U.S. TREASURY

Government at the Brink

Volume II.

An Agency by Agency

Examination of

Federal Government

Management Problems

Facing the Bush

Administration

Senator Fred Thompson

Committee on

Governmental Affairs

United States Senate

Washington, DC

June, 2001
i.

Table of Contents Volume II.

I. Department of Agriculture ................................................................................................................ 1

II. Department of Commerce................................................................................................................ 9

III. Department of Defense ................................................................................................................. 15

IV. Department of Education .............................................................................................................. 24

V. Department of Energy .................................................................................................................... 30

VI. Federal Emergency Management Agency.................................................................................... 40

VII. Department of Health And Human Services............................................................................... 46

VIII. Department of Housing and Urban Development ..................................................................... 55

IX. Department of the Interior ............................................................................................................ 62

X. Department of Justice .................................................................................................................... 69

XI. Department of Labor .................................................................................................................... 77

XII. National Aeronautics and Space Administration (NASA).......................................................... 86

XIII. Small Business Administration.................................................................................................. 92

XIV. Department of State ................................................................................................................... 98

XV. Department of Transportation ................................................................................................... 105

XVI. Department of the Treasury ..................................................................................................... 113

Internal Revenue Service (IRS) ........................................................................................................ 119

XVII. Department of Veterans Affairs.............................................................................................. 125
1

 Testimony before the Senate Agriculture Committee’s Subcommittee on Research, Nutrition, and General

Legislation (September 27, 2000).

2

 GAO lists eight such problems in its report, “Major Management Challenges and Program Risks:

Department of Agriculture,” GAO-01-242 (January 2001). The IG lists many of the same problems in its report,

Department of Agriculture, Office of Inspector General, “Top Ten Management Challenges for the Department of

Agriculture” (December 4, 2000). 

I. Department of Agriculture

[T]he Department, as a whole, does not know whether it correctly reported

monies to be collected in total, how much money is collected, the cost of its

operations, or any other meaningful measure of financial performance.

Our annual financial statement audits, which we have performed since 1991,

have disclosed only a limited correlation between the accounting numbers the

Department reports and the resources or events those numbers are to represent.

Roger C. Viadero 

Inspector General

U.S. Department of Agriculture1

The U.S. Department of Agriculture is one of the largest federal agencies, employing over

110,000 people and managing a budget of over $65 billion. Its 29 sub-agencies and offices are

responsible for operating over 200 programs that support the profitability and productivity of

farming, protect the environment, ensure food safety, improve the well-being of rural America,

promote domestic marketing and the export of farm products, conduct agricultural research, and

provide food assistance to needy Americans.

Repeated studies by both the GAO and the Agriculture Department’s own IG have documented

over 15 core management problems that plague the Department.2 Two of the

problems—information security and Forest Service financial management—are on GAO’s “highrisk list” of those federal activities that are most vulnerable to fraud, waste, abuse, and

mismanagement. 

The following is a brief description of eight of the most serious core management problems at the

Agriculture Department. These problems are:

C Weak oversight of federal crop insurance programs;

C Food stamp fraud and error;

C Abuses in the Child and Adult Care Food Program;

C Fragmented food safety programs;

C Rural rental housing fraud and abuse;

C Delays in handling civil rights complaints;

C Financial mismanagement; and

C Poor use of information technology. 
3

 Department of Agriculture, Office of Inspector General, “Semiannual Report to the Congress”

(September 30, 2000), p. 17. 

4

 General Accounting Office, “Food Stamp Program: States Seek to Reduce Payment Errors and Program

Complexity,” GAO-01-272 (January 2001). 

5Department of Agriculture, Office of Inspector General, “Operation Talon: October 2000 Update.”

2

Federal Crop Insurance

Crop insurance is the farmer’s “safety net.” In late 1999 and in 2000, Congress provided about

$28 billion for agricultural programs including crop loss payments, tobacco payments, oilseed

payments, livestock assistance, and dairy assistance. These programs need stronger oversight. 

IG audits show continuing conflict-of-interest problems that involve policyholders, sales agents,

loss adjustors, and insurance companies' employees. Weaknesses in verification of losses by

adjustors have resulted in insurance overpayments and other program abuses. For example: 

• A husband and wife were convicted on almost 50 charges, ranging from conspiracy to

mail fraud to making false statements to obtain Agriculture Department program

payments. Over a ten year period, the couple wrongfully received over one million

dollars under various crop insurance programs.3

Food Stamp Program

The Food Stamp Program, which is administered by the states, helps put food on the table of

some 7.6 million households and 18.2 million individuals each day. It provides low-income

households with coupons or electronic benefits they can use like cash at participating grocery

stores to ensure that they have access to healthy food. Unfortunately, the program is highly

vulnerable to fraud and error. Many ineligible recipients and retailers participate in the program,

and controls to identify payments to disqualified retailers are in danger of becoming ineffective. 

Also, states continue to claim administrative costs that should not be reimbursed by the

Agriculture Department. A few examples of fraud, waste, and abuse are listed below:

• In fiscal year 1999, an estimated $1.1 billion was erroneously paid in food stamp benefits

to ineligible recipients while eligible food recipients were underpaid by $450 million. 

Together, these errors of about $1.5 billion amounted to nearly 10 percent of the total

food stamp budget.4

• Since 1997, law enforcement authorities have arrested 6,733 fugitives who were illegally

receiving food stamps. They include 1,500 accused drug offenders, 31 murderers, 45 sex

offenders and child molesters, and hundreds wanted for assault or robbery.5

• Thousands of prisoners and deceased persons have been included as members of
6

 General Accounting Office, “Major Management Challenges and Program Risks: Department of

Agriculture,” GAO/OCG-99-2 (January 1999).

7

 Department of Agriculture, Office of Inspector General, “Semiannual Report to the Congress”

(September 30, 2000), p. 20.

8

 Department of Agriculture, Office of Inspector General, “Top Ten Management Challenges for the

Department of Agriculture” (December 4, 2000), Enclosure, p. 4.

9

 Department of Agriculture, Office of Inspector General, “Semiannual Report to the Congress”

(September 30, 2000), p. 22.

10 Department of Agriculture, Office of Inspector General, “Mother and Daughter Plead Guilty to

Embezzling Child Care Funds,” News Release (May 8, 2000). 

3

households receiving food stamps.6

• IG investigations have uncovered numerous cases of food stamp trafficking or fraudulent

receipt of food stamps by ineligible persons. The co-owner of a New York City grocery

store laundered $1.3 million worth of trafficked food stamps through his store. A bar

employee with a history of narcotics violations exchanged cocaine for food stamps,

becoming one of 17 street traffickers found to have purchased over $269,000 in food

stamps from undercover officers and then selling them to authorized food retailers in

Seattle. Twenty-four Southern California grocery stores engaged in an estimated $50

million worth of food stamp fraud between 1994 and 1997.7

Child and Adult Care Food Program

The Child and Adult Care Food Program reimburses day care providers for meals served to

people in their care. The program is administered by state agencies through sponsor

organizations that act as a link between the state agencies and day care providers. In fiscal year

1999, day care providers served 2.6 million participants at a cost of $1.6 billion. Audits of

program sponsor organizations have uncovered a widespread breakdown of controls. An

investigative effort named “Operation Kiddie Care” identified 47 sponsors with deficiencies

serious enough to warrant termination from the program. These 47 sponsors had been receiving

approximately $82.7 million annually in food and administrative funds.8 For example:

• A Georgia program sponsor was terminated from the program for inflating meal counts

and creating fictitious child participants in the program.9

• Two New York women pled guilty in federal district court to embezzling $75,000 from

the program. The pair, who were directors of a meal service for day care centers,

transferred program funds into their personal bank accounts. They used the money for

personal expenses, including a Hawaiian vacation, jewelry, clothing and gifts.10
11 Letter from Roger Viadero, Inspector General, Department of Agriculture, to Senator Fred Thompson, 

December 4, 2000, Enclosure, p. 4-5.

12 General Accounting Office, “Major Management Challenges and Program Risks: Department of

Agriculture,” GAO-01-242 (January 2001). 

13 Ibid. 

4

Food Safety

The Agriculture Department is responsible for the safety of meat, poultry, and some egg

products. It is estimated that unsafe foods cause as many as 76 million illnesses, 325,000

hospitalizations, and 5,000 deaths in the United States each year. They cost up to $37 billion

annually in medical expenses and productivity losses. According to the IG, the Department

needs to improve in four areas: (1) implementation of new pathogen reduction and inspection

systems; (2) compliance and district enforcement activities; (3) laboratory testing of meat and

poultry products; and (4) inspection of imported meat and poultry products. There also is a

critical need to ensure that criminal activity is identified and halted in cases involving the

intentional contamination of food products consumed by the public; the processing and sale of

adulterated meat, poultry, and egg products; and the substitution, adulteration, or other

misrepresentation of food products.11

According to GAO, the most serious food safety challenge is fragmented jurisdiction among

federal agencies. As many as 12 different federal agencies administer over 35 different food

safety laws. For example, the Agriculture Department inspects meat pizzas while the Food and

Drug Administration, which is part of the Department of Health and Human Services, inspects

non-meat pizzas. They also have completely different ways of conducting inspections. The

Agriculture Department inspects plants under its jurisdiction once a day, while the Food and

Drug Administration inspects its plants an average of once every 5 years.12 Among the more

serious problems are the following:

• More than one-fourth of the over $1 billion annual federal food safety budget could be

used more effectively if the statutory requirement for carcass-by-carcass slaughter

inspections was eliminated. These inspections don’t detect the most serious health threats

and the resources they require could be applied to higher priority safety needs.13

• The Agriculture Department has reduced its oversight of meat and poultry plants below

what is prudent and necessary to protect consumers. For example, it does not require

plants to provide its inspectors with positive environmental microbial tests results, even

though these tests could indicate sanitary deficiencies at the plants. It does not adequately

track deficiency notices or require corrective action. One plant did not respond to a

deficiency notice for over 4 months. Some plants had repetitive deficiencies. One had

102 deficiency notices, one-third of which involved the same non-compliance concerning
14 Department of Agriculture, Office of Inspector General, “Food Safety and Inspection Service:

Implementation of the Hazard Analysis and Critical Control Point System,” 24001-3-At (June 2000). 

15 Department of Agriculture, Office of Inspector General, “Food Safety and Inspection Service: Imported

Meat and Poultry Inspection Process Phase 1,” 24099-03-Hy (June 2000). 

16 Department of Agriculture, Office of Inspector General, “Semiannual Report to the Congress”

(September 30, 2000), p. 25. 

17 Department of Agriculture, Office of Inspector General, “Semiannual Report to the Congress” (March

2000), p. 26. 

5

fecal matter.14

• The Department is responsible for ensuring that imported meat and poultry are safe and

wholesome. It does this by determining whether foreign countries have food safety

systems equivalent to ours (“equivalency determinations”) and by spot-checking imports. 

However, control weaknesses affect all areas of the import inspection program. 

Requirements for annual certifications and residue test plans go unenforced; the eligibility

status of importers is not kept current; and equivalency determinations are not based on

adequate analysis and support.15

Rural Rental Housing

The Rural Rental Housing Program provides low-cost apartments to people with low incomes in

rural areas. In FY 2000, the government provided approximately $640 million in rental

assistance and interest credit subsidies for tenants residing in apartment complexes. The

Agriculture Department currently has over $12 billion invested in the program’s properties

through its outstanding loans, even though the program is highly vulnerable to fraud and abuse. 

• An IG review of 11 farm labor housing projects in California, Florida, and Washington

identified $475,000 in improper costs charged by the borrowers and other overpayments.

In Washington, the IG found that one housing authority overcharged its three projects

almost $397,000 in management fees between 1996-1998.16 In California, a regional

manager of a Rural Rental Housing complex was convicted of conspiracy to defraud the

government by using project funds for personal use, paying dummy companies for

landscaping never carried out, stealing money from coin-operated laundries at Program

facilities, and taking kickbacks from contractors at the complexes.17

Civil Rights Complaints

The Office of Civil Rights is responsible for handling complaints of discrimination arising out of

Agriculture Department employment activities and federally-assisted or federally-conducted

programs. The Department needs to reengineer its complaint resolution process to deal with its

ongoing problems. Among other issues, the Office needs to eliminate the backlog of civil rights
18 Roger C. Viadero, Inspector General, Department of Agriculture, Testimony before the Senate

Committee on Agriculture, Nutrition, and Forestry (September 12, 2000).

19 Department of Agriculture, Office of Inspector General, “Office of Civil Rights Status of the

Implementation of Recommendations Made in Prior Evaluations of Program Complaints,” 60801-4-HQ (March 10,

2000).

20 Department of Agriculture, Office of Inspector General, “Report on the Department’s Consolidated

Financial Statements for Fiscal Year 2000” (February 2001).

6

program complaints and explain how it computes damage awards and attorney fees. The

database for the number and status of equal employment opportunity complaints is inaccurate

and underutilized, and the case files are poorly maintained. These inefficiencies, along with the

inability to meet time lines set by the Equal Employment Opportunity Commission, are

attributable to the Office’s constant reorganization and lack of employee accountability.

• The Inspector General calls the Department’s Office of Civil Rights “a portrait of a

dysfunctional agency.”18 Based on the findings of a recent audit and on the Office’s poor

record of responding to recommendations from six prior audits, the IG stated, “it is

difficult to recognize any significant level of progress.”19

Financial Management

Becasue its financial management is so deficient, the Department can’t ensure that its financial

statements are reliable and presented in accordance with generally accepted accounting

principles. The IG’s “disclaimer of opinion” on the Department’s annual financial statements for

the past seven years means that the Department can’t accurately account for or manage its assets

of over $124 billion or its program costs of over $84 billion. For example, the IG has been

unable to substantiate the Department’s fund balance with Treasury, reported at over $38 billion.

The Department cannot even provide assurance that its financial management systems comply

with statutory requirements. 

A big part of the problem is that the Department operates under at least 66 different financial

management systems. The IG states that the Central Accounting System, one of the Agriculture

Department’s most critical financial management systems, “does not work and cannot be fixed.” 

Financial management at the Agriculture Department’s Forest Service is on the GAO “high-risk

list” of federal operations most vulnerable to fraud, waste, and abuse. The results of these

problems show up repeatedly in the annual audits of the Department’s financial statements: 

• For fiscal year 2000—the seventh straight year—the Agriculture Department failed its

annual financial audit. For the ninth straight year, the Department’s financial systems

failed to comply with basic accounting standards and principles. These pervasive

problems stem primarily from the lack of oversight and planning at the Department’s

leadership levels.20
21 Roger C. Viadero, Inspector General, Department of Agriculture, Statement before the House

Subcommittee on Government Management, Information, and Technology (March 21, 2000). 

22 Roger C. Viadero, Inspector General, Department of Agriculture, Statement before the House

Appropriations Subcommittee on Agriculture, Rural Development, Food and Drug Administration, and Related

Agencies (February 17, 2000).

23 Senate Governmental Affairs Committee, “Administration Compromises Citizens’ Privacy: Thompson

Reveals Agency Policy Violations and Breaches of Computer Security That Leave Citizen Privacy at Risk,” Press

Release (October 20, 2000).

