is probably a fair

one, do you think that in those six we should anticipate some entities that have clean opinions now not getting a clean opinion next

year because of the more substantive review that the new internal

control requirements will place on them?

Ms. COMBS. Absolutely not. I expect that we will continue to improve the number of clean opinions. I expect that A–123 and the

certifications that are done in June are indeed going to uncover

some things, but I do believe that they will uncover some things

that are not as difficult to correct as some of the things that we

already know about.

I think that one of the things that we have seen over the past,

if you look at the material weaknesses and you analyze the material weaknesses in each and every department, these are very longterm, pervasive, repeat material weaknesses. And while there may

be new material weaknesses that are presented, there may be evidence that some of the internal controls that are not in place that

should be put in place. I envision while they may be deeper, they

may be indeed easier to correct. That is my hope, my anticipation.

Because as you and I have talked before, we will be closer to where

we want to be in terms of financial management in each and every

department when we have all the program managers and all the

financial managers looking at material weaknesses and reportable

conditions just like they were the same and correcting them on a

day-by-day, month-by-month basis, understanding what they are

and understanding what it means to correct them.

So I think that my anticipation at this point is we’re going to

push forward, we’re going to use this opportunity with A–123 that

we have to ferret out additional things that need to be corrected,

and expect and hold accountable departments and entities in making them happen and making them happen quickly.

Mr. PLATTS. And I think maybe it is a fair statement to say, in

that belief it was going to happen is what you have seen at IRS,

is that exact type of identification, correction and positive results.

Mr. STEINHOFF. Yes. I think fixing something that you find to be

wrong, holding someone accountable. Some things in the past are

hung out there for years that could have been relatively simply resolved, and it’s having a basic policy perhaps that we expect these

things resolved in 3 months or 2 months, whatever it is, and holding someone accountable for doing that. It needn’t result in a loss

of a clean opinion. If you have done the work in an arduous manner, you should find your problems before year end.

Looking at some of the problems this past year, there were

things that were found toward the end of the audit or end of the

period sometimes found by management. They didn’t know about

a certain something. So it’s getting on it quickly, it’s recognizing

when you’ve got a long-term, deeply rooted problem, what it takes

to do that and get on top of that and hold someone accountable,

but not having hundreds and hundreds of open weaknesses, hundreds and hundreds of audit recommendations and requiring management to take responsibility.

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One of the very important things in the revision to A–123 is it

really revitalizes what was in the 1982 act, and that is that management is responsible for this, it’s a fundamental responsibility.

And there is nothing wrong with finding a control problem. The

problem is if one doesn’t then fix it. It should be rewarded for finding it and rewarded for fixing it and punished if they don’t fix it.

Mr. PLATTS. Agreed. And that approach is certainly what we all

are after.

The only two questions that somewhat relate to the personnel

issue and continuity, one is we find that many agencies rely heavily on contractors to perform their financial statement production.

And how does that impact the long-term ability or continuity of

that department or agency using contractors to maintain and really

have that knowledge base be there and retained year to year, long

term to build on if it’s contractors performing the work?

Mr. STEINHOFF. It’s not the environment you want to find yourself in. You want to use a contractor if you think this is a body of

work that you need it to be done once or twice, you don’t have the

skill mix; but you wouldn’t want to be paying somebody every year

to carry out your basic responsibility. There certainly are good reasons to use contractors, especially if you have a skills gap. But if

you’re totally dependent on a contractor to do just basic things and

every year you’re paying someone to come in and estimate what

your inventory is worth or how much property you have, that’s only

a number for that 1 day. It doesn’t really give you the kind of information to manage day-to-day.

I remember early on in our work at IRS they hired a contractor

to come up with an estimate of their property, and we made it very

clear to them that 1 day after the end of the fiscal year any number they had was not of any use, and they would have to spend

that money again, and again, and again. And you ought to fix the

basic system, you want your own people to be generating those

numbers. And the fact that they were going to have to keep paying

and paying and paying, you want to have your own capacity. But

that is not to say that you can’t make a business decision in certain

areas that it might be more cost effective to use a contractor, but

it shouldn’t be to process transactions and what not.

Mr. PLATTS. Dr. Combs.

Ms. COMBS. I think it really boils down to management accountability and management effectiveness. I think good managers and

good leaders in any organization look across the entire enterprise

and they see where the human capital needs are. And you either

go out and buy the support you need, whether it’s temporary or

long term. You might make a long-term decision, as Jeff just mentioned, that is a particular cadre of individuals that maybe we can’t

attract into the Federal sector like we should. But it all comes back

to the general management responsibility and having a leader, a

manager look across the entire enterprise of an organization and

decide what human capital needs there are. And if there are business reasons and good business reasons for using contractor support versus our own Federal cadre, then I think that needs to be

explained by management, both to employees as well as the people

that we support.

