For Release on Delivery

Expected at

2 p.m.

Tuesday,

March 21, 2000

GAO/T-AIMD-00-115

FINANCIAL

MANAGEMENT

USDA Faces Major

Financial Management

Challenges

Statement of Linda M. Calbom

Director, Resources, Community, and Economic

Development, Accounting and Financial Management

Issues

Accounting and Information Management Division

Testimony

Before the Subcommittee on Government Management,

Information and Technology, Committee on Government

Reform, House of Representatives

United States General Accounting Office

GAO
Page 1 GAO/T-AIMD-00-115

Mr. Chairman and Members of the Subcommittee:

I am pleased to be here today to discuss U. S. Department of Agriculture

(USDA) financial management issues. As evidenced by the Inspector

General’s sixth disclaimer of opinion in a row on USDA’s consolidated

financial statements, the agency has serious accountability problems over

the $118 billion in assets and $120 billion in budgetary resources provided

for fiscal year 1999 to carry out its diverse missions. Before USDA can

achieve financial accountability, it or its component agencies must address

a number of issues that we or USDA’s Office of Inspector General (IG)

have reported as serious problems. My statement will focus on problems

the agency has encountered in five major areas: (1) implementing the

Federal Credit Reform Act of 1990 and related accounting standards,1

(2) reconciling its Fund Balance with Treasury accounts, (3) addressing

weaknesses in the Forest Service’s financial accounting and reporting,

(4) correcting certain other material internal control weaknesses, and

(5) complying with some key laws and regulations. I will also briefly

discuss our assessments of the Rural Utilities Service’s (RUS) electric loan

program policies and procedures and the risk of loss to the federal

government from direct loans or loan guarantees RUS provides to electric

cooperatives.

USDA is responsible for a variety of major programs that (1) boost farm

production and exports, (2) promote small community and rural

development, (3) ensure a safe food supply for the nation, (4) manage

natural resources, and (5) improve the nutrition of families and individuals

with low incomes. The financial results of the activities of these programs

are reported in USDA’s consolidated financial statements and make up a

significant portion of certain components of the consolidated financial

statements of the U.S. government. For example, USDA is responsible for

managing the nation’s largest federal direct loan portfolio, with reported

net credit program receivables of about $70.7 billion as of September 30,

1999. In addition, USDA reported net costs of $32.7 billion for fiscal year

1999 for its food assistance programs such as the Food Stamp Program

(FSP) and Child Nutrition Programs (CNP), that represent a significant

portion of income security net cost reported in the U. S. consolidated

financial statements.

1The Federal Accounting Standards Advisory Board (FASAB) developed the accounting standard for credit

programs, Statement of Federal Financial Accounting Standards (SFFAS) No. 2, Accounting for Direct Loans

and Loan Guarantees (SFFAS No. 2), which became effective beginning in fiscal year 1994.
Page 2 GAO/T-AIMD-00-115

Improving financial accountability throughout the federal government has

been an area of emphasis since implementation of the Chief Financial

Officers (CFO) Act of 1990, which required a CFO structure in 24 major

agencies and the Office of Management and Budget (OMB) to provide the

necessary financial management leadership and focus. To help instill

greater accountability and fix pervasive and costly control breakdowns,

financial statements were required to be prepared and audited, beginning

with those for fiscal year 1991, for revolving and trust funds and

commercial activities. For 10 agencies–including USDA–audited financial

statements were required as part of a pilot program to test this concept for

an agency’s entire operations.

Since USDA’s participation in the pilot program in 1991, USDA and several

of its component agencies have received a series of unfavorable financial

audit reports due to deficiencies in financial reporting that are attributable

primarily to weaknesses in the agency’s financial management systems.

USDA’s Chief Financial Officer recognizes the seriousness of these

problems and has a number of efforts underway to address these issues.

The Government Management Reform Act (GMRA) of 1994 expanded the

CFO Act by mandating that (1) major departments and agencies produce

annual financial statements subject to independent audit, beginning with

those for fiscal year 1996, and (2) the Secretary of the Treasury, in

cooperation with the Director of the Office of Management and Budget,

prepare financial statements for the U.S. government that are audited by

GAO, starting with those for fiscal year 1997.

In addition, the Congress passed the Federal Financial Management

Improvement Act (FFMIA) of 1996, Public Law 104-208. FFMIA requires

auditors for each of the 24 major departments and agencies named in the

CFO Act to report, as part of their audit report on agencies’ annual

financial statements, whether the agencies’ financial management systems

comply substantially with three requirements: (1) federal financial

management systems requirements, (2) applicable federal accounting

standards, and (3) the U. S. Government Standard General Ledger (SGL) 2

at the transaction level. These requirements are critical for ensuring that

agency financial management activities are consistently and accurately

recorded and promptly and uniformly reported throughout the federal

government. Departments and agencies must comply with these

2The SGL provides a standard chart of accounts and standardized transactions that agencies are to use in all

their financial systems.