7

• Due to financial system weaknesses and failure to perform annual inventories, the

Department’s figures for personal property assets, which totaled over $888 million for

FY1999, are inflated and impossible to verify. There are significant misstatements for

items, such as a $97 million vehicle and an $11 million microscope.21

Information Resources Management

The Department has numerous information assets that include market-sensitive data on the

agricultural economy and commodities, sign-up and participation data for programs, personal

information on customers and employees, and accounting data. This information and related

systems face unprecedented levels of risk from intentional or accidental disruption, disclosure,

damage or manipulation. Public confidence in the security and confidentiality of the

Department’s information and technology is essential, yet IG audits continue to identify security

deficiencies. The Agriculture Department’s information technology security controls have

widespread weaknesses that fail to adequately protect: (1) assets from fraud and misuse, (2)

sensitive information from inappropriate disclosure, and (3) critical operations from disruption. 

• The Inspector General has found over 600 security vulnerabilities in Agriculture

Department computer systems. Systems that have been easily “hacked” include: the

National Agricultural Statistics Service quantity/price database, which, if altered, could

“drastically impact world commodity markets”; the $56 billion rural development loan

portfolio; and the Food Safety and Inspection Service database that ensures a safe meat

and poultry supply.22

• The Department of Agriculture’s Forest Service was found to be allowing a private

company to use “cookies” to collect information about users on the agency’s Web site. 

Visitors to the Forest Service International Programs Web site were tracked by cookies

that were placed on visiting computers by a private company. In return for the Web site

“traffic reports” that the private company provided, the Forest Service had agreed to a

number of terms and conditions, including granting the company co-ownership of the

data collected by its cookies.23

• In September 2000, the House Subcommittee on Government Management, Information

and Technology gave the Agriculture Department an “F” in computer security. This was
24 Cathy Newman, “Cyber-Security Called ‘Dismal’; House Panel Warns Federal Data Is Vulnerable to

Hackers,” The Washington Post (September 12, 2000). 

8

a step back from 1997, when the Department received a “D.”24
1

 Department of Commerce, Office of Inspector General, “Top Ten Management Challenges for the

Department of Commerce” (December 1, 2000).

2

 General Accounting Office, “Major Management Challenges and Risks: Department of Commerce,”

Performance and Accountability Series, GAO-01-243 (January 2001), p. 15.

3

Ibid., p. 7.

II. Department of Commerce

[The] Department of Commerce is faced with a number of problems, and

difficult issues, including some that we view as major management challenges. 

We believe that, by addressing these challenges, the Department and the

Congress can enhance program effectiveness, eliminate serious operational

problems, decrease vulnerability to fraud, waste, and achieve substantial

savings.

Johnnie E. Frazier

Inspector General

United States Department of Commerce1

The Department of Commerce is composed of nine distinct administrations, offices, and

agencies, whose programs and activities include supporting export policy; administering the

nation’s export control system; forecasting the weather; providing assistance to distressed

communities; fostering telecommunications policies; protecting patents, trademarks, and

intellectual property rights; and conducting the decennial census. Due to this wide range of

responsibilities, GAO recently stated that the Department “has come to symbolize dispersed

responsibility for federal programs,” despite the government’s increased focus on results and

responsibility.2

The Department of Commerce faces a number of systemic management problems. In January,

GAO updated its High-Risk list. These are the areas of the federal government that are

particularly susceptible to fraud, waste, abuse, or mismanagement. Two of the areas on the list

apply to the Department of Commerce: strategic human capital management and information

security. For example, GAO recently reported that “the ability of Commerce and two other trade

agencies to monitor and enforce trade agreements was limited because the agencies lacked

sufficient numbers of experienced staff with the right expertise. . . .”3

On December 1, 2000, Johnnie E. Frazier, the Department’s IG, provided Chairman Thompson

with an assessment of the most serious management challenges facing the Department. The

challenges, which are discussed below, “were chosen because of their importance to the

Department’s mission or the nation’s well-being, complexity, sizable expenditures, or need for
4 Department of Commerce, Office of Inspector General, “Top Ten Management Challenges for the

Department of Commerce” (December 1, 2000).

5

Paul Sperry, “Cyberporn Scandal Hits Commerce Department,” WorldNetDaily (September 27, 2000).

6

 Department of Commerce, Office of Inspector General, “Semiannual Report to the Congress” (September

30, 2000), p. 46.

7

Ibid., p. 56.

8

Ibid.

10

significant management improvements:”4

• The Decennial Census;

• Financial management system;

• Information security;

• U.S. Patent and Trademark Office’s transition to a performance-based organization;

• The National Technical Information Service;

• Fishery management; and

• Acquisition reform initiatives.

In addition to these systemic problems, other studies have identified cases of either criminal or

inappropriate behavior on the part of individuals.

• In August 2000, a security official in charge of investigating the private backgrounds of

Department employees, was suspended for downloading and storing a “monolithic” stash

of pornographic files on his government computer and on the Department’s Intranet,

posing a security risk for the entire system. In the past, several female employees had

filed sexual harassment complaints against him, but the complaints were allegedly

“overlooked” by the director of the security office.5

• In July 2000, a secretary at the Census Bureau was convicted of theft of government

property after an investigation revealed she had used a government purchase card to buy

more than $800 worth of clothing, jewelry, electronic equipment, and other items for her

personal use.6

• An employee resigned from the Department in the face of his proposed demotion for use

of a government vehicle for personal use on “a regular and recurring basis.”7

• A former secretary agreed to settle charges that she had used a government credit card to

make more than $4,300 of personal purchases.8
9

 Department of Commerce, Office of Inspector General, “Top Ten Management Challenges for the

Department of Commerce” (December 1, 2000).

10 Department of Commerce, Office of Inspector General, Memorandum to the Secretary of Commerce

(March 1, 2001). (Material weaknesses are serious flaws in the design or operation of an internal control

component that increase the risk that errors, fraud, or noncompliance in material amounts may occur and not be

readily detected.) 

11

The Decennial Census

The IG recently identified several problems that need to be addressed in completing the fiscal

year 2000 census and beginning to plan for the 2010 census. An evaluation found that the

address list used to support the Census Bureau’s operations in 2000 was not completed in time to

ensure high-quality address data for labeling questionnaires. The Bureau also needs to increase

data quality and improve its software engineering standards in the future. Previous reviews

found that too little time was allowed for enumerator training, late delivery of supplies caused

problems, some homeless shelters and soup kitchens were not visited by enumerators, and the

effectiveness of the assistance centers varied.

• An investigation into allegations of census fraud revealed that (1) at one office, some

enumerators had not made the required number of visits and telephone calls to

households, (2) at another, some crew leaders had not adequately reviewed

questionnaires, and (3) at the third, quality control procedures were not functioning

properly.9

Financial Management

Despite the absence of a single integrated financial management system, the Department received

an unqualified (clean) opinion on its FY 2000 consolidated financial statements. Although the

Department's Chief Financial Officer and other senior financial managers have made substantial

improvements in financial management, continued emphasis on further improvements is

essential in order for the Department to correct the weaknesses and deficiencies that were

identified. 

• The Department’s fiscal year 2000 consolidated financial statements identified 13

material weakness and reportable conditions, and several instances where the Department

was not complying with existing laws and regulations.10

Despite the obvious advantages to unified processes, the Department has had an extremely

difficult time developing and implementing a single integrated financial system. For more than

10 years, Commerce’s lack of such a system has been identified as a significant internal control

weakness. To address this weakness, Commerce began planning for the acquisition and

development of a Department-wide financial system in 1992. Despite large investments of time

and money, implementation of the system, known as the Commerce Administrative Management
11 Department of Commerce, Office of Inspector General, “Top Ten Management Challenges for the

Department of Commerce” (December 1, 2000).

12 Department of Commerce, Office of Inspector General, “Semiannual Report to the Congress”

(September 30, 2000), p. 75.

12

System, has progressed slowly. In 1997, the Department added contractor support to augment

the work of the original contractor. The Department also conducted a review of the system to

address concerns about costs incurred and schedule delays. In 1998, based on the results of the

review, the Department modified the system and drastically revised its implementation strategy. 

The revised strategy calls for pilot implementation and testing of the redefined system at the

Census Bureau before implementing it at other bureaus. It is not expected that the Department

will have the system fully operational before fiscal year 2004.

• According to former Secretaries of the Department of Commerce, “Many of the

Department’s financial systems are seriously outdated and fragmented; they are unable to

provide timely, complete and reliable financial information; they are inadequately

controlled; and they are costly and difficult to maintain. The financial systems, taken as a

whole, are not compliant with GAO principles and standards, nor with requirements of

[various laws and programs] or the [Office of Management and Budget].”11

Information Security

The number of attacks on our nation’s computer systems has grown dramatically over the last

few years and is projected to grow at an even faster rate in the future. The computer systems that

support Commerce’s operations are increasingly vulnerable, creating a need to improve

procedural and technical security measures.

A Presidential directive, issued in May 1998, called for the Department to protect its assets

against physical and cyber-based attacks. In reviewing the Department’s progress, the IG

identified several problems including the following: several elements of the plan are outdated or

missing; milestones have slipped; and the inventory of critical assets is not current.12

U.S. Patent and Trademark Office’s Transition To a Performance-Based Organization

The American Inventors Protection Act of 1999 reorganized the U.S. Patent and Trademark

Office as a performance-based organization, so that it could be run more like a business. As

such, it would have greater authority and responsibility for decisions regarding the management

and administration of its operations, while exercising greater control of its expenditures,

personnel decisions and processes, and procurement operations. Despite these potential benefits,

the transition process is formidable. The Office must formulate the necessary personnel,

procurement, and administrative policies. At the same time, however, it has the challenge of

responding to the increase in patent and trademark filings and appeals.
13 Department of Commerce, Office of Inspector General, “Patent and Trademark Office: Improved

Internal Controls Needed for Office of Human Resources,” BTD-12830 (September 2000), p. 1, 4.

14 Ibid., p. 2.

15 Ibid., p. 5-6.

16 Department of Commerce, Office of Inspector General, “Top Ten Management Challenges for the

Department of Commerce” (December 1, 2000).

13

Last year, the IG conducted an audit of the U.S. Patent and Trademark Office’s hiring practices

and determined that the Office needed to improve its operations in order to avoid security leaks:

• As of May 2000, the Department’s Patent and Trademark Office had failed to request

required background checks on 113 employees hired since October 1997, all of whom

had access to sensitive proprietary business data.13 For 1,626 employees hired since

1970, there was no documentation of such investigations in the Office’s Security

Database.14

• As of September 2000, almost 50,000 forms documenting personnel actions remained

unfiled in the Office of Human Resources. The Inspector General also found that 10

percent of employee records were missing.15

The National Technical Information Service

Disappointing operating results continue to call into question the National Technical Information

Service’s ability to be self-sustaining. While drastic cost-cutting measures may resolve its

problems in the short-run, they cannot help the agency solve its major problem—a steady decline

in the sales of its products and services caused by fundamental changes in the marketplace. The

Department developed a proposal that would close the Service and transfer its scientific,

technical, business, and engineering publications to the Library of Congress to ensure permanent

public access to such documents. Because of congressional concerns, the closure was delayed

pending the outcome of a GAO review of the service’s functions and a comprehensive study of

overall U.S. government public information dissemination. The Department needs to work

closely with the Congress and other stakeholders to reach agreement on the future of the

Service.16

Fishery Management

Ensuring healthy stocks of fish and other marine animals in the coastal waters beyond each

state’s jurisdiction is a federal responsibility carried out principally by the Commerce

Department’s National Marine Fisheries Service and eight regional fishery management councils. 

The Service and the councils track the condition of fish and other marine species, determine the

levels of catch that will provide the greatest benefit to the nation, and measure the economic

impacts of fishery regulations and policies. Measures to manage various species are generally
17 Ibid.

18 Ibid.

14

developed by the councils, subject to review by the Service and approval by the Secretary of

Commerce. These measures are often controversial because they impose fish quotas that affect

both the survival of a species and the economic health of the fishing industry and many coastal

communities. A recent GAO report concluded that, while progress is being made in several

areas, the Service needs to improve its data collection efforts, improve communications between

the government and the fishing industry, improve economic analysis, and identify the costs of

achieving compliance with the act’s fish habitat provisions.17

Acquisition Reform Initiatives

The Department is increasingly relying on contractors to provide the goods and services essential

to its operations. The Department spends more than $1 billion each year, about one-quarter of its

annual appropriations, through large contracts and simplified acquisitions. The purpose of

acquisition reform and its streamlining initiatives is to reduce the time and money spent in

acquiring needed goods and services by relying on the competitive marketplace. 

GAO recently reported some concerns about the implementation of acquisition reform. 

Specifically, GAO reported problems in the use of government-wide agency contracts, finding

that agencies have employed various tactics to avoid holding required vendor competitions,

essentially making sole source awards. In addition, agencies have exhibited a tendency to make

awards to large businesses, thereby reducing the number of awards to small and disadvantaged

businesses. As a recent IG report indicates, several key problems regarding:

• Commerce acquisitions have been identified, including “improper use of task order

contracts, inadequate documentation of market surveys, insufficient planning for contract

administration and monitoring, and the administration of the purchase card program.”18
1General Accounting Office, “Major Management Challenges and Program Risks: Department of

Defense,” GAO-01-244 (January 2001), p. 6. 

2

Thomas G. McInerney, Lieutenant General, USAF (Ret.), President and CEO, Business Executives for

National Security, Statement before the National Defense Panel of the Quadrennial Defense Review (April 29,

1997). 

III. Department of Defense

The effectiveness of U.S. forces is well evidenced by experiences in the Persian

Gulf, Bosnia, and Kosovo. However, the same level of excellence is not evident

in many of the business processes that are critical to achieving the

Department’s mission in a reasonably economical, efficient, and effective

manner.

David M. Walker

Comptroller General of the United States1

The need for the Defense Department to fix the way it manages its service and

support infrastructure has never been more acute.

Thomas G. McInerney, Lieutenant General, USAF (Ret.)

President and CEO

Business Executives for National Security2

The Department of Defense is the primary agency responsible for maintaining the national

security of the United States. Safeguarding the nation’s security is the first and most important

duty of the federal government. When this security is threatened, other issues become secondary.

Encompassing the Army, Navy, Air Force, and Marine Corps, the Defense Department is the

nation’s largest employer, with 1.4 million men and women on active duty, 700,000 civilians,

and another 1.28 million volunteers serving in the Guard and Reserve. The Department also

supports 1.8 million retirees and families that are receiving benefits. In 1999, the Department

purchased about $140 billion in goods and services through 14.8 million purchases. 

Being such a large and complex organization, the Defense Department is bound to have

management problems. However, the issues confronting the Department are worse than they

have to be. Wasteful spending and mismanagement sap the readiness of the armed forces and

weaken national security. GAO, the Pentagon’s own IG, and other watchdog groups have found

flagrant and continuing examples of waste, fraud, and abuse in the Department. These failures

divert funds from vital defense programs. Among the problems the IG and GAO listed as the

worst included:

• Financial management;

• Computer technology;

• Computer security;
3Department of Defense, Office of Inspector General, “Semiannual Report to the Congress” (September

30, 2000), p. i.

4General Accounting Office, “Major Management Challenges and Program Risks: Department of

Defense,” GAO-01-244 (January 2001). 

5Department of Defense, Office of Inspector General, “Internal Controls and Compliance With Laws and

Regulations for the DoD Agency-Wide Financial Statements for FY 2000,” D-2001-070 (February 28, 2001).

16

• Personnel management; and

• Acquisition management.