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Mr. PLATTS. Is my understanding correct that with the A–123

work, that’s heavy—or maybe not extensive, or mostly contractor

done work?

Ms. COMBS. I am aware that there are some agencies and departments that are contracting some of that work out, but I am further

aware and have been very clear with other CFOs that this is a

management responsibility. This particular element, and certifying

these internal controls is nothing that can be delegated, it’s nothing

that can be bought, this is clearly on the shoulders of management.

You have to stand behind whatever work is done, whether it’s done

by contractors or whether it’s done internally.

Mr. PLATTS. OK. The related issues—you have touched on really

both of getting the necessary human capital in place, especially in

times when we’re really trying to emphasize good financial management and really to set a good path for the future.

And Mr. Steinhoff, in your written testimony, I’m going to just

quote and I think you capture it well, ‘‘building a world class financial work force will require a work force transformation strategy

devised in partnership between CFOs and agency human resource

departments working with OMB and the Office of Personnel Management.’’ I would be interested if both of you, where are we recording that type of effort, that strategy and all the partners being

on the same page to bring that together?

Mr. STEINHOFF. I think this is a huge challenge. We’re in a technology age today, it’s the very early stages of it. We have a Federal

work force that has large numbers that are going to be retiring

soon, and we have major opportunity to restructure at the same

time. If you look at the financial management arena, the IT arena,

both of which are heavily engaged in what a CFO would be doing,

the competition for talent is intense. The students get top dollar

when they get out of school, you have to aggressively compete for

them, you have to be very agile in doing that. And frankly, you

have to have a very strong human capital strategy. You have to be

able to quickly respond to needs. And I know at GAO I feel very

fortunate that we have a lot of these abilities. And I have attended

forums in the executive branch and I think they face a real difficult

challenge, challenge of being agile and being able to immediately

hire somebody to go out and try to get the best people they can get

when they’re competing against the major consulting firms who are

paying top dollar. We have to challenge people when they come

into government. The average person today that enters the work

force is not going to spend 30 years or 40 years at the same job

like yours truly did, they’re going to move from job to job. I have

kids in their 20’s, and I don’t think they plan to stay one place for

their whole career. But the government’s going to have to be able

to really compete in a tough, tough market. It presents a good opportunity, but I know that GAO can compete quite well. I’m not

sure that some of the agencies are prepared to compete on the

same basis.

Mr. PLATTS. Are you seeing that type of—that recognition governmentwide and the strategy that you reference even in the initial

stages?

Mr. STEINHOFF. I don’t think in the financial management arena,

based on just discussions I’ve had with CFOs, some of the forums

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that have been sponsored in the past where people have talked

about human capital and they’ve shared the war stories about 8

months to hire someone, and you know, and they go down to colleges. I know I asked my kids all the time when they were in college, well, when the recruiters came down, you know, how was it.

And there was sometimes a big difference between what was sent

down to these colleges to recruit these kids. If you’re going to be

recruiting an accountant, you send a young accountant down, you

don’t send a personnelist down, you don’t send a person down to

pass out fliers, you don’t give them a 45-page form to fill out with

many of the questions not really applicable to them, and you don’t

spend months getting back to them on it. You have to do it immediately.

We have a lot of summer interns in GAO, we are bringing in

sharp people, they’re seniors maybe going into their fifth year because most of the cutting students are in 5-year programs now.

And we have them there, they’re there for the summer, and we

make a face to face offer at the end of the summer. We have a competitive wage we’re paying them, and we are pursuing them the

same way a CPA firm would be. And I think that’s really what the

executive branch is going to have to be in a position to do.

One of the concerns that I always have whenever we have budgetary problems is some of the first things to go are what are called

support functions in financial management. But as people retire,

you have an opportunity, but you have to have a good plan for succession. You have to be grooming people for the future and you

have to be willing to move quickly, you have to be agile.

I will let Linda speak a little more about some of the authorities

they have, but I felt in some of the forums I participated in that

I was speaking about a whole different way of procuring services

than some others were. And it’s not easy for me because I’m competing against all the major accounting firms, I’m competing

against all the consulting houses. The government has a lot to

offer, and we have to have strategies both for the entry level, we

also have to have strategies for those people that want to rebound

in their career, they’ve been with a major firm for 5 or 6 years,

they have sort of burnt that out in life, they want to move on. And

you have to have very, very astute recruiting strategies there. And

I’m not really sure if the CFO community—my sense is that is an

area they need to work on, look at in the future on.