Background
Page 3 GAO/T-AIMD-00-115

requirements in order to maximize their performance and ensure their

accountability.

As USDA’s financial statements have continued to be subjected to annual

audits, the agency’s history of deficiencies in financial reporting has

continued. Many of these weaknesses persist because of (1) an outdated

accounting system and (2) problems with supporting computerized

systems–referred to by USDA as feeder systems. The USDA IG has

reported that the old accounting system does not comply with the

requirements of FFMIA because, among other things, it does not conform

with the SGL. In addition, the IG reported that the feeder systems–which

include information such as billing, purchases, and real and personal

property activities–are poorly documented, operationally complex,

deficient in appropriate control processes, and costly to maintain.

In order to help address these systems problems, on December 23, 1994,

the Office of the Chief Financial Officer (OCFO) purchased a new

accounting system, the Foundation Financial Information System (FFIS),

with the goal of replacing the old accounting system USDA-wide. But

while USDA has implemented the new system in several component

agencies, it has experienced delays in agencywide implementation. The

agency plans to complete implementation of the system USDA-wide by

October 1, 2002. Meanwhile, USDA’s CFO has agreed with the IG’s

recommendation to develop a long-range plan to consolidate, integrate,

and/or reengineer the feeder systems.

USDA’s fiscal year 1999 audit was conducted by the Office of Inspector

General. We reviewed the IG’s workpapers between January and February

2000. We shared a draft of this statement with USDA officials, who

provided us some clarifying comments. We have incorporated their

comments where appropriate. Our work was conducted in accordance

with generally accepted government auditing standards.

Prior to the implementation of the Federal Credit Reform Act (FCRA) of

1990, credit programs—like most other federal programs—were reported

in the budget on a cash basis. Thus, loan guarantees appeared to be free in

the budget year, while direct loans appeared to be as expensive as grants.

As a result, costs were distorted and credit programs could not be

compared meaningfully with other programs and with each other. FCRA

and the related accounting standard, together known as credit reform,

were enacted to more accurately measure the government’s costs of

federal loan programs and to permit better comparisons both among

credit programs and between credit and noncredit programs. As part of

Barriers to

Implementing Credit

Reform
Page 4 GAO/T-AIMD-00-115

implementing credit reform, agencies are required to estimate the net cost

of extending credit, generally referred to as subsidy costs, based on the

present value3 of estimated net cash flows, excluding administrative costs.

Since 1994,4 the IG has reported material weaknesses in the processes and

procedures used by USDA’s lending agencies to estimate and reestimate

loan subsidy costs. In January 1999, we reported5 that the agency was

unable to make reasonable estimates of the cost of its loan programs

because it did not maintain key historical data needed as a basis to

estimate future cash flows and that USDA’s computer systems were not

configured to capture the data needed to make the estimates. The USDA

CFO established a task force in March 1999 to assist in resolving the

agency’s credit reform problems. To date, USDA has not provided the

resources needed to properly address this problem. As a result, progress

has been slow.

Since USDA is the largest direct lender in the federal government and the

amount involved is material, the agency’s inability to properly implement

credit reform will continue to contribute to our inability to give an opinion

on the consolidated financial statements of the U.S. government.

Additionally, for most of USDA’s credit programs, cost estimates based on

unreliable data can affect the availability of credit programs to potential

borrowers because changes in these estimates can affect the number and

amount of loans and guarantees which can be made.

Because loan program cost estimates are based on estimated cash flows,

agencies have to be able to predict borrower behavior–how many

borrowers will pay early, pay late, or default on their loans, and at what

point in time. Generally, the best predictor of borrower behavior is prior

historical data adjusted for expected changes in future economic events.

Agencies use this historical information and sophisticated computer

models, known as cash flow models, to estimate the cost of a loan

program. USDA has not been able to make reasonable financial statement

cost estimates for its loan programs because it does not maintain some of

3Present value is the worth of a future stream of returns or costs in terms of money paid immediately. In

calculating present value, prevailing interest rates provide the basis for converting future amounts into their

“money now” equivalents.

41994 was the first year in which agencies were to apply credit reform in their financial reporting, following

FASAB’s publication of SFFAS No. 2 in July 1993.

5Credit Reform: Key Credit Agencies Had Difficulty Making Reasonable Loan Program Cost Estimates

(GAO/AIMD-99-31, January 29, 1999).

USDA Lacks Adequate

Systems and Historical

Data to Reasonably

Estimate the Cost of Its

Credit Programs
Page 5 GAO/T-AIMD-00-115

the key historical data needed to predict borrower behavior. This problem

also raises questions about the quality of the budget data related to

USDA’s loan programs since the accounting data underlying credit reform

is generally derived from the same sources as the related budget data.