Financial Management

According to the IG at the Department of Defense, “Despite the massive audit effort, the

Department of Defense could not overcome the fundamental inadequacy of its financial reporting

systems and produce reliable data through the patchwork of processes needed to compile

financial statements.”3 Comptroller General David Walker agrees: “The Department continues to

confront pervasive and complex financial management problems that can seriously diminish the

efficiency of the military services’ support operations.”4

This means the Defense Department just can’t get its books to add up. Each year the Department

tries to “balance its checkbook,” but can’t do it. Throughout the year, the Defense Department is

operating without information on the cost of its operations, where its money is going, or what is

happening to the supplies it buys. This is no way to run the world’s most sophisticated military.

The Defense Department’s poor financial management affects every aspect of its operations. In

very cold language, the IG details the problems:

We identified deficiencies in internal controls and accounting systems related to

General Property, Plant, and Equipment; Inventory; Environmental Liabilities;

Military Retirement Health Benefits Liability; and material lines within the

Statement of Budgetary Resources. We identified $1.1 trillion in department-level

accounting entries to financial data used to prepare DOD component financial

statements that were not supported by adequate audit trails or by sufficient

evidence to determine their validity.

5

 

There is no major component of the Defense Department that can balance its books. This causes

some of the most incredible examples of waste, fraud, and abuse in government. For example:

• In fiscal year 2000, the Department made $4.4 billion in “problem disbursements” or “intransit disbursements.” These include payments made that do not have a corresponding

bill or “obligation.” They can also include payments that were made, but that the entity to

whom payment was made did not receive it. As one can imagine, these payments are

highly susceptible to fraud or error. The reason for many of these problems is the
6General Accounting Office, “Defense Inventory: Army Needs to Strengthen and Follow Procedures to

Control Shipped Items,” NSIAD-00-10 (June 23, 2000).

7Department of Defense, Office of Inspector General, “Development and Implementation of a Joint

Ammunition System,” D-2001-014 (December 6, 2000).

17

SRD1

ADS

IPC

IAPS

CAPS

DJAS

1 Bill

Pay

MOCAS

DPPS

DSDS

SABRS

GAFS

STARS

STANFINS

BCAS

APADE

ITIMP

SAACONS

SPS

CEFT

Debt

Mgt

Prevailidation

SYSTEM USED BY THE DEPARTMENT OF DEFENSE 

TO TRACK CONTRACT AND VENDOR PAYMENTS

Source: Department of Defense

complex contract payment process, which is pictured below:

• Management of its inventory has been a traditional problem for the Department of

Defense. Because the Department doesn’t maintain adequate records of its current

inventory, it often purchases much more than it actually needs. A recent GAO report

stated that “available logistics and accounting records indicated that the Army could not

account for about $900 million in shipped inventory.”6 In one particularly outrageous

example of mismanagement, the Department spent $41.3 million on a system to track its

ammunition. Unfortunately, according to the IG, after 8 years of work, “the DoD did not

produce a working system or even have one near completion.”7
8Robert J. Lieberman, Deputy Inspector General, Department of Defense, Statement before the

Subcommittee on National Security, Veterans Affairs and International Relations, House Committee on

Government Reform, D-2001-083 (March 15, 2001).

9General Accounting Office, “Defense Information Management: Continuing Implementation Challenges

Highlight the Need for Improvement,” T-AIMD-99-93 (February 25, 1999). 

10Department of Defense, Office of Inspector General, “Acquisition of the Defense Joint Accounting

System,” D-2000-151 (June 16, 2000).

11Department of Defense, Office of Inspector General, “Program Management of the Defense Security

Service Case Control Management System,” D-2001-019 (December 15, 2000).

18

Poor Management of Computer Technology

The Department of Defense’s operations rely on a massive system of 10,000 computer networks

and 2.5 million computers. The Department has an annual budget of about $20 billion just for

computers and computer technology. According to the IG, however, “virtually every information

technology project that we audit exhibits significant management problems. Those flaws include

poorly defined requirements and frequent user dissatisfaction.”8 Likewise, the GAO reported that

“in a comprehensive review of [the Department’s] $18 billion efforts to replace functionally

duplicative and inefficient automated information systems with the best existing systems, we

found that Defense consistently failed to adhere to sound . . . . decision-making and oversight

processes.”9

In a recent report, the Chairman of the Senate Governmental Affairs Committee wrote that most

federal agencies were not complying with the computer management requirements put in place

by the Congress. Because of these weaknesses, the IG at the Defense Department reports that a

number of major technology projects administered by the Department are at risk of failure. 

These include:

• The Defense Joint Accounting System. While originally designed to unify the

accounting systems of disparate entities within the Department of Defense, several

Defense organizations, namely the Navy and the Air Force, were allowed to opt out of it. 

Nonetheless, the Department continued with the more than $700 million project

(originally projected to cost $500 million), despite the fact that its projected savings

decreased dramatically. According to the IG, “These cost increases, combined with a

decreasing return on investment, represent an increased risk that the system may not be

the most cost-effective alternative to perform [the Department of Defense’s] general fund

accounting.”10

• The Defense Security Service Case Control Management System. This system would

track the myriad security investigations conducted by the Department and was expected

to reduce processing time for all cases. After more than $76 million was spent on the

project, the IG reports that the system “did not meet performance expectations” and that

“times for investigations were not reduced.”11
12Department of Defense, Office of Inspector General, “Defense Environmental Security Corporate

Information Management Program,” D-2001-015 (December 7, 2000).

13General Accounting Office, “Major Management Challenges and Program Risks: Department of

Defense,” GAO-01-244 (January 2001).

14General Accounting Office, “DOD Information Security: Serious Weaknesses Continue To Place

Defense Operations at Risk,” AIMD-99-107 (August 26, 1999).

19

• The Defense Environmental Security Corporate Information Management

Program. This system would have provided better coordination of the Defense

Department’s environmental mission. However, after expenditures of over $100 million

and 9 years of work, the project could not demonstrate success, and the IG recommended

scrapping it.12

Computer Security

As mentioned, the Defense Department’s procurement of information technology is beset by

delays, cost overruns, and, because of poor planning, ineffective implementation. Once

implemented, however, many of the systems are vulnerable to lapses in security. The IG has

identified an increasing threat of attacks on Defense Department computers, poor security

clearance procedures, and the lack of a consistent policy on technology protection, and says:

“The most formidable of known challenges in the area of information technology relate to

ensuring the security of networked systems and overcoming a legacy of overly decentralized and

poorly controlled information systems management.” GAO shares the IG’s concerns about

computer security at the Department of Defense. In its recent “Performance and Accountability

Series,” GAO wrote:

[S]erious weaknesses in [Defense Department] information security provided hackers

and hundreds of thousands of unauthorized users the opportunity to modify, steal,

inappropriately disclose, and destroy sensitive [Defense Department] data. These

weaknesses impair [the Department’s] ability to (1) control physical and electronic

access to its systems and data; (2) ensure that software running on its systems is properly

authorized, tested, and functioning as intended; (3) limit employees’ ability to perform

incompatible functions; and (4) resume operations in the event of a disaster.

13

Some of the more sensitive investigations of Defense Department vulnerabilities with respect to

its systems are classified and can not be discussed here. However, what is public is still

disturbing. 

• According to GAO, the Military Retirement Trust Fund suffers from such a lack of

overall security that it is vulnerable to unauthorized access to Fund data files and other

files storing sensitive information, such as social security numbers, pay rates, child and

spousal abuse allegations, and medical test results.14
15Ibid.

16Ibid.

17Department of Defense, Office of Inspector General, “Internal Controls and Compliance With Laws and

Regulations for the DoD Agency-Wide Financial Statements for FY 2000,” D-2001-070, (February 28, 2001).

18General Accounting Office, “Financial Management: Significant Weaknesses in Corps of Engineers'

Computer Controls,” GAO-01-89 (October 11, 2000).

20

• Two cases in which employees embezzled nearly $1 million led GAO to review the Air

Force’s vendor payment system. GAO identified a number of security weaknesses, which

leave the Air Force vulnerable to similar thefts.15

• GAO, in an audit of the Defense Department’s computer security procedures, discovered

that many individuals could make “unauthorized changes to programs and data while

using their security privileges to disable the system’s capability to create an audit trail of

those changes.” Thus the individuals could, for example, “modify payroll records or

shipping records to generate unauthorized payments or to misdirect inventory shipments

and suppress the related system audit data to avoid detection.”16

• The Defense Department IG identified major security weaknesses in the Joint Military

Pay System. According to the IG, weaknesses don’t allow the Department to limit access

to the system or monitor use of the system’s software. These weaknesses allowed 20,000

security violations to go uninvestigated.17

• In an investigation of computer security at the Corps of Engineers, “GAO found

pervasive weaknesses in Corps computer controls at its data processing centers and other

Corps sites revealed serious vulnerabilities that would allow both hackers and numerous

legitimate users with valid access privileges to improperly modify, inappropriately

disclose, or destroy sensitive and financial data, including Privacy Act data such as social

security numbers and other personal information among others.”18

Clearly, information security will remain a challenge for the Defense Department for the

foreseeable future. With an increasing reliance on computers and computer technology,

problems will continue to grow. In fact, according to some officials, attacks on Defense

Department systems exceeded 20,000 in 1999 alone. The Department will have to ensure

vigilance in protecting its infrastructure from attack. 

Poor Management of Personnel

Greater focus is being put on the federal government’s problems in hiring and retaining the right

people to accomplish its mission, largely because the federal government is facing a personnel

crisis. The Defense Department is no exception. In its recent Performance and Accountability
19General Accounting Office, “Major Management Challenges and Program Risks: Department of

Defense,” GAO-01-244 (January 2001).

20Department of Defense, Office of Inspector General, “Top Ten Management Challenges for the

Department of Defense” (December 1, 2000).

21Ibid.

22Ibid.

21

Series, GAO wrote:

The Department is dealing with military personnel issues such as shortages of

junior officers for the career force, problems in retaining certain skills (such as

intelligence analysts, computer programmers, and pilots), and the military

services’ failure to meet recruiting goals. The Department also faces significant

challenges in managing its civilian workforce. For example, the sizable

reduction in civilian personnel since the end of the Cold War has led to an

imbalance in age, skills, and experience that is jeopardizing certain acquisition

and logistics capabilities within the Department.

19

In a December 2000 letter to the Governmental Affairs Committee, the Defense Department IG

described the human capital crisis at the Department in detail. Among the problems described by

the IG were:

• Downsizing. “The deep cuts in both the military force structure and the civilian

workforce after the end of the Cold War were not accompanied by proportionate

reductions in the numbers of military force deployments or in civilian workload. On the

contrary, military operating tempo [number of missions] has been very high and there

have been indications of morale problems among both military and civilian personnel.”20

• Retirements. “The current DoD civilian workforce is largely composed of ‘baby

boomers’ and the average age in many organizations is nearly 50. The [Defense

Department] must replace the bulk of its management as they retire over the next five

years. There are serious questions about the availability of enough sufficiently trained

and talented individuals to fill the likely management vacancies occurring across the

spectrum of [Defense Department] organizations.”21

• Skills and Training. “The pervasiveness of information technology in all facets of

[Defense Department] activities and the rapid evolution of business practices necessitate

a much more effective and aggressive approach to personnel training, especially for

[Defense Department] civilians. It will be a continuing challenge . . . to provide

meaningful training in flexible ways that enable individuals to keep up to speed in their

professional fields.”22

The consequences of the Department’s inability to hire and retain the right people are severe. 
23Statement of Robert J. Lieberman, Deputy Inspector General, Department of Defense, Before the House

Subcommittee on National Security, Veterans Affairs and International Relations, on “Defense Security Service:

Mission Degradation” (March 2, 2001).

24Department of Defense, Office of Inspector General, “Top Ten Management Challenges for the

Department of Defense” (December 1, 2000).

25Department of Defense, Office of Inspector General, “Contracts for Professional, Administrative, and

Management Support Services,” D-2000-100 (March 10, 2000).

22

The Defense Department IG recently testified that the Department does not have enough people

to conduct the hundreds of thousands of investigations required to grant security clearances to

those who need them. These investigations are required to ensure that our national security

secrets don’t get into the wrong hands. According to the IG:

[T]he Department’s ability to comply with [f]ederal guidelines on security

clearances and to carry out the several hundred thousand investigations needed

annually for initial clearances or updates virtually collapsed during the late

1990's. The causes included: an ill-considered 40 percent cut in Defense Security

Service staffing, with no proportionate decrease in workload; failure of the

information system acquisition project that was supposed to facilitate productivity

improvement; poor management oversight; and initial attempts to deal with

declining investigative productivity by arbitrarily limiting the number of

clearance investigation requests that could be submitted by managers and

commanders.

23

Acquisition Management

According to the Defense Department IG: “The scope, complexity, variety, and frequent

instability of Defense acquisition programs pose particularly daunting management challenges. 

No major acquisition cost reduction goals have yet been achieved and the results of most of the

specific initiatives are still to be determined, particularly since many have not yet been fully

implemented and are in a developmental or pilot demonstration phase.”24

Similar problems also affect the more than $50 billion a year in services for which the Pentagon

contracts. Of these procedures, the IG reported: “An extensive audit of 105 contracting actions

for professional administrative and management support services showed flaws in all of them;

government cost estimates were wrong in 77 percent of the service contract actions; and DOD

has not been taking steps critical to ensuring that it is getting the best services at the best

prices.”25

Specific examples of contracting problems that result from this mismanagement include the

following:

• The catalogue price of a set screw bought by the Defense Logistics Agency increased

from 5 cents in 1997 to $17.72 in 1998. Likewise, the catalogue price of a machine bolt

increased from 46 cents in 1997 to $139.83 in 1998, a mere 30,298 percent increase since
26General Accounting Office, “Defense Acquisitions: Price Trends for Defense Logistics Agency’s

Weapon System Parts” (November 2000).

27Department of Justice, “Boeing to Pay U.S. for Selling Army Defective Helicopters,” Press Release

(August 3, 2000).

28Department of Defense, Office of Inspector General, “Spare Parts and Logistics Support Procured on a

Virtual Prime Vendor Contract” (June 14, 2000).

23

its last purchase in 1976.26

• Waste, fraud, and abuse can mean that not only dollars but the lives of service members

are at stake. Last year, the Boeing Company agreed to pay the United States up to $54

million to settle two lawsuits that allege that the manufacturer placed defective gears in

CH-47D “Chinook” helicopters and then sold the aircraft to the Army. The CH-47D is

used by the Army to move troops and equipment. One of its gears failed in flight,

causing an Army Chinook helicopter to crash and burn while on a mission in Honduras in

1988. Five servicemen aboard were killed. Another craft crashed in January 1991 during

Operation Desert Shield in Saudi Arabia and was totally destroyed. Two persons aboard

were injured. In another incident at Ft. Meade, Maryland, in June 1993, a Chinook

sustained over $500,000 in damage. The helicopters destroyed in Honduras and Saudi

Arabia were valued at more than $10 million each.27

• The IG reviewed specific contract actions that the Defense Logistics Agency entered into

with Hamilton Standard. These “actions” totaled $19.0 million. According to the IG, the

contracts with Hamilton Standard were not the most economical and effective purchasing

strategy to obtain spare parts and logistics support:

• The Defense Logistics Agency customers paid about $4.9 million, or 38

percent, more than necessary.

• The government paid $1.4 million for propeller blade heaters for the C130 and P3 aircraft. According to the IG, this was between 124 and 148

percent more than a fair and reasonable price for the heaters. 

• Warner Robins Air Force Base, where most of the parts are used, could

reduce costs of the parts by at least $17.1 million for fiscal year 2001

through 2006 by buying reparable parts using a different type of contract.28
1General Accounting Office, “Financial Management: Education Faces Challenges in Achieving Financial

Management Reform,” GAO/T-AIMD-00-106 (March 1, 2000).