Mr. PLATTS. Dr. Combs, I would be interested in your perspective, and especially what, if any, relations with Office of Personnel

Management and how to develop that effort.

Ms. COMBS. I, too, am very concerned about our ability to attract

and retain financial managers in the Federal Government. I think

that the President’s management agenda on human capital governmentwide has sensitized people to the fact that we have a particular need in the financial community to strengthen that particular

area, as well as others. But Jeff mentioned the IT community. But

CFO and IT are more and more difficult to attract and retain people because the outside salaries are so substantial and we can’t

even come close to those.

But I think the other thing that I would commend GAO on and

say that I think we have to buildupon the work that GAO has done

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over the last several years in their human capital effort. I think

they’re probably one of the stars that I have seen in—certainly in

the Washington arena, but certainly for a private sector organization as well. I think they’ve done some remarkable things relative

to human capital efforts, and I think that certainly is a priority of

the CFO Council.

We have a sitting CFO from the corporate world to come to each

one of our CFO Council meetings and talk with us about issues of

common concern. They are always the first to bring up human capital, and we listen with intrigue to hear them talk about retention

and attracting their share of well-trained financial managers. And

I can’t help but know, as I hear them talk about the training programs that they embark upon and the tremendous efforts that they

undertake in these very large corporations to keep people on their

payroll, they do an awful lot once they are able to attract people

into their corporation.

We had a loose federation of us CFOs embark upon bringing in

some MBAs between their first and second year last summer, and

I had done it when I was at EPA and DOT. And I think we had

11 MBAs throughout government this past summer. They had

never thought about working for the Federal Government, and

would not have thought about it had I not gone and recruited on

their campus. They had a tremendous eye opening as to what it

was like to work in financial management in the Federal Government. It was a very, very positive experience. But I told them coming in I already apologize to you because I know when you get

ready to graduate this coming June, I will not be able to attract

you into the Federal Government because the salary I could offer

you is so low compared to what you could get in the private sector.

I will not be able to touch you. And that breaks my heart to know

that is the way we have less vehicles than we need to work with

in our human capital.

You asked if I had done some work with OPM. Obviously there

are some proposals underway right now, and the financial community is of course a part of some of those proposals, but I truly look

forward to a day when I can say to those MBA candidates, you

come see me next year, I want to have a shot at you as well. That’s

where we need to be.

Mr. PLATTS. And some of that is outside of all of our control, and

not just meaning salaries, but perspective of the employee that

serving in public service is a high calling. And maybe it’s money,

but there is a way of giving back to the service that makes up for

less money, that you’re serving your country, whether it be in uniform in the military or civilian in a department or agency.

Mr. STEINHOFF. They have to see they’re making a difference,

they have be to challenged and motivated, they have to be given

responsibilities that they feel are challenging. I think all those

things are very, very key. And you have to then, once you have

them, to point that finger raised on spending money and developing the people. You have a procurement community right now

that’s got an acquisition sort of professional that receives certain

training and certain special funding. They should have that in the

financial management community. I mean, do they have the money

to train, to develop, to move people around? And again, it’s retainVerDate 11-MAY-2000 11:59 Apr 26, 2006 Jkt 000000 PO 00000 Frm 00064 Fmt 6633 Sfmt 6633 D:\DOCS\26239.TXT HGOVREF1 PsN: HGOVREF1
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ing, it’s attracting. And people are attracted, as you say, for a variety of reasons.

Mr. PLATTS. I see it in my immediate office with our district offices and my D.C. office with summer interns. We always have six

each summer that split the summer, half in the district, half down

in D.C. and then throughout the school year. And one of the things

we find, especially when they are in the district, is that making a

difference as a college student, either junior or senior year going

into, and when they’re—because we very quickly throw them in the

deep end. We’re not interested in having someone around to make

copies, we’re interested in having them really understand what the

work is all about, and very quickly, you know, swim—not sink,

swim. But when they start to experience that they’ve made a difference in the life of a constituent, a veteran in getting their benefits or Social Security, whatever it may be, that feeling of accomplishment that they helped somebody, you know, that goes a long

way.

Ms. COMBS. And in the financial community, when you give them

projects that are in the billions of dollars of magnitude, that they

would never probably work on in a lifetime in a corporation—or

maybe not for 10 or 15 years in some of the major corporations—

they really have their eyes opened. And many of them have indeed

said what you just did. Well, yes, you’re right, you can’t attract me

because of the money, but because I’ve seen what I’ve seen about

public service and been able to look at the magnitude of responsibility I could have even as a summer employee, and they get to

see some of these other capable senior managers in our work force

as well, they can tell that they can truly make a difference.