Because USDA lacks historical information, it bases some of its

predictions of borrower behavior, such as the amount and timing of future

defaults and prepayments, primarily on the opinion of program managers.

While program management opinion may be used when a new or unique

program is established, it should only be an interim method and does not

provide the reliable basis for estimating borrower behavior that historical

data adjusted for changes in future economic events does. Further,

program manager opinion, when used, should be compared to actual cash

flow data to corroborate the reasonableness of management’s judgement.

However, USDA does not routinely perform these comparisons.

The lack of historical data is largely the result of system inadequacies.

Prior to the implementation of credit reform, USDA systems did not track

certain key cash flow data that are critical to estimating the cost of a loan

program. For example, because USDA’s systems were incapable of

accumulating summary level information on when borrowers had paid

their loans early, the agency’s ability to calculate reasonable estimates of

future borrower early payments was limited. In addition, some of the key

cash flow data in the system are suspect. For example, USDA’s system for

reporting some of its non-housing direct loans contains inaccurate data on

the number of payments borrowers make each year. As a result, the

agency cannot reasonably estimate the amount of cash that should be

received annually from borrowers using these data.

USDA has made limited progress in addressing the deficiencies related to

reasonably estimating the cost of its loan programs. The primary reason

for the limited progress has been a shortage of resources, both staff and

funds, to properly address the problem. USDA developed an action plan to

address deficiencies in estimating the cost of its loan programs and

established a task force that comprises representatives from budget,

program, accounting, and IG offices to assist in resolving the agency’s

credit reform problem. We have provided extensive guidance and

consultation to this task force, and in December 1999, we briefed the

USDA Executive Steering Committee for Credit Reform Implementation6

6The Steering Committee includes the Chief Financial Officer, Rural Development Deputy Under Secretary for

Operations and Management, Farm Service Agency Administrator, and Assistant Inspector General for Audit.

USDA Has Not Allocated

the Resources Needed to

Correct Credit Reform

Issues
Page 6 GAO/T-AIMD-00-115

on the progress that the task force had made during the year, highlighting

the large amount of work that remained to be done.

USDA recognizes the need to hire additional qualified staff to help make

reasonable estimates of its loan program costs. During 1999, two budget

staff and one budget assistant were internally reassigned to work in this

area. In addition, in May 1999, the agency started the lengthy process to

hire additional staff. To date, one additional person has been hired.

However, none of these people work full time on addressing the problems.

Instead, these staff, as well as other staff in the finance office, attempt to

resolve the complex problems associated with credit reform while

performing other duties.

In April and June 1999, we met with the Steering Committee and discussed

how other agencies had successfully used outside contractors to help

estimate the cost of their credit programs. Specifically, these agencies had

used contractors to help gather adequate historical data, establish a

reliable basis for cash flow estimates, and improve the agencies’ cash flow

models. USDA obtained limited funding late in fiscal year 1999 to contract

with an independent public accounting firm to assess loan accounting

systems data availability related to its direct loan housing programs.

This is just one of several steps that remain to be completed before the

agency will be able to make reasonable estimates of loan program costs.

Other significant tasks that have yet to be completed include developing

and implementing new cash flow models for USDA’s direct loan housing

program and its guaranteed loan programs, comparing estimated loan

performance to historical cash flow data to determine whether the

estimates reasonably predicted borrower behavior, testing key cash flow

data maintained in the systems to determine whether they accurately

reflect loan file contents, and completing efforts to document policies and

procedures for estimating the cost of its loan programs.

Despite the lack of adequate historical data and adequate resources

dedicated exclusively to resolving these long-standing deficiencies, some

progress has been made. For example, sensitivity analysis has been done

for some agency programs to identify the key cash flow assumptions that

have the greatest impact on the loan program cost estimates. These

assumptions include the average interest rate borrowers pay and the

number of payments borrowers make each year. Further, USDA loan

program regulatory and legislative requirements have been summarized

and compared to some of the cash flow models to ensure that the models

address all aspects of the agency’s credit programs. In addition, some of

the cash flow models have been reviewed, and formula and logic errors
Page 7 GAO/T-AIMD-00-115

have been identified and corrected. Preliminary efforts are also underway

to assess the quality of the data that are used to predict loan program

performance. However, without a significant increase in resources

dedicated to resolving this problem, measurable progress will continue to

be slow.