IV. Department of Education

Education is the primary agency responsible for overseeing the more than $75

billion annual federal investment in support of educational programs for U.S.

citizens and eligible non-citizens. The Department is also responsible for

collecting about $175 billion owed by students or their parents. . . . The

Department’s stewardship over these assets has been under question as the

agency has experienced persistent financial management weaknesses. 

Beginning with its first agencywide audit effort in fiscal year 1995, Education’s

auditors have each year reported largely the same serious internal control

weaknesses, which have affected the Department’s ability to provide financial

information to decision makers both inside and outside the agency.

U.S. General Accounting Office1

Americans rank education as a top national priority. The Department of Education is the primary

agency responsible for overseeing the investment of the federal government in support of U. S.

education. Education provides about 7 percent of the total resources used for elementary and

secondary education. State and local agencies are directly responsible for elementary and

secondary education, and the Department of Education supports and encourages their efforts. 

The Department of Education also provides billions of dollars of financial aid for post-secondary

education, through a combination of direct loans and guarantees of private sector loans to

students and their parents, as well as through grants.

Over the years, GAO and the Education Department’s IG have reported on a number of core

management weaknesses within the Department that waste billions of taxpayer dollars and limit

the Department’s ability to serve the American people effectively. The worst of these problems

are concentrated in three interrelated areas:

C Student financial assistance programs;

C Financial management; and 

C Information technology management.

Each of these problems is discussed in more detail below. 

Student financial assistance programs

The Department of Education administers grant and loan programs that help finance the higher

education of millions of students. Each year, these student financial aid programs provide more

than $50 billion in federal loans and grants. However, they have not adequately protected the

financial interests of the federal government and the American taxpayers. 
2

 Department of Education, Office of Inspector General, “Semiannual Report to the Congress” (September

30, 2000), p. 9-12.

25

The Education Department’s student assistance programs are highly vulnerable to fraud, waste,

abuse, and mismanagement. They are one of the 23 items included on GAO’s “high-risk list” of

the most vulnerable programs and activities throughout the federal government. Student

assistance programs were on the first high-risk list in 1990 and have been included in every

update since then. These programs suffer losses through intentional fraud and abuse as well as

loan defaults.

Fraud and abuse. Both student loan and grant programs are highly vulnerable to fraud and

abuse. They have been victimized by educational institutions, banks, scam artists, and dishonest

individuals. Indeed, student assistance programs have spawned a cottage industry of criminals

who counsel students and their parents on how to obtain loans and grants fraudulently. These

people even help their “clients” submit phony tax returns, so that they appear to meet income

eligibility requirements. The following are some examples reported by the IG:

• Officials of CORUS Bankshares and CORUS Bank settled a false claims suit by repaying

the government nearly $11.5 million. The case grew out of allegations that CORUS

submitted fraudulent insurance claims on guaranteed student loans.

• CSC Credit Services settled a false claims suit for about $6.5 million. CSC Credit was an

Education Department contractor engaged in collecting defaulted student loans. It

submitted false claims for payment of commissions and incentive bonuses.

• The owners of Midland Career Institute were convicted of student aid financial fraud and

conspiracy. They fraudulently obtained $2.3 million in Pell grants and federally

guaranteed student loans. 

• Nine individuals were indicted in Miami, Florida, for false claims and money laundering

involving student aid fraud. They recruited “college students” from a population of

elderly residents of a senior citizens home. The seniors had participated in some crafts

classes, which the defendants fraudulently passed off as qualifying for Pell grants.2

Another notorious case of criminal student aid fraud drew recent publicity when former President

Clinton commuted the sentences of the perpetrators. The Education IG described this case as

follows in Congressional testimony last year:

In October 1999, four New York men were sentenced for their roles in a Pell

grant fraud scheme. The defendants were convicted on a indictment charging

conspiracy, program fraud, false statements, wire fraud, mail fraud and tax fraud

in connection with postsecondary programs that they falsely claimed to be

administering. Judge Barbara Jones noted that the serious and sophisticated

long-term fraud committed against the Department warranted substantial periods

of incarceration and also ordered the men to make restitution of $11 million to

the Department. Judge Jones stated that the $11 million loss to the Department’s
3

Lorraine Lewis, Inspector General, Department of Education, Statement before the House Budget

Committee Task Force on Education (May 24, 2000), p. 3-4. 

4General Accounting Office, “High-Risk Series: An Update,” GAO-01-263 (January 2001), p. 174-175.

5

Lorraine Lewis, Inspector General, Department of Education, Statement before the House Budget

Committee Task Force on Education (May 24, 2000), p. 6. 

6U.S. Department of Education, Office of Inspector General, “Semiannual Report to Congress” (September

30, 2000), Inspector General’s Message to Congress.

26

Pell grant program was a very conservative estimate since it related to losses

associated with only one of the fraudulent educational programs administered by

the defendants.3 

Student loan defaults. Although the student loan default rate has declined to 6.9 percent in fiscal

year 1998, student loan defaults still cost the federal government billions of dollars each year—

$4.3 billion in fiscal year 1999 alone and more than $28 billion in the last 10 years. Also, GAO

has raised some cautions about the decline in student loan default rates. First, GAO suggests that

the downward trend may be more attributable to the strong economy of recent years than to

management improvements. Therefore, the trend may be reversed if the economy weakens. 

Second, GAO reports that the calculation method used by the Education Department understates

the default rate.4 

Student loan default losses are made worse by the Department’s laxity in forgiving student loan

repayment obligations. The magnitude of this problem is unknown. However, since October

1999, the IG has recovered more than $1 million in restitution for improper student loan

discharges. For example:

C In May 2000, two doctors, also brothers, were convicted of fraud for having their medical

student loan obligations of over $40,000 discharged. They claimed to be disabled, one

confined to his home and the other wheelchair-bound. However, IG investigators

observed the brothers riding bicycles and swimming at the beach. The investigation

revealed they had submitted disability claims that were signed by a non-existent physician

and accompanied by letters from a non-existent lawyer.5

 

Clearly, the Department needs to do a better job of protecting the American taxpayers from the

types of fraud and error described above. In particular, it needs to implement some specific

actions that it has neglected up to now. The IG recommended that the Department develop a

method to estimate how much it loses each year in improper payments.6 Experience

demonstrates that disclosing improper payment levels fixes attention on them and helps spur

improvements. Thus far, the Department has failed to act on this recommendation. 

Also, the Department has failed to implement a 1998 law intended to allow it to verify with the
7Department of Education, Office of Inspector General, “Top Ten Management Challenges for the

Department of Education” (December 8, 2000).

8General Accounting Office, “Major Management Challenges and Program Risks: Department of

Education,” GAO-01-245 (January 2001), p. 18.

9General Accounting Office, “Major Management Challenges and Program Risks: Department of

Education,” GAO-01-245 (January 2001), p. 12-13.

27

Internal Revenue Service income information submitted by student aid applicants. A

bureaucratic impasse has developed between Education and IRS over how to implement the law,

or even whether the law can be implemented in its present form. The IG lists the need to resolve

this impasse as one of the Department’s top management challenges.7 GAO likewise has

stressed the importance of this data verification. Neither the Department nor the academic

institutions that check the accuracy of student financial aid applications currently have access to

data sources to independently verify most applicants’ family income. While Education’s

verification procedures, such as computer checks, can detect mistakes on applications, they

cannot identify students who intentionally under-report family income.8

Financial management

The vulnerabilities of the student assistance programs to fraud and abuse stem primarily from the

Department’s financial management weaknesses. The Department lacks the financial

information systems and accounting controls needed to manage these programs effectively and to

maintain the integrity of their operations. Both GAO and the IG have reported year after year on

largely the same financial management problems. The Department continues to face serious

financial management problems that hinder its ability to (1) obtain timely and complete financial

information; (2) decrease vulnerability to fraud, waste, and mismanagement; (3) ensure adequate

accountability to taxpayers; (4) manage for results; and (5) help decision-makers make timely

and informed judgements. 

With the exception of fiscal year 1997, the Department of Education has not received an

unqualified or “clean” opinion on its financial statements since its first agency-wide audit. That

means it can’t even balance its books once a year. Needless to say, it can’t manage its money on

a day-to-day basis either. According to GAO, these financial management weaknesses make the

student financial aid programs increasingly vulnerable to fraud, waste, and mismanagement.9

The IG has found many cases that prove this point. For example:

C In October 1999, the Department’s systems generated several duplicate payments. One

was a $19 million double payment of grant funds. The other involved $125 million in

duplicate payments to about 48 grantees. In December 1999, the Department made about

$ 664,000 in duplicate payments to 51 schools, and another $6 million double payment to
10Lorraine Lewis, Inspector General, Department of Education, Statement before the Oversight

Subcommittee of the House Committee on Education and the Workforce (September 19, 2000), p. 3. 

11Ibid., p. 8. 

12Department of Education, “Financial Statements Report for Fiscal Year 2000: Ernst & Young Report to

the Inspector General on Internal Controls” (January 26, 2001), p. 6, 9. 

13Michael Fletcher, “Education Audit Finds $450 Million Misused; Agency’s Problems Persist, Panel

Told,” The Washington Post (April 4, 2001).

14Department of Education, Office of Inspector General, “Top Ten Management Challenges for the

Department of Education” (December 8, 2000), Enclosure, p. 2.

28

a single school.10 

These errors were eventually identified and corrected, but one wonders how many double

payments and similar errors are never caught.

The lack of adequate financial controls also can encourage fraud schemes and other improper

actions by the Department’s own employees. For example, the IG discovered almost $1 million

was paid in schemes by the same employees:

C Three Department employees used government funds to purchase goods worth over

$300,000 for their personal use. These goods included computers, computer software,

cordless telephones, compact disc players, and a 61-inch television. The same employees

were also paid about $634,000 for hours they fraudulently claimed to have worked.11

The results of the Education Department’s financial audit for fiscal year 2000 were released in

early March 2001. Once again, the Department failed to get a clean opinion. Once again, the

auditors identified a number of internal control and accounting glitches by the Department. They

included listing $900 million as an asset instead of a liability and being unable to find $56

million that was missing from three appropriation accounts.12

Poor financial management and the fraud, waste, and abuse it causes impose real burdens on

education programs. The IG recently estimated that the Education Department lost at least $450

million to fraud, waste, and abuse over the last three years.13 To put this figure in perspective,

$450 million over three years would (1) pay for 194,721 Pell grants, (2) supply the funds to

increase the Charter School Program by almost 80 percent, or (3) more than double the amount

of grants to states under the Safe and Drug Free Schools Program. 

 

Information technology management

According to the IG, two of the 10 most serious management problems at the Education

Department relate to information technology management.14 One is the Department’s failure to
15Ibid., Enclosure, p. 2-3.

16General Accounting Office, “Major Management Challenges and Program Risks: Department of

Education,” GAO-01-245 (January 2001), p. 15.

29

comply with the Clinger-Cohen Act of 1996. This law requires agencies to adopt specific

practices to improve their management of information technology—including the acquisition,

use, and disposal of information technology resources. The Department has yet to fully

implement three key requirements of the Act relating to capital planning and investment control

process, a sound and integrated information technology architecture, and the information

resource management knowledge and skills of agency personnel.

The second problem is computer systems security. In a February 2000 report on security for the

Department’s 14 mission-critical information technology systems, the IG found significant

control weaknesses, including the lack of required security plans, reviews, and awareness

training. These weaknesses collectively constitute a significant threat to the security of the

Department’s information technology systems and the data they contain. The IG found that the

Department needs to strengthen controls to enhance overall accountability and security for its

Department-wide network called “EDNet.” The IG also found that the Department has not taken

sufficient actions to implement a Presidential directive on computer security.15

Computer security is also a government-wide problem on GAO’s high-risk list. GAO has

reported on specific computer security problems at the Education Department. Specifically,

GAO found that “continued weaknesses in information systems controls increase the risk of

disruption in services and make Education’s loan data vulnerable to unauthorized access,

inadvertent or deliberate misuse, fraudulent use, improper disclosure, or destruction, all of which

could occur without detection.”16
1

 General Accounting Office, “High-Risk Series: An Update,” GAO-01-263 (January 2001), p. 200.

2

 General Accounting Office, “Major Management Challenges and Program Risks: Department of Energy,”

Performance and Accountability Series, GAO-01-246 (January 2001), p. 6.

3General Accounting Office, “Major Management Challenges and Program Risks: Department of Energy,”

Performance and Accountability Series, GAO/OGC-99-6 (January 1999), p. 1.

V. Department of Energy

For years, we and others have reported on problems with [the Department of

Energy’s] contract management, which we have defined broadly to include

contract administration and project management. These problems have

included noncompetitive awards, cost and schedule overruns, inadequate

oversight of contractors’ activities, an over-reliance on cost-reimbursement

contracts, and an inability to hold contractors accountable.1

Over the past several years, GAO, Congressional Committees, and others have

questioned [the Department’s] management practices and effectiveness in

carrying out its missions. . . .2

U.S. General Accounting Office

The Department of Energy is responsible for maintaining the safety and reliability of the nation’s

nuclear weapons capabilities, cleaning up the contamination resulting from prior nuclear

weapons activities, fostering a reliable and sustainable energy system, and promoting U.S.

leadership in science and technology. The Department has more than 50 major facilities in 35

states. It contracts for the management and operation of its major facilities—including its

national laboratories, nuclear weapons production facilities, and those facilities undergoing

environmental cleanup—and has more than 100,000 contractor employees at its facilities.

The Department was created in 1977. In doing so, Congress brought together most of the

government’s energy programs and defense responsibilities. During the last decade, the

Department conducted or commissioned several studies concerning the missions and

organization of its national laboratories. According to the GAO, however, “[the Department] has

not always implemented reform recommendations and has been slow in acting on others.”3

Others have been even more critical of the Department. On June 14, 1999, a high-level White

House panel condemned the Department as a “dysfunctional bureaucracy that has proven it is

incapable of reforming itself” and called for the nation’s nuclear laboratories to be placed under

separate management. The panel, drawn from President Clinton’s Foreign Intelligence Advisory

Board, was asked to investigate charges that the Department had failed to protect nuclear secrets

after the disclosure that Wen Ho Lee was suspected of passing classified information to China. 

The panel’s public report gave only a few examples of security lapses found because of the

confidential nature of the investigation:
4

 Doyle McManus and Bob Drogrin, “Nuclear Security Panel Assails Energy Department,” Los Angeles

Times (June 15, 1999), p. A1.

5

 General Accounting Office, “Department of Energy: Opportunity to Improve Management of Major

System Acquisitions,” GAO/RCED-97-17 (November 1996).

6

 General Accounting Office, “Department of Energy: Management Problems Require a Long-Term

Commitment to Change,” GAO/RCED-93-72 (August 1993), p. 5.

7

 General Accounting Office, “Department of Energy: Improving Management of Major System

Acquisitions,” GAO/T-RCED-97-92 (March 6, 1997), p. 5.

31

• A Department employee was dead for 11 months before department officials noticed that

he still had four secret documents signed out.

• An illegal telephone wiretap was discovered at one of the nuclear labs. An employee

confessed to installing it but was not prosecuted.

• As of June 1999, foreign citizens, including some from “sensitive” countries, could still

connect their computers to the nuclear labs’ unclassified computer networks via

telephone, without monitoring by the labs.