Mr. PLATTS. I have one final specific question, and it really is—

again is pretty early, but the GSA disclaimer is one that seems,

given a track record of great success, that jumps out. Is there an

initial read that either or both of you have on what has transpired

there to result in the disclaimer being required?

Ms. COMBS. We have not had a chance to review that completely

yet. It’s obviously a disappointment. I know that in talking with

the CFO there, she was extremely disappointed. It came up, as Jeff

talked about, toward the end as well. And very, very committed,

though, to doing the right things to turn that around, and we’re

eager to help in any way we can.

Mr. PLATTS. OK.

Mr. STEINHOFF. We really have not had a chance to look behind

it. I think it is somewhat related to some systems changes they

made, but we have not had an opportunity to go behind it.

In that case they—as I recall they got a clean opinion on certain

statements and disclaimer on others, so they have a mixed kind of

opinion for 2005.

Mr. PLATTS. We’re kind of anxious to see how that does play out

and what we have learned from that because of that, that we’re

going to move forward in an increasingly positive way and not regress, and they have been an agency as a great example of good

work, that continues.

One final more general question, and that is we’ve talked early

this year, and we’re continuing to work on I guess behind the

scenes on the kind of consolidation, looking at the CFO Act and the

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various related financial management pieces of legislation that

have been adopted over the last 20 or so years and how they need

to be updated and better coordinated.

Is there a benefit for us going forward with that effort to eliminate redundancies? As we’re challenging financial managers in lots

of ways, is it worth the effort that we’re putting forth and will need

to continue to put forth to undertake a major consolidation effort

that in the end benefit those managers out there day in and day

out to have that consolidation occur?

Ms. COMBS. I think any way that we can better define what success looks like to managers in a more streamlined fashion, the way

that we continue to look at financial management throughout government, if we can pull together some things that make sense to

work together, even in the internal controls efforts, we continue to

encourage people to look across their entire enterprise and look at

things they already have in place, things that are already being

looked at, take those and adopt those. Don’t layer on something on

top of this, this is not a layering on process, this is a utilization

of what is already there and helping management to come to grips

and to agreement with the idea that this is a management accountability, and I’m the one certifying this using their own judgment.

So those are the kind of I think things I think that help managers

a lot to know that they have the authority to do that, and to rely

on their own good judgment and their own good processes that are

in place.

Mr. STEINHOFF. I think it’s also a good idea to do that now. We

need to harmonize certain things, we need to clarify certain things,

consolidate certain reporting. Some things are now being done that

meet the intent of these acts, but they’re in a different form. And

we need to make that legitimate. We no longer really need to have

a separate Federal Manager’s Integrity Act report if you make it

part of the PAR. We don’t need to have some of the things that we

presently have.

So a lot of harmonization, perhaps updating certain things to address what’s been more refined practices. We can deal with some

of the investment issues, place more clearly some of the things that

would be, in fact, expected. I think there is a good opportunity for

a committee report that would lay out and provide a record of

where the Congress is today of where they’re expecting this to be,

some of the things we’ve spoken about today. There can even be

some human capital proposals in there that deal with training, development, etc. So we look forward to working with you all on it.

And I think it’s a good opportunity to kind of step back. All these

acts interrelate in some way, and it’s not too hard for those who

have been involved for a long time to see how they interrelate, but

I could certainly see someone coming on the scene new looking at

all these laws and all these acronyms and what not and not recognizing that gee, it’s not this and that, it’s really this broader concept. You don’t see some of the things we spoke about today in

Black and White in some of those bills.

Mr. PLATTS. Well, as Dr. Combs was saying about a young graduate coming out and the opportunity to work on billion dollars

projects, that is the other side. I was thinking of also coming out

and saying you have the CFO Act, you have FMFIA, you have—

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being a little overwhelmed, because as we kept layering as opposed

to bring it in in a cohesive fashion—we are working on that type

of report and welcome the continued insights of our offices and

staff. And again, part of that same team effort that we’re all after

at the end of the day, that same goal.

We are very grateful for your testimony here today, and especially day in and day out the work of you and your staffs on what

I continue to believe is one of our most important responsibilities,

as we like to reference to, accounting for the people’s money was

laid out in Article I of the Constitution, and I think appropriately

so. And it’s a little different times today in 2005 than in the 1700’s,

but the importance and the right of the public to know what their

money is being used for is just as important today as it was then.

So your efforts are very commendable and appreciated.

We will keep the record open, if there is anything you need to

followup with us for 2 weeks, and we will look forward to our continued interactions with you.

Mr. STEINHOFF. Thank you very much.

Mr. PLATTS. This hearing stands adjourned.

[Whereupon, at 4:25 p.m., the subcommittee was adjourned.]

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