USDA is the largest direct federal lender, with reported credit program

receivables of about $70.7 billion as of September 30, 1999. As these loans

are significant to the federal government’s financial statements, USDA’s

inability to make reasonable cost estimates for its loan programs will

continue to contribute to our inability to give an opinion on the

consolidated financial statements of the U. S. government. This problem

also raises questions about the quality of the budget data related to

USDA’s loan programs since the accounting data under credit reform

generally mirror the related budget data. This “mirroring” provides the

opportunity to improve the integrity of the budget estimates through the

financial statement audit. However, USDA has not yet seized this

opportunity.

Providing reasonable credit program cost estimates based on reliable data

is critical to effective program stewardship and accountability. For most of

USDA’s credit programs, unreliable information can affect the availability

of credit programs to potential borrowers because changes in cost

estimates can affect the number and amount of loans and guarantees

available. For example, if the agency initially underestimates the cost of a

loan program, it will spend more than expected over time to provide the

amount of loans it told the Congress could be made for the initial cost. On

the other hand, if USDA initially overestimates a loan program’s cost, less

credit would likely be made available to borrowers than if the cost of the

program had been better estimated. Therefore, until USDA is able to

provide reasonable estimates, the Congress does not have valid cost data

on which to base its decisions about whether to expand or scale back the

agency’s loan programs.

USDA records its budget authority in asset accounts called Fund Balance

with Treasury and increases or decreases these accounts as it collects or

disburses funds. The Inspector General was unable to fully substantiate

the Fund Balance accounts with the U. S. Treasury, which totaled over

$38 billion as of September 30, 1999, because the agency had not

reconciled the balance with the amount reported by Treasury. Prior to

May 1999, USDA merely adjusted its records to agree with Treasury’s

without determining which, if either, number was correct, and did not

USDA Credit Reform

Issues Impact Budget

Estimates and

Consolidated Financial

Statements Opinion

USDA Is Unable to

Reconcile Fund

Balance With Treasury

Accounts
Page 8 GAO/T-AIMD-00-115

establish or analyze the causes of the differences between its and

Treasury’s records before reporting its ending balance to Treasury. Since

May 1999, USDA discontinued adjusting its records to agree with

Treasury’s records and began disclosing any differences in its reports to

Treasury. Because most assets, liabilities, revenues, and expenses stem

from or result in cash transactions, errors in the receipt or disbursement

data affect the accuracy of various USDA financial reports, including

certain data concerning fiscal year 1999 obligations and outlays that USDA

provided for inclusion in the President’s Budget.

The Office of the Inspector General first identified unreconciled

differences between USDA and Treasury records in its fiscal year 1992

audit. According to the IG, differences in some instances have gone

uncorrected for more than 10 years. In May 1999, USDA established a goal

of reconciling differences within 120 days after Treasury notified USDA of

discrepancies between USDA and Treasury records. However, USDA has

not been able to meet this goal to date. As of September 30, 1999, the IG

reported the unreconciled amount was about $5 billion. Unreconciled

amounts continue to occur because of, among other things, timing

differences, missing documentation, input errors, and the inability of

USDA feeder systems to properly transfer data to the accounting system

and/or the accounting system’s inability to record transactions in the

correct general ledger accounts.

USDA formed a task force consisting primarily of members representing

the Forest Service, the National Finance Center (NFC), USDA’s Office of

the Chief Financial Officer, and an outside consultant—

PricewaterhouseCoopers LLP—to resolve outstanding differences and

develop procedures that will prevent this problem from recurring in the

future. In addition, we and the IG have monitored this effort for the past 6

months. The task force anticipates that the reconciliations and

implementation of procedures to prevent this problem from recurring will

be completed by March 31, 2000, a date we consider to be optimistic. Until

this problem is corrected, the integrity of much of USDA’s financial data is

questionable.

The Forest Service is a major USDA component agency. It accounts for a

substantial portion of USDA’s general property, plant, and equipment and

almost all of USDA’s stewardship land. As of September 30, 1999, the

Forest Service reported $3.1 billion of general property, plant, and

equipment—82 percent of USDA’s total—and 192 million acres of national

forest land and grasslands that the Forest Service holds in stewardship for

current and future generations.

Status of Forest

Service Efforts to

Achieve Financial

Accountability
Page 9 GAO/T-AIMD-00-115

Since the first audit of the Forest Service’s financial statements, which

covered fiscal year 1991, USDA’s IG has found serious accounting and

financial reporting weaknesses, some of which continue to exist today.

For example, while the Forest Service implemented its new accounting

system agencywide on October 1, 1999, as scheduled, the system is

supported by feeder systems that the IG has described as, among other

things, deficient in appropriate control processes and costly to maintain.

Furthermore, the independence afforded by the agency’s autonomous field

structure has hampered efforts to correct accounting and financial

reporting weaknesses. These shortcomings mean that the agency and the

Congress do not have accurate financial data to track the cost of programs

and activities and to help make informed decisions about future funding.