• The report also stated: “Organizational disarray, managerial neglect and a culture of

arrogance—both at Energy Department headquarters and the labs themselves—conspired

to create an espionage scandal waiting to happen.”4

In addition to security problems, the Department has a notoriously poor record for managing

large, technical projects. In 1996, GAO reported that the Department had begun 80 major

projects since the mid-70's. Of those, 15 were completed, but most were finished behind

schedule and with cost overruns; 31 projects were terminated prior to completion after spending

over $10 billion; and 34 projects were ongoing, but cost overruns and schedule slippages had

occurred on many of the projects.5 Since 1996, Department of Energy data indicate that 6

additional projects are experiencing cost overruns and/or schedule slippages.

Weaknesses in human capital have contributed greatly to this problem.

• In 1993, GAO indicated that, “[w]ork force weaknesses, including a shortage of technical

and administrative skills and inadequate management support systems, still impede [the

Department’s] ability to properly administer contract management changes.”6

• In 1997, GAO stated: “DOE’s lack of technical expertise to oversee the design,

construction, and operation of its major system acquisitions. . . has been chronicled since

DOE’s early years. A 1981 DOE task force and a 1987 report by the National Research

Council both noted DOE’s lack of technical capabilities and expertise. A March 1996

report by the Defense Nuclear Facilities Safety Board echoed those same concerns.

Throughout a series of management reviews of DOE that began in 1991, many DOE

managers told us that the lack of skilled staff in program, project, and contracting

oversight positions is one of the most fundamental problems in the Department.”7
8

 General Accounting Office, “Nuclear Waste: Department of Energy’s Hanford Tank Waste Project—

Schedule, Cost, and Management Issues,” GAO/RCED-99-13 (October 1998), p. 18.

9

 General Accounting Office, “Major Management Challenges and Program Risks: Department of Energy,”

GAO/OCG-99-6 (January 1999), p. 15.

10 General Accounting Office, “National Ignition Facility: Management and Oversight Failures Caused

Major Cost Overruns and Schedule Delays,” GAO/RCED-00-271 (August 2000), p. 16.

11 Department of Energy, Office of Inspector General, “Top Ten Management Challenges for the

Department of Energy” (November 28, 2000).

32

• In 1998, GAO reported: “[The Department] has had difficulty managing other large

projects. Our past reviews have shown a consistent pattern of poor management and

oversight by [the Department of Energy].”8

• In 1999, GAO stated: “[I]nadequate technical and managerial skills have resulted in

higher costs and delays. For example, according to [the Department], the Defense Waste

Processing Facility in South Carolina cost about $900 million more than planned and

opened about 6 years late, in large part because the project’s managers lacked experience

with large-scale technology projects and did not focus sufficient attention on technical,

institutional, or management issues.”9

• In 2000, GAO reported: “[The Department] acknowledges that its managers in

headquarters and at the Laboratory site office did not properly oversee [the National

Ignition Facility] and, as a result, remained unaware of major cost and schedule problems

until several months after Laboratory managers had first documented them.”10

In addition, on November 28, 2000, Gregory Friedman, the Department’s IG, provided Chairman

Thompson with an assessment of the most serious management challenges facing the

Department. The IG is responsible for identifying fraud, waste, abuse, and inefficiency within

the agency. According to Mr. Friedman, the challenges, which are discussed below, “warrant

increased emphasis or appear to have reached a heightened level of urgency”:11

• The National Nuclear Security Administration; 

• Contract administration; 

• Environmental remediation (including radioactive waste storage); 

• Human capital;

• Information technology;

• Infrastructure; 

• Property controls and asset inventories; 

• Safety and health; and

• Security.

The National Nuclear Security Administration
12 Department of Energy, Office of Inspector General, “Semiannual Report to the Congress” (September

30, 2000), p. 29.

13 Department of Energy, Office of Inspector General, “Semiannual Report to the Congress,” (March 31,

2000), p. 19.

33

The National Nuclear Security Administration was established in March 2000 as a semiautonomous agency within the Department to administer its national security functions. It is

intended to provide clear and direct lines of accountability and responsibility for the management

and operation of the nation’s nuclear weapons, naval reactors, and nuclear nonproliferation

activities. As with the establishment of any new enterprise, the administration faces a number of

challenges. Logistical and organizational issues must be resolved; expectations, responsibilities,

and authorities must be established; and human capital issues must be addressed. Further, the

agency has a number of major policy issues it must address. Many of those issues—notably

contract administration, security, infrastructure, and information technology—represent

management challenges to the agency, as well as to the Department.

Contract Administration

In a 1999 report, the Department stated that it had reformed its contracting practices, which had

been largely unchanged for more than 50 years. However, based on observations and reviews

conducted since 1994, the IG concluded that many of the Department’s contract reform goals

have yet to be achieved. For example, while incentives have been included in most contracts,

reviews have disclosed systemic weaknesses in the way these incentives have been administered. 

Ongoing reviews have disclosed continuing problems associated with performance-based

incentives and fees for contractors at major Department facilities. Since $13 billion of the budget

of the Department is spent by its major contractors, improvements in contracting practices

represent one of the greatest opportunities for enhancing the economy and efficiency of

operations. Within the last year, the IG disclosed several instances where certain contracting

practices were not in the government’s best interests:

• The University of California used $24,000 in contract funds to conduct a poll to “gauge

public awareness and impressions” of Lawrence Livermore National Laboratory

concerning unfavorable press coverage.12

• Only one of the four contractors audited by the IG had properly determined whether it

would be better for the Department to make or buy certain items. Had the determinations

been made for all four cases, the Department could have saved over $5 million. 

According to the IG, “[s]ubstantial additional savings are possible if the make-or-buy

concept is fully adopted at all Department sites.” Unfortunately, these determinations are

not being made because the Department’s procurement officials have not adequately

monitored contractor implementation of the program.13

• The Department’s Richland Operations Office allowed the contractors to use an off-site

laboratory to analyze groundwater samples rather than directing them to use a less

expensive on-site laboratory with the same testing capability. As a result, Richland
14 Ibid., p. 9.

15 Department of Energy, Office of Inspector General, “Semiannual Report to the Congress” (September

30, 2000), p. 26.

16 Department of Energy, Office of Inspector General, “Semiannual Report to the Congress” (March 31,

2000), p. 8.

34

incurred unnecessary costs of approximately $550,000.14

In 1994, the Department replaced its standard management and operating contract with a new

performance-based contract. The new contract included incentives to improve performance

and/or reduce costs. An audit of 13 programs at the Idaho Engineering and Environmental

Laboratory revealed that contractors were getting paid for improved performance even though

performance was not actually improving:

For some incentives, performance declined or was unchanged. For others,

performance improved but the improvement was overstated, was compensated

twice, could not be directly linked to actions taken by [the contractor] during the

incentive period, or carried a disproportionately high fee. For still others, [the

contractor] could not demonstrate any reduction in costs.

15

Environmental Remediation (including Radioactive Waste Storage)

The Department’s effort to address the environmental consequences of its nuclear weapons

mission has been recognized as the largest remediation program of its kind ever undertaken. The

Department reports that it is responsible for cleaning up 113 geographic sites located in 30 states

and one territory. Sites range in size from as small as a football field to larger than the state of

Rhode Island. Cleaning up the entire nuclear weapons legacy will take several decades and,

according to the Department’s most recent estimate, cost about $230 billion. The magnitude of

the cleanup effort, along with its technical complexities and uncertainties, ensures that it will

remain a Departmental challenge for the foreseeable future. While the Department has made

progress in defining the cleanup effort, estimating its scope, and prioritizing individual projects,

increased management attention is needed to achieve intended environmental cleanup goals. 

• The Department currently estimates that it will cost $47 billion to clean up radioactive

waste in tanks at Hanford, Washington. This reflects an increase from an earlier estimate

of $30 to $38 billion. In 1993 and 2000, the IG studied the management of the clean-up

project. Both studies concluded that the project lacks a comprehensive project

management plan, even though the Department has already spent $3.8 billion on the

project.16

• During another audit, the IG found that “ineffective management and insufficient

oversight” increased the cost and delayed the schedule for an environmental cleanup. 

Specifically, the decontamination and decommissioning of three large uranium
17 Department of Energy, Office of Inspector General, “Semiannual Report to the Congress” (September

30, 2000), p. 19. 

18 Department of Energy, Office of Inspector General, “Top Ten Management Challenges for the

Department of Energy” (November 28, 2000).

19 General Accounting Office, “Major Management Challenges and Program Risks: Department of

Energy,” Performance and Accountability Series, GAO-01-246 (January 2001), p. 15.

20 Ibid., p. 19.

35

enrichment buildings at the Department’s East Tennessee Technology Park was two years

behind schedule and $94 million over budget.17

Human Capital

Due to a weakened workforce, the Department faces major problems fulfilling its duties in the

near future. Since 1995, the Department has decreased its staff from 13,640 to 10,027 through

reductions in force, buyouts, and attrition. During this period, the average age of employees

increased from 44 to 48. Fully 34 percent of the staff will be eligible to retire in the next 5 years.

Separations exceed hires by almost 3 to 1. Some of the Department’s major contractors have

experienced similar losses. 18

The Department should develop and implement a plan to preserve the nuclear weapons program

knowledge base, including capturing information that could be provided only by retiring weapons

experts. The Department has taken steps to “reinvigorate” its knowledge and records

management and has developed a comprehensive approach to preserving the nuclear weapons

program knowledge base. While it is evident that management recognizes the seriousness of its

human capital problem, the need for action to ensure that the Department has the technical,

scientific, and management resources it needs to meet its mission requirements has become

critical.

The difficulties being experienced at the National Ignition Facility illustrate this problem. The

National Ignition Facility is a stadium-sized laser facility that is intended to simulate in a

laboratory the conditions created in nuclear explosions. According to GAO, “[contractor]

management and Department oversight failures led to major cost overruns and schedule delays in

the construction of [this] new state-of-the-art facility.”19 In August 2000, GAO reported that the

$3.5 billion facility would not be completed until 2008—more than $1 billion and 6 years later

than originally estimated. Equally important, they noted that “[neither the Department’s]

headquarters staff nor field managers had the skills to oversee the management and technical

complexities of this large project, and the field staff did not have technical proficiency in laser

operations.”20

Information Technology
21 Department of Energy, Office of Inspector General, “Top Ten Management Challenges for the

Department of Energy” (November 28, 2000).

22 Ibid.

23 Department of Energy, Office of the Inspector General, “Semiannual Report to Congress” (September

30, 2000), p. 32. 

24Senate Governmental Affairs Committee Press Release, “Administration Compromises Citizens’ Privacy: 

Thompson Reveals Agency Policy Violations and Breaches of Computer Security That Leave Citizen Privacy at

Risk” (October 20, 2000).

36

Since 1996, ten audit reports have been issued identifying problems associated with the

Department’s management of $1.6 billion in annual information technology expenditures. 

Recent audits indicate that the Department does not have an effective investment strategy for

information technology.

• The Department spent at least $38 million developing duplicative information systems.

Also, “[duplicative] systems existed or were under development at virtually all levels

within the Department.”21

• The Department “failed to take advantage of enterprise-wide software contracts that could

have saved nearly $40 million on just one of its desktop software suites.”22

• Two contractors, Westinghouse Savannah and the University of California, could not

implement integrated business information systems because they did not follow

established federal and Departmental guidelines. Westinghouse terminated its project

after investing 9 months and $11.5 million; the University of California terminated its

project after spending over 2 years in development and $3.6 million.23

Equally important, the Department is using its technology inappropriately. In October 2000, the

Department’s Ames Laboratory was found to use information-collecting devices called “cookies”

on its Web site without informing the public. This practice was in violation of government

policy on privacy not only because the cookies were “persistent” cookies, meaning that they

could track computer users over time, but also because the Ames Laboratory Web site had failed

to post a privacy policy of any kind.24

Infrastructure

The condition of the Department’s infrastructure is deteriorating rapidly. Some Stockpile

Stewardship Plan milestones and goals have slipped, restoration costs have increased, and future

nuclear weapons production work is at risk. 

• In September 2000, the IG reported: “[T]he Department planned to dismantle 328 retired

weapons at [the] Pantex [Plant] during Fiscal Year 1999. However, only 207 were

completed partly due to roof leaks, attributed to delayed repairs and preventive

maintenance that resulted in standing water in some Pantex operating bays. The leaking
25 Department of Energy, Office of Inspector General, “Management of the Nuclear Weapons Production

Infrastructure,” DOE/IG-0484 (September 2000), p. 4.

26 Department of Energy, Office of Inspector General, “Semiannual Report to the Congress” (September

30, 2000), p. 13.

27 Ibid., p.17.

37

roof caused a dismantlement work stoppage.”25

Furthermore, the Department has not implemented its critical infrastructure protection plan. As a

result, the Department faces increased risk of damage to cyber-related critical infrastructure that

could adversely impact its ability to protect critical assets and deliver essential services.

Property Controls and Asset Inventories

The Department has extensive inventories of nuclear and non-nuclear materials that may no

longer be needed. Not only could the funds spent to store, secure, and handle these materials be

put to better use, some of the materials pose potentially serious safety and health problems in

their current locations. In March 2000, the Secretary announced an initiative to “clean out the

attic” of unneeded and unused property. Since then, Department managers have been working to

deploy a number of new processes, including on-line auctions, to deal with this issue. Despite

renewed attention to this longstanding problem, the IG has reported significant deficiencies in

controls over the disposal or sale of government property:

• Rocky Flats Environmental Technology Site and its contractor “failed to properly dispose

of and account for weapons parts.” According to the IG, this occurred because Rocky

Flats failed “to require its operating contractor to maintain an accurate inventory or to

require screening of parts prior to disposal.”26

• A contractor at the Savannah River Site “failed to comply with Department and Savannah

River Site requirements for disposal of surplus computers.” The Savannah River

contractor failed to clear stored information, including sensitive unclassified information

and Unclassified Controlled Nuclear Information, from surplus computers.27

Safety and Health

Ensuring the safety and health of its workforce and the public is one of the Department’s most

difficult long-term challenges. Safety and health issues encompass all activities relating to the

identification, testing, handling, labeling, cleanup, storage, and disposal of radioactive and

hazardous waste.

The Department has had a troubled history when it comes to this issue. In 1999, for example,

GAO stated: “In 1995 . . . a [Department of Energy] advisory committee concluded that the
28 General Accounting Office, “Major Management Challenges and Program Risks: Department of

Energy,” Performance and Accountability Series, GAO/OCG 99-6 (January 1999), p. 17.

29Department of Energy, Office of the Inspector General, “Top Ten Management Challenges for the

Department of Energy” (November 28, 2000).

30 Department of Energy, Office of Inspector General, “Semiannual Report to the Congress” (September

30, 2000), p. 18.

38

widespread environmental contamination at [the Department’s] facilities and the immense costs

associated with their cleanup is evident that self-regulation has failed. In 1998, the Defense

Nuclear Facilities Safety Board, an independent group that overseas but has no regulatory

authority over [the Department’s] defense facilities, criticized the Department for failing to

correct worker health and safety hazards.”28

There has even been recent criminal misconduct regarding safety and health issues. One of the

Department’s subcontractors mixed hazardous materials with non-hazardous/non-regulated paint

waste material. The subcontractor was sentenced to three years probation and fined for the

treatment of hazardous waste without a permit and for transportation of hazardous waste without

the required paperwork.29

Security

Recent incidents indicate that security has not been given the necessary priority and attention

within the Department and its laboratories. One of the objectives of the Department is ensuring

that its nuclear weapons, materials, facilities, and information assets are secure through effective

safeguards and security policy, implementation, and oversight. The Department spends over $1

billion per year for physical and personnel security. In the past, reviews have identified

weaknesses in the Department’s protection of nuclear weapons-related information. Lapses in

security were frequently cited during the debate leading to the creation of the National Nuclear

Security Administration. Based on the following examples, improvements in security operations

are still needed.