They also raise questions about the accuracy of program performance

measures and of certain budget data drawn from the same database.

The Forest Service has completed several actions and begun others that, if

successfully carried through, represent important steps toward achieving

financial accountability. Nevertheless, as we testified before your

Subcommittee in July 1998,7 major barriers remain, and the Forest Service

may need several years to achieve financial accountability. Therefore, in

January 1999, we designated the Forest Service’s financial management as

a high-risk area because of the serious and long-standing accounting and

financial reporting weaknesses plaguing its operations. Because of this

high-risk designation, we will give sustained attention to monitoring the

Forest Service’s efforts to achieve financial accountability.

The Forest Service implemented USDA’s new accounting system on

October 1, 1999, as scheduled. Previously, the IG, an outside consultant,

and we have reported problems the agency encountered attempting to

implement the system at the Forest Service. For example, in October 1998

we reported that (1) the agency had not fully tested the system before

attempting to implement it, (2) the agency had encountered problems with

the system transferring data to other systems, and (3) the overall

implementation project lacked adequate oversight and management

control. USDA developed a strategic plan to address reported problems,

and established a project management office that had only one objective—

developing and carrying out the strategic plan for implementing the new

system departmentwide.

7Forest Service: Financial Management Issues (GAO/T-AIMD-98-230, July 7, 1998).

New Accounting System

Implemented
Page 10 GAO/T-AIMD-00-115

Despite some start-up problems, such as rejected transactions and system

downtime, Forest Service staff are now entering fiscal year 2000

transactions into the system. However, the new accounting system

depends on and receives data from feeder systems that the IG and the

Logistics Management Institute—a consultant for USDA—have

characterized as seriously deficient. Specifically, the IG reported that

these feeder systems—which process and transfer information such as

credit card, personal property, and travel transactions into the new

accounting system–are poorly documented, operationally complex,

deficient in appropriate control processes, and costly to maintain. The IG

has also concluded that these feeder systems reduce assurance that the

new system will be able to provide timely, accurate, reliable, and

consistent financial information. USDA has agreed with the IG’s

recommendation to develop a long-range plan to consolidate, integrate,

and/or reengineer the feeder systems.

The Inspector General’s February 2000 audit report on the Forest Service’s

fiscal year 1999 financial statements—a disclaimer of opinion—shows that

the agency remains unable to reliably track and report on major assets

worth billions of dollars. For example, the IG found several reporting

errors in the Forest Service’s supporting accounting records for its

$1.1 billion of individual real property assets, such as buildings, recreation

sites, dams, and utility systems. In addition, the IG reported that the Forest

Service’s portion of the USDA Fund Balance with Treasury account could

not be verified because the reconciliation of this account had not been

completed. This account, which is similar in nature to a checking account

with the U. S. Treasury, contained $2.6 billion as of September 30, 1999.8

In addition, the Forest Service has over $100 million in unsupported

balances remaining from its old accounting system. These unsupported

balances resulted largely from the Forest Service’s use for some 20 years

of an accounting system that did not meet basic federal requirements. The

Forest Service faces a major effort in trying to (1) document and validate

these balances so they can be converted to the new system or (2) reach

agreement with the IG on a policy for resolving the remaining amounts.

8As previously stated, a USDA-wide task force was established to correct the weaknesses associated with the

Fund Balance with Treasury account.

Accounting and Reporting

Deficiencies Remain
Page 11 GAO/T-AIMD-00-115

In our February 1998 report,9 we stated that the Forest Service’s

autonomous organization may hinder top management’s ability to gain the

full participation of all regional fiscal directors in efforts to achieve

financial accountability. An independent contractor’s report issued in

March 1998, which addressed financial management and organizational

analysis at the Forest Service, also raised the issue of the agency’s

autonomous structure.10 Further, the contractor reported that whether the

subject is budget execution, financial plan development, or accounting for

reimbursable agreements, each unit operates independently.

The Forest Service restructured its national office management team in

April 1998 to create functional lines of accountability for fiscal

management by establishing a Chief Financial Officer position that reports

directly to the Chief Operating Officer of the Forest Service. A Forest

Service official told us in January 2000 that a decision about hiring chief

financial officers at the regional level will be made following completion of

a study of the Forest Service’s financial management field structure during

fiscal year 2000. The establishment of the Chief Financial Officer in the

national office addresses some of the concerns we have previously raised

regarding management structure. However, the key issue regarding the

Forest Service’s decentralized and autonomous field structure as it relates

to financial management remains unresolved.

Since 1990, we have periodically reported on government operations that

we have identified as high risk because of their greater vulnerabilities to

waste, fraud, abuse, and mismanagement. Our high-risk status report is

now provided at the start of each new Congress. We designated Forest

Service’s accounting and financial reporting in our latest, High-Risk Series:

An Update (January 1999, GAO/HR-99-1), because of the agency’s severe

weaknesses in this area.

In order to be removed from the list, the Forest Service will need to

demonstrate sustained financial accountability, which goes beyond

receiving an unqualified audit opinion. The Forest Service will also need to

address material internal control weaknesses that limit its ability to

maintain accountability over its assets on an ongoing basis. For example,

it needs to implement a system of controls to properly record, track, and

9Forest Service: Status of Progress Toward Financial Accountability (GAO/AIMD-98-84, Feb. 27, 1998).

10Modernizing Financial Management at the Forest Service–Financial Management & Organizational

Analysis, Coopers & Lybrand Consulting (March 18, 1998).

Current Field Structure

Hampers Accountability

High-Risk Designation
Page 12 GAO/T-AIMD-00-115

depreciate property and equipment from acquisition to disposition, which

is essential to properly safeguarding these assets.

In October 1999, we reported11 that the Forest Service had completed

several corrective actions and begun others that, if successfully carried

through, represent important steps toward achieving financial

accountability. To its credit, the Forest Service has achieved some major

accomplishments so far this fiscal year in addition to implementing the

new accounting system. Specifically, the Forest Service has accomplished

the following:

• made significant progress in completing its physical inventory of real and

personal property, as well as developing a methodology for valuing its

road assets;

• begun implementation of a new methodology for tracking and reporting

the cost of its operations;

• continued staffing its newly organized Office of Finance;

• received a final report, Financial Statement Risk Assessment, from its

consultant that assessed the relative audit risk of financial statement line

items, thereby enabling the Forest Service to prioritize its efforts and

develop a realistic time-line to achieve a clean opinion;

• developed a plan to study the Forest Service’s highly decentralized and

autonomous field office financial management structure; and

• finalized a long-range plan with goals and objectives, timeframes, and

measures for attaining financial accountability.

As these accomplishments demonstrate, the Forest Service has made

progress in addressing its financial management deficiencies and is on the

right track towards financial accountability. However, much work

remains, and sustained top management commitment is necessary to

ensure that progress continues.

11Forest Service: A Framework for Improving Accountability (GAO/AIMD-00-2, October 1999).

Corrective Measures Are

Underway
Page 13 GAO/T-AIMD-00-115

A strong internal control system provides the framework for the

accomplishment of management objectives, accurate financial reporting,

and compliance with laws and regulations. Effective internal controls

serve as checks and balances against undesired actions and, as such,

provide reasonable assurance that agencies operate in a safe and sound

manner. The lack of good internal controls puts an agency at risk of

mismanagement, waste, fraud, and abuse. Further, without strong internal

controls, an agency is unable to generate consistent, reliable financial

information needed to maintain accountability over its assets on an

ongoing basis.

At USDA, several persistent internal control weaknesses contributed to

the IG’s inability to form an opinion on the agency’s fiscal year 1999

consolidated financial statements. These weaknesses, as well as others

identified by the IG, are discussed below.

The IG has reported material internal control weaknesses related to Food

and Nutrition Service (FNS) food stamp recipient claims since fiscal year

1991. FNS relies on state agencies to administer the program and collect

and report on any overissuance of Food Stamp benefits. FNS has been

working with state agencies to put systems and procedures in place to

collect overissued Food Stamp benefits, which were estimated to total

$193 million12 as of September 30, 1999. However, as of July 1999, FNS

noted that only 21 of the 53 state agencies have claim systems that can

report accurate, complete, and supportable information on overissued

Food Stamp benefits and related collections. Thirty state agencies have

prepared corrective action plans to address reported deficiencies in their

systems and the remaining two have not prepared corrective actions plans.

FNS must continue to work with state agencies on implementing systems

and controls to properly identify and collect overissuances because

program funds are lost when claims are not established promptly and

pursued vigorously.

Since fiscal year 1997, the IG has reported that USDA’s financial systems

do not always process and report departmentwide financial information

accurately. The IG has reported that many of these systems are not fully

integrated with other USDA systems and do not fully comply with federal

12This amount represents USDA’s estimate of collectible overissued amounts. However, USDA statistically

projected that total overissuance of food stamps could have been as much as $1.3 billion for fiscal year 1998.

Material Internal

Control Weaknesses

Hamper

Accountability

Food Stamp Recipient

Claims

Financial Management

Systems
Page 14 GAO/T-AIMD-00-115

financial management systems requirements. Among the more serious

problems cited by the Inspector General were that USDA

• had a net difference of about $130 million between its accounting records

and the supporting personal property system;

• had a payroll system that contained data dating as far back as 1979 that

had not been properly analyzed; and

• lacked controls to ensure that transactions recorded in its old accounting

system were accurate and properly authorized.