• “Management officials of the Albuquerque Operations Office changed annual security

survey ratings for Los Alamos National Laboratory without documented rationale for

such changes. Furthermore, Los Alamos National Laboratory personnel believed that

they had been pressured by management to change security self-assessments.”30

• Another inspection identified significant problems in the manner in which security plans

were reviewed and quality assurance issues were closed. IG reviews have also identified

security weaknesses relating to information technology. One audit of six sites disclosed

significant weaknesses that increased the risk at all sites that unclassified computer
31 Department of Energy, Office of Inspector General, “Top Ten Management Challenges for the

Department of Energy” (November 28, 2000).

39

networks could be damaged by malicious attack.31
1

 Federal Emergency Management Agency, Office of Inspector General, “Top Ten Management

Challenges for the Federal Emergency Management Agency” (December 1, 2000).

VI. Federal Emergency Management Agency

Much work is left to be done to ensure that business is carried out in an

economical and efficient manner and appropriate results are achieved.

George Opfer

Inspector General 

Federal Emergency Management Agency 1

The Federal Emergency Management Agency is the federal agency charged with responding to

national emergencies. It works in partnership with groups such as state and local emergency

agencies, fire departments, other federal agencies, the American Red Cross, and other volunteer

organizations. It helps to develop disaster mitigation programs, and to meet the needs of people

and infrastructure when major disasters occur.

The U.S. Fire Administration and the Federal Insurance Administration are also under its

jurisdiction. The Fire Administration supports the nation’s fire service and emergency medical

service communities with training, public education, and research in fire protection technologies

and emergency response procedures. The Federal Insurance Administration makes insurance

available to residents and businesses in communities that participate in the national Flood

Insurance Program.

The Federal Emergency Management Agency faces a number of systemic and long-standing

management problems. On December 1, 2000, IG George J. Opfer provided Chairman

Thompson with an assessment of the most serious management challenges facing the agency. 

The most serious challenges that the IG identified are listed below and discussed in the following

sections: 

• Financial management;

• Information technology management;

• Grants management;

• Disaster response and recovery;

• National Security Support Program;

• Flood Insurance Program; and

• Mitigation Program.

In addition to these systemic problems, other studies have identified cases of either criminal or

inappropriate behavior on the part of individuals.

• A former cabinet member of the Virgin Islands government was convicted of filing false

claims for disaster-related expenses. The official hired a contractor without competitive

bids to repair the roofs of two different buildings that had been damaged as a result of
2

 Federal Emergency Management Agency, Office of Inspector General, “Semiannual Report to the

Congress” (September 30, 2000), p. 11.

3

 Ibid., p. 12.

4

 Federal Emergency Management Agency, Office of Inspector General, “Auditor’s Report on FEMA’s

Fiscal Year 2000 Financial Statements” (March 1, 2001). 

5

Investigative Report of Senator Fred Thompson, Chairman of the Committee on Governmental Affairs,

United States Senate, “Federal Compliance with the Clinger-Cohen Act” (October 2000).

41

Hurricane Marilyn. The contractor did not repair either roof, but submitted invoices that

the cabinet member certified and approved.2

• A contractor company pleaded guilty to conspiracy to defraud the agency. Specifically,

the contractor was submitting fraudulent claims for work following Hurricane Andrew. 

The fraudulent claims contained false time sheet entries for fictitious employees, false

entries for equipment not used as reported and false time sheet entries verifying inflated

work hours of employees. 3

Financial Management

Much more must be done to ensure that the Federal Emergency Management Agency can

produce timely, accurate and relevant financial information to support program management and

accountability decisions. The audit of the agency’s fiscal year 2000 financial statements again

revealed significant deficiencies. To overcome these deficiencies, “employees and contractors

had to engage in intensive efforts requiring expensive and time-consuming manual procedures to

develop reliable information.” The audit continued: “Based on these deficiencies and their

impact on the [agency’s] ability to generate timely, reliable, and consistent financial information,

[the auditors] concluded that the [agency’s] financial management system did not substantially

comply with [f]ederal . . . requirements.”4

Information Technology Management

The agency relies heavily on computers and other information technology to accomplish its

mission and, like the rest of the government, faces challenges in this area. Last year, a review of

federal agency compliance with the Clinger-Cohen Act found that many agencies were not fully

complying with the law and therefore, were not conducting cost/benefit analysis before investing

in computer systems. Also, most agencies were not managing information technology for

performance or results. The agency relies heavily on computers to provide services to disaster

victims but seems to be making a halfhearted attempt at complying with this important

information technology management law. In fact, the report found that the agency does not have

a capital planning and investment process in place as required by the law and therefore is not

conducting cost/benefit analysis before investing in computer systems.5
6

 Federal Emergency Management Agency, Office of Inspector General, “Semiannual Report to the

Congress” (March 31, 2000), p. 16.

7

Federal Emergency Management Agency, Office of Inspector General, “Top Ten Management Challenges

for the Federal Emergency Management Agency” (December 1, 2000).

8

 Federal Emergency Management Agency, Office of Inspector General, “Semiannual Report to the

Congress” (September 30, 2000), p. 8.

42

In addition, recent reports show that the Federal Emergency Management Agency’s operations

and assets are very vulnerable to computer hackers. For example, a former employee illegally

accessed the agency’s internal computer system on three separate occasions.6 While the

government has been taking steps to address the issue, it is not keeping pace with the growing

threat. Last Congress, a new law, the Government Information Security Act, was passed as part

of the fiscal year 2001 Defense Authorization Act in hope that agencies like FEMA would

develop agency-wide computer security programs to protect government computers and the

information contained in them. A recent audit found that the agency had not identified all of its

critical information-based assets; was significantly behind schedule in conducting tests of how

vulnerable these assets are; and did not even know how much it would cost to actually protect

these critical assets. 

Finally, the Federal Emergency Management Agency is behind schedule on an analysis of its

requirements for an improved flood insurance processing system. Consequently, it continues to

rely on outdated technology to process and maintain flood insurance policies.7

Grants Management

The agency needs to address problems with the money it gives out in the form of grants. When

providing disaster assistance grants, it usually awards a single grant to the state emergency office

in the state where the disaster occurred. The state emergency office then divides the grant into

small pieces and gives it to other state agencies, local governments, and private non-profit

organizations. The state emergency office is responsible for awarding, disbursing, and

monitoring the disaster assistance funds.

The IG audited 17 state emergency management offices over the last three years to see whether

they were properly managing their grants. They identified a number of recurring problems:

• The Maryland Emergency Management Office did not “properly monitor subgrantee

activities” or properly close out complete programs.8

• The Mississippi Emergency Management Office did not “obtain progress or financial

status reports from subgrantees,” “monitor subgrantees’ progress toward project

completion in a timely manner,” or have a system in place “to prevent excessive
9

 Ibid., p. 8.

10 Ibid., p. 9.

11 Federal Emergency Management Agency, Office of Inspector General, “Semiannual Report to the

Congress” (March 31, 2000), p. 8.

12 Ibid.

13 Ibid.

14 Ibid.

15Federal Emergency Management Agency, Office of Inspector General, “Top Ten Management

Challenges for the Federal Emergency Management Agency” (December 1, 2000). One such initiative being

examined involves turning over the management of small disasters to states. 

43

payments” to certain recipients.9

• The Nebraska Emergency Management Agency made “incorrect calculations and

payment of administrative allowances to subgrantees” and “reimbursement to a

subgrantee for unallowable costs.”10

• The Washington State Emergency Management Office failed to recoup and return invalid

payments to the Federal Emergency Management Agency.11

• A disaster claim from the Georgia Board of Regents included “unsupported charges,

excess land acquisition and development costs, charges covered by insurance, ineligible

project management costs, and unreasonable contract charges.”12

• The Pennsylvania Department of Transportation claimed “specific charges under both

large and small projects that were unauthorized, unsupported, allocable to another

[f]ederal grant program, excessive, and duplicative in nature.”13

• The North Carolina Department of Transportation claimed “excessive overtime salary

and fringe benefit charges, ineligible regular-time salaries, duplicative funding,

unsupported costs, and unauthorized work.”14

Disaster Response and Recovery

The management of the Disaster Response and Recovery Program continues to be one of the

Federal Emergency Management Agency’s largest challenges. The number of federally declared

disasters continues to increase, making it critical that the agency reduce disaster response and

recovery costs, better manage its disaster workforce, ensure the integrity of its many financial

assistance programs, and improve program service delivery. It has begun initiatives to address

these problems. The effectiveness of the initiatives, however, has yet to be examined.15

Another area where problems remain is debris removal. The agency needs to improve its

controls over the Debris Removal Program to prevent serious fraud, waste, and abuse. If left

unchecked, the IG warns that “the abuse within the Debris Removal Program will detract from or
16 Ibid.

17 Ibid.

18 Ibid.

19Federal Emergency Management Agency, “The Federal Emergency Management Agency Annual

Performance Plan: Fiscal Year 2001” (March 2000), p. 6.

44

overshadow the improvements that [the agency] has made in its disaster response and recovery

programs.”16

National Security Support Program

In 1995, the agency was assigned the lead federal agency responsibility for developing and

maintaining a national strategy to combat domestic terrorism. In May 1999, GAO reported that

FEMA’s domestic consequence management exercise program was not well developed.17 In

more recent reports and testimonies, GAO reported that terrorism preparedness training programs

are sometimes duplicative and not well coordinated among the various federal agencies with

terrorism-preparedness responsibilities. Although the agency has taken steps to begin addressing

these issues, its role in terrorism-related preparedness and consequence management needs to be

monitored.18

Flood Insurance Program

The National Flood Insurance Program presents a formidable management challenge for the

agency. One of the program’s greatest challenges is financial management. Since 1993, it has

incurred operating losses of approximately $1.56 billion.19 There are two reasons for this

financial instability - 1) it does not collect sufficient premium income to build reserves to meet

future flood losses; and 2) the cost to the program for properties destroyed more than once is

approximately $200 million annually. Finally, the program needs to better coordinate and

integrate its activities with that of the disaster mitigation activities of the agency. 

Mitigation Program

The Federal Emergency Management Agency needs to tackle the inherent problems associated

with the Hazard Mitigation Grant Program to ensure that funds are effectively spent and address

mitigation priorities. A major component of this program is buyouts. It is important to have

regulations and guidance as to how the buyout program is implemented. In June 2000, the IG

highlighted significant problems with the manner that the agency implemented the special

Hurricane Floyd buyout program. Many of the problems were traced to lack of guidance and

delays in conforming to the eligibility criteria specified for this buyout. Given the significant

role buyouts have within the program, it is critical that they are effectively executed and address

mitigation priorities. In this respect, it is important to address how the mitigation planning
20 Federal Emergency Management Agency, Office of Inspector General, “Top Ten Management

Challenges for the Federal Emergency Management Agency” (December 1, 2000).

21 Ibid.

45

process in the states can be more effectively coupled with developing buyout projects and

ensuring mitigation priorities are met and monies are spent in a timely manner.20

Finally, the agency needs to ensure that the modernization of Flood Insurance Rate Maps

continues to move ahead in a timely and effective manner. To date, significant progress has not

been made in implementing the Map Modernization Plan. The agency has estimated that the

modernization program will cost approximately $750 million. In September 2000, the IG issued

a report that concluded that this estimate is unreliable because of the difficulty of predicting

several of the key components of cost, as well as the high risk that some of the assumptions that

underpin the estimate may be wrong.21
1General Accounting Office, “Major Management Challenges and Program Risks: Department of Health

and Human Services,” GAO-01-247 (January 2001).

VII. Department of Health And Human Services

The Department of Health and Human Services, with a $376 billion budget,

presents one of the more massive and complex management and programrelated challenges in the federal government. The federal health and social

programs it oversees tangibly affect the lives and well-being of virtually all

Americans and encompass some of the most costly issues facing the nation.

U.S. General Accounting Office 1 

The Department of Health and Human Services has about 59,000 employees and manages over

300 federal programs. Its largest operating component, the Health Care Financing

Administration, runs the Medicare program, and partners with the states to administer the

Medicaid program. Medicare is the federal government’s nationwide health care system for

senior citizens and the disabled. Medicaid is a joint state-federal program that provides medical

services to qualifying low-income persons. 

The GAO and the Department’s IG have identified a number of critical management problems at

the Department. While these problems hamper many of the Department’s hundreds of programs

and activities, their greatest impact is on the Medicare program. According to the IG, eight of the

Department’s 10 most serious problems involve Medicare. Also, Medicare is on GAO’s “highrisk list” of those federal programs throughout the government that are most vulnerable to fraud,

waste, and mismanagement. Medicare has been on the biennial GAO high-risk list ever since its

inception in 1990. 

A program as large and complex as Medicare will always be hard to manage and vulnerable to

some loss and error. However, the program’s intrinsic risks are compounded by the

Department’s pervasive financial and information technology management weaknesses, as well

as its staffing problems. For example, like most federal agencies, the Department suffers from

another GAO high-risk problem—failure to adequately protect sensitive computerized

information from unauthorized access and misuse. This problem threatens the confidentiality of

the massive amounts of medical and other sensitive personal data the Department keeps on

millions of our citizens. 

The following sections provide more specific information on the Department’s core problems:

C Medicare; 

C Medicaid;

C Financial and information technology management; and 

C Staffing.
2General Accounting Office, “Efforts to Measure Medicare Fraud,” GAO/AIMD-00-69R (February 4,

2000).

47

Medicare

The Medicare program covers about 40 million persons age 65 or older, and certain disabled

persons. Beneficiaries enroll in either the “fee-for-service” part of Medicare, where they choose

their own doctors and other health care providers for covered services that Medicare pays, or in

the managed care part of Medicare, called “Medicare+Choice.” The total Medicare budget is

more than $200 billion a year. Most of this budget (about $174 billion last year) goes to fee-forservice payments. The rest funds Medicare+Choice. 

Each year, the Medicare program loses a significant portion of its total budget to erroneous

payments. These include payments to people who are not eligible for Medicare, payments for

goods or services that are not covered by Medicare, or higher payments than allowed for covered

goods or services. For the past 5 years, the Department’s IG has estimated erroneous payments

in the fee-for-service part of the program. The following figure shows these estimates: 

While estimated errors are decreasing, they still take a heavy toll on the program. The $11.9

billion lost in 2000 was 6.8 percent of the entire fee-for-service budget for that year. Such losses

divert important resources from the Medicare program and its intended beneficiaries. For

example, the lost $11.9 billion would go a long way toward funding the annual cost of a

prescription drug benefit under Medicare. Furthermore, the IG estimates don’t even capture the

full amount of Medicare’s erroneous payments. They don’t include errors in the

Medicare+Choice part of Medicare, nor do they necessarily include fraudulent payments. 

Therefore, the total annual losses to improper Medicare payments are probably much greater than

the IG estimates. According to GAO, “How much greater, no one knows.”2
3Department of Health and Human Services, Office of Inspector General, “Top Ten Management

Challenges for the Department of Health and Human Services” (December 1, 2000).

4

Ibid.

5Department of Health and Human Services, Office of Inspector General, “Semiannual Report to the

Congress” (September 2000), p. 39-40. 

6

Ibid., p. 11. 

48

Erroneous payments affect all aspects of the Medicare program. One particularly serious

problem area is mental health services. Reviews by the IG and by the Department itself reveal a

pattern of inappropriate claims for mental health services spanning a variety of provider types. 