It is critical that USDA correct these problems by implementing new or

revamped systems that are properly designed and implemented to

integrate budgetary and cost information with external reporting to

provide USDA with the capability to accurately track assets and identify

all costs associated with an activity.

The IG reported that material internal control problems exist in the

accountability and valuation of personal property at agency field offices,

headquarters, and the National Finance Center. For example, the IG noted

that about 60 percent of approximately 10,000 USDA accountable property

officers as of December 7, 1999, were either delinquent in performing

physical inventories or had never recorded that an inventory had been

taken. In addition, IG staff noted that documentation supporting the

purchase price of property was lacking, and numerous errors in the

property values were recorded in the system. For example, the staff found

a motor vehicle recorded in the system at over $97 million and a

microscope recorded in the system at $11 million. Until all counts are

taken and recorded in the accounting records, USDA does not fully know

what assets it has, where they are, and what they are worth. Further, the

Congress cannot be assured that USDA requests for additional funds to

purchase property and equipment are fully warranted.

The IG reported that tests of USDA’s computer network disclosed

significant security vulnerabilities that require immediate action.13 The IG

stated that USDA is vulnerable to abuse and losses because few of its

13We have also reported on USDA’s information security weaknesses at the National Finance Center (USDA

Information Security: Weaknesses at National Finance Center Increase Risk of Fraud, Misuse, and Improper

Disclosure (GAO/AIMD-99-227, July 30, 1999).

Accounting for Personal

Property

Information Technology

Security and Controls
Page 15 GAO/T-AIMD-00-115

component agencies comply with the departmental regulation that

requires that sensitive and Privacy Act data not be transmitted in clear text

over the Internet. In addition, USDA did not have a proactive network

monitoring and intrusion detection program. Such a program would

require component agencies to promptly identify and investigate unusual

or suspicious network activity, such as repeated failed attempts to log

onto the network; attempts to identify systems and services on the

network; connections to the network from unauthorized locations; and

efforts to disrupt operations by overloading the network. Without these

controls, USDA has little assurance that unauthorized access to systems

on its network would be detected in time to prevent or minimize damage.

Generally accepted government auditing standards require auditors to

report on whether or not agencies complied with laws and regulations

where instances of noncompliance could have a material impact on the

agency’s financial reporting. Instances of noncompliance include

situations in which an agency fails to follow a requirement of a law or

regulation or performs an act that is prohibited by a law or regulation. The

management of USDA is responsible for complying with laws and

regulations that are applicable to the agency. The IG reported some

instances in which USDA was noncompliant, including the following:

• The IG noted that some component agencies’ financial management

systems do not substantially comply with the three requirements of

FFMIA. The act requires agencies to implement and maintain financial

management systems that comply substantially with federal financial

management systems requirements, applicable federal accounting

standards, and the Standard General Ledger at the transaction level. USDA

has prepared a remediation plan that includes corrective actions that are

scheduled to be completed no later than September 2003.

• The IG noted that USDA’s lending agencies are not in full compliance with

some of the provisions of the Debt Collection Improvement Act. The

purpose of the act is to maximize collections of federal non-tax debt by

directing actions towards debtors with the ability to pay and to minimize

the costs of debt collection by consolidating related functions and

activities. The IG found that the National Finance Center did not refer debt

that was delinquent over 180 days to Treasury for cross-servicing. The

Center did not forward the debt because it was waiting for notification

from Treasury as to whether it would be designated as a debt collection

center. In January 2000, the Center was notified that it would not be

designated a debt collection center. Therefore, it plans to begin referring

delinquent debt to Treasury later this year.

USDA Does Not Fully

Comply With All Key

Laws and Regulations
Page 16 GAO/T-AIMD-00-115

• The IG also concluded that USDA has not fully addressed two problems

related to compliance with the CFO Act. Specifically, the agency has not

implemented a fully integrated financial information system. The current

system relies on data from various program and administrative systems

throughout the agency in order to prepare USDA’s consolidated financial

statements. In addition, USDA has not (1) conducted required biennial

reviews of the fees, royalties, and other charges imposed by USDA

agencies for services and (2) made recommendations on revising those

charges to reflect costs incurred by the agencies in providing those

services as required by the CFO Act. The IG noted that one agency did not

update its user fees for its inspection services for fiscal year 1998 and part

of fiscal year 1999. As a result, the agency did not bill for millions of

dollars that it was entitled to receive because the fees were not adjusted

for salary increases and inflation factors.

RUS provides direct loans or loan guarantees primarily to rural electric

cooperatives that market power on a wholesale and retail basis. As of

September 30, 1999, RUS’ entire portfolio of loans–including direct and

guaranteed electricity, telecommunications, and water and waste disposal

loans–totaled about $35 billion of the $70.7 billion of USDA’s net credit

program receivables. Of the $35 billion in RUS loans, $25 billion (or 71

percent) consisted of electric loans.