For example, IG reviews found the following:

• Over 90 percent of Medicare payments to community mental health centers for partial

hospitalization services in five states—$229 million of $252 million—were unallowable

or highly questionable.3

• An estimated 58 percent—$224 million of $382 million—of outpatient psychiatric

charges at acute care hospitals in ten states were unallowable or unsupported. At least

$57 million of $149 million in Medicare payments was unallowable or unsupported for

outpatient psychiatric services provided by psychiatric specialty hospitals in ten

locations.4

Another major problem area is payment for medical equipment and supplies. The Medicare

payment process is vulnerable to double-billing, coding errors that result in excessive payments,

and outright fraud. For example: 

• Inappropriate Medicare reimbursement for orthotics continues at significant levels. The

IG found that about two-thirds of sampled claims for orthotic devices were miscoded or

lacked adequate documentation. Based on this sample, the IG projected that Medicare

overpaid orthotic claims by $33 million in one year.5

Medicare also is plagued by unscrupulous individuals and firms, who deliberately take advantage

of the program. The IG reported on the following recoveries from false claims cases: 

• A large operator of 36 hospitals in rural areas and small cities paid the government $31.8

million for submitting false claims through a practice know as “upcoding,” or billing

more expensive services than the hospitals actually provided by assigning inappropriate

diagnostic codes.6

• A New York doctor was imprisoned and fined for submitting over $8 million in false
7

Ibid., p. 13.

8

Ibid., p. 20.

9General Accounting Office, “Health Care Fraud: Schemes to Defraud Medicare, Medicaid, and Private

Health Care Insurers,” GAO/T-OSI-00-15 (July 25, 2000).

49

claims to Medicare.7

• A dialysis services company based in Sweden and two of its Florida subsidiaries repaid

the government more than $53 million for false claims submitted to Medicare and

Medicaid. Among other things, the companies double-billed for lab tests and also billed

for medically unnecessary tests.8

Medicare and Medicaid have even spawned a cottage industry of organized criminals who

specialize in defrauding the programs. GAO investigators recently described some of these

criminal schemes:

• In the “rent-a-patient” scheme, organizations pay for, or “rent,” individuals to go to

medical clinics for unnecessary diagnostic tests and cursory examinations. Licensed

physicians sometimes participate in the rent-a-patient scheme. Medicare and Medicaid

are billed for those services and for other services or medical equipment that were never

provided.

• In the “pill mill” scheme, separate health care providers, usually including a pharmacy,

work together to generate a flood of fraudulent claims that Medicare or Medicaid pay. 

After a prescription is filled, the “beneficiary” sells the medication to pill buyers on the

street, who then sell the drugs back to the pharmacy.

• In the “drop box” scheme, a private mailbox facility is used as the fraudulent health care

provider’s address, with the provider’s “suite” number actually being its mailbox number. 

The fraudulent health care provider then uses that address to submit claims and receive

payments from Medicare and Medicaid.9

These criminals seem capable of cheating the government with frightening ease. One convicted

felon whose previous experience was owning a nightclub in Miami bragged:

I had no experience or training in health care services. . . . Without this

experience and with no knowledge of the Medicare program, I purchased a

business and started billing Medicare. It was very easy for me to get approval

from Medicare to become a provider. . . . They gave me a provider number over

the phone. No one from the government or anywhere else ever came to my place

of business to check any information on the application. No one ever checked my
10Quoted in General Accounting Office, “Medicaid: HCFA and States Could Work Together to Better

Ensure the Integrity of Providers,” GAO/T-HEHS-00-159 (July 18, 2000), p. 5. This individual was actually caught

for defrauding Medicaid.

11General Accounting Office, “Major Management Challenges and Program Risks: Department of Health

and Human Services,” GAO-01-247 (January 2001), p. 19. 

50

credentials or asked if I was qualified to operate a medical supply business.10 

The Department also has serious problems with its own contractors. The Medicare program is

administered through about 50 contractors that handle claims processing and administration. The

contractors are responsible for paying health care providers under Medicare fee-for-service, fully

accounting for Medicare funds, and conducting activities designed to safeguard program funds.

For several years, the IG has reported problems in the Medicare contractors’ financial

management and accounting procedures and longstanding weaknesses in internal controls.

As part of their payment safeguard activities, Medicare contractors are required to have fraud

units to detect fraud and abuse by providers. Staff turnover, lack of proper training, and lack of

understanding of program requirements have hampered the effectiveness of the fraud units.

Worse yet, there have been fraud problems with the contractors themselves. One contractor

prepared bogus documents to falsely demonstrate superior performance, which Medicare then

rewarded with bonuses and additional contracts. Some contractors adjusted their claims

processing so that system edits designed to prevent inappropriate payments were turned off,

resulting in misspent Medicare funds. Contractor cost reports were found to contain

improprieties, such as claiming private insurance business costs as if they were costs incurred

under Medicare contracts. As GAO observed:

Although Medicare contractors are the front line of defense against health care

provider fraud and abuse and erroneous Medicare payments, in the 1990's,

several contractors defrauded the government or settled cases alleging fraud for

hundreds of millions of dollars. The Department rarely uncovered these cases

through its own oversight, in part because it relied on self-certifications and selfreporting by the contractors, and seldom attempted to independently verify their

information.11

Another source of Medicare waste is the excessive rates that Medicare pays for some goods and

services. While Medicare doesn’t pay for most over-the-counter prescription drugs, it does cover

some drug expenses. Its total payments for prescription drugs have risen sixfold over the past

decade from about $700 million to almost $4 billion. However, Medicare pays at exorbitant

rates. This is wasteful now, and would become much more serious if the program is expanded to

offer a broader prescription drug benefit. 

Medicare’s payment methodology for drugs is fundamentally flawed. Medicare bases its

payments on a drug’s “average wholesale price.” However, the “average wholesale price” that
12Department of Health and Human Services, Office of Inspector General, “Top Ten Management

Challenges for the Department of Health and Human Services” (December 1, 2000).

13Ibid.

14General Accounting Office, “Major Management Challenges and Program Risks: Department of Health

and Human Services,” GAO-01-247 (January 2001), p. 24.

51

Medicare uses is essentially meaningless since it bears little or no resemblance to actual

wholesale prices available to physicians, suppliers, and other large government purchasers. The

Medicare reimbursement rate for a particular drug sometimes also includes payment for

dispensing and administering a drug. However, numerous IG reports have found that Medicare

still pays too much for prescription drugs. For example:

• A review of 34 Medicare-covered drugs for which Medicare paid $2.1 billion found that

Medicare and its beneficiaries would have saved $1 billion in 1998 if the allowed

amounts for the drugs were equal to prices obtained by the Department of Veterans

Affairs. Medicare paid between 15 percent and 1,600 percent more than the Department

of Veterans Affairs for each of the 34 drugs.12

• Medicare pays almost double the Medicaid price and almost seven times more than the 

Department of Veterans Affairs for one milligram of albuterol. Nearly every pharmacy

sells generic albuterol at prices lower than Medicare pays. Any consumer could buy a

monthly supply of albuterol for about $52. For the same monthly supply, Medicare and

its beneficiaries pay $120, $96 from Medicare and $24 from the beneficiary.13

Managed care plans under the Medicare+Choice option also have their share of integrity

problems. GAO cites the following examples:

C Some plans were paid for deceased beneficiaries and beneficiaries who were already

covered by the fee-for-services part of Medicare.

C Some plans classified healthy beneficiaries residing in retirement communities as living

in “institutions,” thereby substantially increasing their Medicare payments.

C One large plan provided a prescription drug benefit with less coverage than agreed to in

its contract with Medicare.

C Several plans distributed marketing materials that contained inaccurate, misleading, or

incomplete information about the benefits they covered.

C Some plans failed to adequately inform beneficiaries about their rights to appeal decisions

on coverage or payment issues.14 

Medicaid
15Department of Health and Human Services, Office of Inspector General, “Report on the Financial

Statement Audit of the Department of Health and Human Services for Fiscal Year 2000,” A-17-00-00014 (February

2001), p. 17-18. 

16Amy Pyle, “State Probing Another Major Medi-Cal Scam,” Los Angeles Times (December 30, 1999). 

17Department of Health and Human Services, Office of Inspector General, “Top Ten Management

Challenges for the Department of Health and Human Services” (December 1, 2000); General Accounting Office,

“Medicaid: State Financing Schemes Again Drive Up Federal Payments,” GAO/T-HEHS-00-193 (September 6,

2000). 

52

The Medicaid program is funded with both state and federal dollars and is administered by the

states under state plans that the Department of Health and Human Services approves. Medicaid

payments totaled about $207 billion in 2000, of which the federal share was $118.7 billion. The

program served more than 33 million people. The Medicaid program has the same problems of

waste and error as Medicare—and probably has similar losses amounting to billions of dollars

annually. However, there is no estimated error rate for Medicaid. The IG has recommended that

such an estimate be developed, but the Department and most states have thus far failed to do so.15

Medicaid also has similar criminal fraud problems:

• Federal and state investigators uncovered a massive criminal scheme to fraudulently bill

California’s Medicaid program, known as “Medi-Cal,” for medical supplies. They

estimate that this scheme will eventually cost taxpayers more than $1 billion. They are

now investigating another scheme in which medical records stolen from hospitals and

clinics were used to set up phony medical operations with ghost doctors and phantom

patients. They estimate this scheme will cost millions in Medicaid funds.16

The IG and GAO have also raised concerns about practices that the states themselves engage in

under the Medicaid program. The IG found that some states required public providers to return

Medicaid payments to the state governments. Once the payments were returned, the states used

the funds for other purposes, some of which were unrelated to Medicaid. These payments could

cost the federal government $12 billion over 5 years. The Congressional Budget Office recently

estimated the loss could be as high as $127 billion over 10 years if all states aggressively pursued

these abusive practices.17 

Financial and information management

The Department got an unqualified, or “clean,” opinion on its financial statements for fiscal year

2000. However, it still can’t use its financial systems for day-to-day management. The

Department’s clean opinion came only after billions of dollars of discrepancies were figured out

many months after the end of the fiscal year. For example, the year-end balance for grant

expenditures was initially off by $2.7 billion, including about $1 billion in grant payments that

had been charged to the wrong appropriation account. The IG found weaknesses in the

Department’s accounting systems that impeded its daily operations. For example, the
18Department of Health and Human Services, Office of Inspector General, “Report on the Financial

Statement Audit of the Department of Health and Human Services for Fiscal Year 2000,” p. 5-8, 13-14.

19General Accounting Office, “Major Management Challenges and Program Risks: Department of Health

and Human Services,” GAO-01-247 (January 2001), p. 25-28.

20Department of Health and Human Services, Office of Inspector General, “Semiannual Report for April 1

to September 30, 2000,” p. 34. 

21General Accounting Office, “Major Management Challenges and Program Risks: Department of Health

and Human Services,” GAO-01-247 (January 2001), p. 13.

53

Department lacks reasonable controls to oversee Medicare contractors and assure that errors are

detected on a timely basis. The Department relies extensively on electronic data processing for

Medicare. However, both the Department’s own electronic data processing systems and those of

its contractors had numerous weaknesses that made them vulnerable to improper payments and to

unauthorized access and disclosure of sensitive information.18

In the early 1990's, the Department launched an initiative to replace Medicare’s multiple,

contractor-operated claims processing systems with a single, more technologically-advanced

information system. However, this initiative failed due to a series of planning and

implementation missteps. A new integrated system is not expected to be ready until 2004 at the

earliest. In the mean time, the Department continues to operate under fragmented systems that

don’t talk to each other. This feeds fraud and error.19 For example:

• Medicare paid an estimated $20.6 million for services that started after the beneficiaries’

dates of death. Of this amount, $8 million was paid despite the fact that the beneficiaries’

dates of death were already recorded in the Department’s database at the time the claims

were processed.20

Staffing problems

The Department lacks the management and staff needed to handle its complex responsibilities

under Medicare and Medicaid. Its Health Care Financing Administration has had 19

administrators or acting administrators in the 24 years since its inception. This impedes longterm planning. Department employees lack experience overseeing preferred provider

organizations, private fee-for-service plans, and medical savings accounts. Many employees lack

experience in dealing with health maintenance organizations. Few of its staff assigned to

managed care oversight have training or experience in data analysis, which is key to monitoring

trends in performance against local and national norms.21 Employees who lack basic accounting

skills and training handle enormous transactions. This increases the risk of huge losses: 

• Inadequate training and supervision, compounded by inconsistent procedures, caused

inexperienced Department employees to make clerical errors in accounting for Medicare
22General Accounting Office, “Clerical Errors in the Medicare HI and SMI Trust Funds,” GAO-01-39R

(October 31, 2000).

54

trust funds. These errors totaled $32 billion and, until discovered and corrected, cost the

trust funds $120 million in lost interest.22

If the Department is to fix the problems with Medicare and Medicaid, as well as other troubled

programs it operates, it will first need to get its own house in order. This means fixing its

weaknesses in financial management, information technology, and staffing. 
1Bill Landauer, “Management Morass Tops HUD Agenda,” Federal Times (February 19, 2001).

2General Accounting Office, “Major Management Challenges and Program Risks: Department of Housing

and Urban Development,” GAO-01-248 (January 2001).

VIII. Department of Housing and Urban Development 

The Housing and Urban Development Department has long been known as

perhaps the most mismanaged of federal agencies. So when Secretary Mel

Martinez pledged to Congress to get the department’s house in order, he set

upon himself one of the Bush administration’s most daunting tasks.

Federal Times1

The Department of Housing and Urban Development encourages home ownership by providing

mortgage insurance for about 7 million homeowners who might not otherwise qualify for loans. 

The Department provides affordable housing for about 4 million low-income households by

insuring loans for multifamily rental housing and providing rental assistance. It also conducts

community development programs. The Department has an annual budget of about $32 billion. 

In addition, it manages about $508 billion in insured mortgages and $570 billion in guarantees of

mortgage-backed securities. 

The Department relies on thousands of mortgage lenders, contractors, property owners, public

housing agencies, communities, and others to administer its programs. Strong oversight and

management by the Department is essential. However, in the late 1980s, there were a number of

widely publicized instances of waste, fraud, abuse, and mismanagement at the Department. In

1994, the GAO designated the whole Department as “high risk” because of four major

department-wide deficiencies that continued to undermine the integrity and accountability of its

programs. These deficiencies were: (1) internal control weaknesses; (2) ineffective and generally

unreliable information and financial management systems; (3) a fundamental lack of

management accountability and responsibility; and (4) insufficient staff with the proper skills. 

GAO still considers much of what the Department does to be high risk. The 2001 update of the

GAO high-risk list included two of the Department’s major program areas—Single-Family

Mortgage Insurance and Rental Housing Assistance. These programs account for about twothirds of all the funds for which the Department is responsible. GAO also reports that the

Department continues to suffer from department-wide weaknesses in staffing as well as

information and financial management.2 

The Department’s IG also has consistently reported on the massive management problems facing

the Department and the limited progress toward solving them: 

While numerous organizational and business process changes have been made, the Office

of the Inspector General sees HUD 2020 [the Department’s management reform plan] as

a work continuously in progress, with promised performance improvements yet to
3Department of Housing and Urban Development, Office of Inspector General, “Semiannual Report to the

Congress” (September 30, 2000), Inspector General’s Message. 

4General Accounting Office, “Major Management Challenges and Program Risks: Department of Housing

and Urban Development,” GAO-01-248 (January 2001), p. 15.