Most RUS borrowers are either generation and transmission (G&T)

cooperatives or distribution cooperatives. A G&T cooperative is a

nonprofit rural electric system whose chief function is to produce and sell

electric power on a wholesale basis to its owners, who consist of

distribution cooperatives and other G&T cooperatives. A distribution

cooperative sells the electricity it buys from a G&T cooperative to its

owners, the retail consumers.

Most RUS direct loans and loan guarantees were made during the late

1970s and early 1980s. For example, from fiscal years 1979 through 1983,

RUS approved direct loans and loan guarantees of about $29 billion,

whereas during fiscal years 1992 through 1999, it approved a total of about

$5 billion in direct loans and loan guarantees. During the late 1970s and

early 1980s, RUS provided financing for several G&Ts that had invested in

the construction of large nuclear-generating and coal-fired generating

power plants. Several of these plants were completed late and over

budget. In addition, an expected increase in demand for electric power did

not materialize. As a result, several of these G&Ts became financially

troubled and could not meet their debt-servicing requirements. In turn, the

federal government incurred several billion dollars in loan losses.

Rural Utilities Service

Electric Loan

Portfolio Issues
Page 17 GAO/T-AIMD-00-115

As we previously testified before this Subcommittee,14 RUS has had, and

continues to have, significant financial problems with the electric loan

portfolio. For example, from fiscal year 1992 through July 31, 1997, RUS

wrote off about $1.5 billion of loans to four rural electric cooperatives. The

most significant write-offs relate to two G&T loans. In fiscal year 1996, one

G&T made a lump sum payment of $237 million in exchange for RUS

writing off and forgiving the remaining $982 million of its RUS loan

balance. In fiscal year 1997, another G&T borrower made a lump sum

payment of approximately $238.5 million in exchange for write-off and

forgiveness of its remaining $502 million loan balance. Since 1997, the

agency has written off an additional $330 million of loans to two rural

electric cooperatives and is in the process of writing off an additional

$3 billion of the total $4.1 billion in loans owed by Cajun Electric, a RUS

borrower that has been in bankruptcy since December 1994. Cajun

Electric filed for bankruptcy protection after the Louisiana Public Service

Commission disapproved a requested rate increase and instead lowered

rates to a level that reduced the amount of revenues available to Cajun to

make annual debt service payments. In addition to these past and

anticipated write-offs, we have reported15 that it is probable that the

agency will continue to incur losses in the future.

In our February 2000 report on RUS’ loan origination policies and

procedures for making G&T loans to electric cooperatives,16 we noted that

RUS’ loan origination policies are reasonably designed to mitigate future

loan losses to the government and are generally consistent with banking

industry standards. However, RUS lacks implementing procedures in

certain key areas to carry out its policies for determining whether to make

G&T loans. Specifically, RUS does not have implementing procedures to

(1) assess some of the primary documents which must be prepared by the

borrower to support the loan application and (2) document its loan

assessment and recommendation that a loan be approved. Because RUS

lacks implementing procedures to carry out its G&T loan origination

policies in certain key areas, misinterpretation and/or inconsistent

implementation of the loan origination policies could occur. In order to

ensure consistent implementation of G&T loan origination policies, we

recommended17 that the Secretary of Agriculture direct the Acting

14Rural Utilities Service: Risk Assessment for the Electric Loan Portfolio, (GAO/T-AIMD-98-123, March 30,

1998).

15Rural Utilities Service: Status of Electric Loan Portfolio (GAO/AIMD-99-264R, August 17, 1999).

16Rural Utilities Service: Loan Origination Policies and Procedures for Generation and Transmission Loans,

(GAO/AIMD-00-89R, February 10, 2000).

17See footnote 16.
Page 18 GAO/T-AIMD-00-115

Administrator of RUS to develop and document written procedures for the

two areas mentioned above. Agency officials have agreed with our

recommendation.

In conclusion, USDA is a large, complex agency with many difficult issues

to address before it can be accountable to you, the Congress, and

taxpayers for the money provided to carry out its varied missions. Many of

the problems are deep rooted and will take time, sustained top

management commitment, and substantial resources to correct. Therefore,

continued congressional oversight, such as this hearing, are essential to

help ensure that USDA focuses adequate attention on resolving its

financial management deficiencies.

Mr. Chairman, this concludes my statement. I would be happy to answer

any questions you or other Members of the Subcommittee may have.

For information about this statement, please contact Linda M. Calbom at

(202) 512-9508. Individuals making key contributions to this statement

included Dan Blair, Carla Lewis, Kelley Quinn, McCoy Williams, and Maria

Zacharias.

(913895)

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