5General Accounting Office, “Major Management Challenges and Program Risks: Department of Housing

and Urban Development,” GAO-01-248 (January 2001), p. 16-18.

56

materialize. Moreover, despite the myriad HUD 2020 changes, HUD still doesn’t have a

solid foundation of skilled staff, a streamlined program inventory, and effective

management systems—elements that the Office of Inspector General views as essential

for meaningful HUD reform.3

The following describes in more detail several of the Department’s most serious management

problems:

C Single-family mortgage insurance;

C Rental housing assistance;

C Staffing; and

C Financial and information management.

Single-family mortgage insurance

The Department administers several programs to make home mortgage financing more

accessible, particularly for low-income and first-time home buyers. To expand home ownership,

the Department insures private lenders against nearly all losses on mortgages that finance

single-family homes. As of the end of fiscal year 1999, the Department had insurance

commitments on about 6.7 million mortgages with a value of about $454 billion. 

In recent years, various factors, especially favorable economic conditions, have resulted in a

national home ownership rate that has increased to an all-time high.4 However, due to poor

oversight of its contractors and other management deficiencies, the Department continues to lose

funds (about $1.9 billion last year) on the sale of foreclosed homes that it insured. Among other

shortcomings, the Department fails to:

C take reasonable steps to make sure that lenders who can make insurance commitments are

qualified;

C monitor those loans and lenders that pose the greatest risks;

C monitor appraisers and hold them accountable for inaccurate appraisals that inflate

property values and expose the Department to more risk; or

C enforce its policy to hold lenders accountable for the work of appraisers they select.5

 

The Department’s IG describes the single-family mortgage insurance program as “beset by
6Department of Housing and Urban Development, Office of Inspector General, “Semiannual Report to the

Congress” (September 30, 2000), Inspector General’s Message. 

7

Ibid., p. 12-13, 68.

57

fraud,” which has devastating effects on victimized borrowers. Also, the growing number of

foreclosures can destroy neighborhoods.6

IG reports are replete with examples of fraud and mismanagement in the single family program:

C A criminal investigation conducted in Houston, Texas, called “Operation Straw House,”

uncovered a massive scheme to defraud the Department and commercial mortgage

lenders. The scheme involved three criminal organizations and an estimated $74 million

in fraudulent insured loans obtained by approximately 75 individuals.

C A former Department employee was convicted of accepting a bribe and tax evasion after

she sold 82 of the Department’s properties valued at about $9.1 million for a total of $2

million. She was also ordered to stop working on business affecting the Department. It

seems that after the Department fired her, she had been hired as a consultant by lenders to

do “quality control work” on Department-insured loans.

C Four people in Los Angeles were convicted in a multi-million dollar loan fraud scheme. 

They had recruited unqualified home buyers and submitted applications containing phony

documents in order to obtain Department-insured loans. The fraudulent loans totaled

about $6.5 million.7 

Rental housing assistance

About 4,500 housing authorities administer the Department’s public housing and tenant-based

rental assistance programs, which serve over 2.8 million households. The Department contracts

with private property owners to provide housing rental assistance, called “Section 8”

project-based assistance, on behalf of eligible low-income households. There are 22,000 projectbased Section 8 contracts covering about 993,000 multi-family housing units. 

Over the years, GAO, the IG, and others have documented problems in the Department’s

management and oversight of these rental housing programs. The IG has reported on a number

of these management failures and the harm inflicted on the people the programs are designed to

serve:

C The Public Housing Authority in Bridgeport, Connecticut, received $750,000 in excess

operating subsidies and incurred $300,000 in unnecessary utility expenses for units in the

Trumble Gardens complex that had remained vacant for 4 years. Because of management

negligence, many of these vacant units had been severely damaged by vandalism, water,
8

Ibid., p. 14.

9

Ibid., p. 42, 64, 86.

10Susan Gaffney, Inspector General, Department of Housing and Urban Development, Statement before

the Senate Subcommittee on Housing and Transportation (September 26, 2000), p. 3-4.

58

and bird infestations. The Authority consistently had high vacancy rates, averaging 11

percent, despite waiting lists of 1,900 families. Over a three-year period, the Department

paid the Authority about $2.5 million in operating subsidies for vacant units. 

C Rental housing managers have been caught engaging in a criminal practice called “equity

skimming.” This is the willful misuse of rents or other proceeds from properties held or

insured by the Department. This practice deprives projects of needed funds for repairs

and maintenance. This, in turn, contributes to the deterioration of properties and

substandard living conditions for their tenants. In Tampa, Florida, 10 individuals and one

business were convicted of “skimming” over $1 million from Department subsidy

payments for 17 insured properties.8

C Housing projects often are hubs of violent crime and drug trafficking. In South Jamaica,

New York, members of a violent gang called the “Chomp Crew” were convicted of

operating a multi-million drug trafficking enterprise in and around a public housing

development. So far, over 100 drug dealers and their associates have been arrested.9

Staffing

Many of the management and oversight deficiencies described above stem from chronic staffing

problems within the Department. The IG stressed the impact of the Department’s staffing

problems in Congressional testimony last fall:

The adequacy of staff resources in the Department has long been a concern of the Office

of Inspector General and a root cause of many of HUD’s material weaknesses. Our

audits have consistently found a mismatch between the number and complexity of HUD’s

programs and the capability of HUD staff to administer those programs. In a 1997 count

of HUD’s programs, we identified over 300 separable program/activities. A count today

using similar measures would likely show programs/activities increasing. We are

concerned when Secretary Cuomo announces new initiatives, such as Teacher Next Door,

Officer Next Door, Gun Buyback, Gun Safety, Healthy Homes, etc. While each of these

activities may offer benefits in and of themselves, HUD cannot afford to deal with an

increasing number of small programs that are staff intensive to manage. . . . In my mind,

adding more weight to an already weak foundation makes HUD a more vulnerable

organization.10

Two of the new programs the IG mentioned—the Officer Next Door and the Teacher Next

Door—illustrate the problem. These programs permit police officers and teachers to buy at half 
11“Discount Home Program Beset by Fraud,” Los Angeles Times (March 4, 2000). To his credit, Secretary

Martinez has suspended this program until oversight can be improved.

12Department of Housing and Urban Development, Office of Inspector General, “Semiannual Report to the

Congress,” September 30, 2000, p. 4-5.

13General Accounting Office, “Major Management Challenges and Program Risks: Department of Housing

and Urban Development,” GAO-01-248 (January 2001), p. 20-21.

14Susan Gaffney, Inspector General, Department of Housing and Urban Development, Statement before

the Senate Subcommittee on Housing and Transportation (September 26, 2000), p. 6.

59

price homes that the Department owns in troubled neighborhoods. Participating teachers and

officers have to agree to live in the homes for 3 years. The idea is that their presence will

improve the troubled neighborhoods. However, due to lax oversight by the Department, the

programs are plagued by fraud. An estimated one-quarter of the participants defraud the

programs by renting out to others the cut-rate properties they buy, by moving out early, or just by

leaving the properties vacant. So far, nine police officer participants have been convicted of

fraud; another 72 are under investigation.11 

According to the IG, the Department’s staffing problems have a severe impact on its singlefamily insurance program. The IG’s audits and investigations have found that the Department’s

current procedures for monitoring lenders, overseeing contractors, and supervising staff activities

are ineffective. This lack of oversight and accountability results in criminal activities going

undetected and in major losses to the insurance fund. The Department attempted to make up for

its staff shortages by contracting out major activities. However, its remaining staff lacked the

ability to monitor the increased level of contractor activity.12 

GAO also has identified persistent staff weaknesses affecting the Department and particularly the

single-family programs. GAO noted that staffing for single-family programs was cut in half by

the Department’s management “reforms.” A lack of staff and insufficient training and travel

resources were cited as reasons for some of the problems GAO identified in reviews of singlefamily programs and in the responses of Department managers to a survey GAO recently

conducted.13 

At a time when the Department needed experienced employees to perform operational work,

former Secretary Cuomo committed 10 percent of the Department’s staff resources to an

initiative called “Community Builders.” This initiative brought inexperienced people into the

Department to “improve community outreach.” The IG found that the Community Builders were

largely ineffective, and sometimes made things worse. The majority of Community Builders

interviewed by the IG said that they spent more than half their time on public relations activities. 

In some cases, the Community Builders’ limited knowledge of the Department’s programs

caused them to give bad advice to communities or to improperly interfere with the work of other

Department employees.14

Financial and information management
15Department of Housing and Urban Development, Office of Inspector General, “U.S. Department of

Housing and Urban Development: Audit of Fiscal Year 2000 Financial Statements,” 2001-FO-0003 (March 1,

2001), p. 1, 4. 

16General Accounting Office, “Major Management Challenges and Program Risks: Department of Housing

and Urban Development,” GAO-01-248 (January 2001), p. 11, 28.

60

Both GAO and the IG have reported on long-standing financial management problems at the

Department. The Department got an unqualified, or “clean” opinion on its financial statements

last year, which was improvement over the year before. However, the Department still can’t use

its financial systems for day-to-day management of its operations. Among the Department’s

major financial management weaknesses are inadequate oversight and monitoring of housing

subsidy determinations, and deficient controls to ensure that subsidies are based on correct tenant

income. These weaknesses have a direct impact on the Department’s programs:

C A recent study of rent determinations in the Department’s major programs found

substantial subsidy overpayments and under-payments. The study projected that, on an

annual basis, some households were overpaid about $1.9 billion in rent subsidies, while

other households received about $0.7 billion less than the rent subsidies to which they

were entitled. 

C The Department estimated that tenants in assisted housing received excess subsidy

payments of $617 million in 1999 because they misreported their income.15

Likewise, GAO reported that excess subsidy payments totaled about $ 3.1 billion over the last

four years and increased for each of those years.16

The Department also has long-standing problems dealing with its information technology needs. 

According to the IG:

[T]he Department has not been successful in establishing effective processes for

planning and controlling its overall information technology resources. We

continue to report instances where inadequate controls over information

technology operations and investments have put [the Department’s] data systems

and data at risk. Since 1993, the Office of Inspector General has reported as a

material weakness slow progress towards improving financial management

systems, control weaknesses over critical systems applications, inadequate

tracking of system development costs, and poor contracting practices. Without

strong controls over information technology resources, [the Department’s] 

systems may not meet business needs, resulting in inaccurate and unreliable data, system
17Susan Gaffney, Inspector General, Department of Housing and Urban Development, Statement before

the Senate Subcommittee on Housing and Transportation (September 26, 2000), p. 8-9.

18Department of Housing and Urban Development, Office of Inspector General, “U.S. Department of

Housing and Urban Development: Audit of Fiscal Year 2000 Financial Statements,” 2001-FO-0003 (March 1,

2001), p. 42-47. 

61

failures, and excessive costs.17

The GAO has designated computer security as a government-wide high-risk problem. Like most

agencies, the Department has computer security weaknesses. The IG has reported for years that

the Department has weak security controls over sensitive payment and privacy-related data in its

main computer system. The IG also has reported for years that the Department does not have

adequate security controls to limit access to sensitive information by its employees and agents. 

For example:

C Individuals continued to have access to sensitive Department information systems after

they ceased to be Department employees or transferred to other positions within the

Department that did not require such access.

C In 1999, the Department had a backlog of as many as 8,200 users who had access to the

Department’s critical information systems without appropriate background investigations.

The Department claims to have eliminated this backlog, but the IG says it still stands at

almost 6,000.18 
1Cobell v. Babbitt, No. 96-1285 (D.D.C. Dec. 21, 1999) (Memorandum Opinion keeping the court’s

jurisdiction over Interior’s efforts to repair the trust fund’s accounting system for at least five years, and requiring

Interior to file quarterly reports with the court.)

IX. Department of the Interior

[The government’s mismanagement of American Indian trust funds] certainly

would not be tolerated from private sector trustees. It is fiscal and

governmental irresponsibility in its purest form.

The Honorable Royce C. Lamberth

United States District Judge

District of Columbia 1

The Interior Department has jurisdiction over 450 million acres of land and about 1.5 billion

acres of the Outer Continental Shelf. It safeguards the many resources under its jurisdiction,

including the National Parks system, allows for the production of minerals on public lands, and

works to meet the nation’s commitment to American Indians. Congress has appropriated about

$7 to $8 billion annually to allow the Department to meet its responsibilities. With these

resources, Interior employs about 66,000 people in eight major agencies and bureaus at over

4,000 sites around the country. 

To accomplish these varied missions, the Department of the Interior manages a number of large

organizations—or bureaus. These include the Bureau of Land Management, the Minerals

Management Service, the Office of Surface Mining, the Bureau of Reclamation, the Geological

Survey, the Fish and Wildlife Service, the National Park Service, the Bureau of Indian Affairs,

and the Office of Insular Affairs. Largely because of this expansive and disjointed organization,

the Department of the Interior suffers from some of the government’s worst management

problems. According the Department’s IG and GAO, the Interior Department’s worst problems

include the following:

• Violating the trust of Indians and insular areas;

• Poor financial management;

• Mismanagement of computer technology;

• Poor attention to health and safety;

• Poor maintenance of facilities, especially the national parks; and

• Waste in procurement, contracts, and grants.

Violating the trust of Indians and Insular Areas

The Department of the Interior is legally obligated to ensure that American Indian and Alaska

Native resources and lands are properly managed, protected, and conserved. The Interior

Department, as trustee for the tribes, manages $3 billion on the tribes’ behalf. In addition, it

distributes $1.8 billion annually for services provided to American Indians. However, according

to GAO, the Department “cannot assure trust account holders that their balances are accurate or
2General Accounting Office, “Performance and Accountability Series: Major Management Challenges and

Program Risks: Department of the Interior,” GAO-01-249 (January 2001).

3General Accounting Office, “Financial Management: BIA's Management of the Indian Trust Funds,”

T-AIMD-93-4 (September 27, 1993).

4General Accounting Office, “Financial Management: Indian Trust Fund Accounts Cannot Be Fully

Reconciled,” GAO/T-AIMD-95-94 (March 8, 1995). 

5Cobell v. Babbitt, No. 96-1285 (D.D.C. Dec. 21, 1999).

63

that their assets are being properly managed.”2 As far back as 1993, GAO wrote, “Over the

years, countless audit reports and internal studies have cited a litany of serious problems in [the

Bureau of Indian Affairs’] oversight of these accounts.”3 Among the problems GAO cited in a

1995 report were “missing lease and accounting records; the inability to verify that all earned

revenues were collected, posted to the correct account, and disbursed to the proper party; and the

lack of accurate, up-to-date ownership information.”4

In 1999, as the result of a lawsuit by Native Americans seeking an accounting of their trust funds,

Federal District Judge Royce Lamberth wrote of Interior’s management of the Indian Trust

Funds:

[D]efendants, the trustee-delegates of the United States, continue to write checks on an

account that they cannot balance or reconcile. The court knows of no other program in

American government in which federal officials are allowed to write checks—some of

which are known to be written in erroneous amounts—from unreconciled

accounts—some of which are known to have incorrect balances. Such behavior certainly

would not be tolerated from private sector trustees. It is fiscal and governmental

irresponsibility in its purest form.

The United States’ mismanagement of the [Indians’] trust is far more inexcusable than

garden-variety trust mismanagement of a typical donative trust. For the beneficiaries of

this trust did not voluntarily choose to have their lands taken from them; they did not

willingly relinquish pervasive control of their money to the United States. The United

States imposed this trust on the Indian people. . . . But the United States has refused to

act in accordance with the fiduciary obligations attendant to the imposition of the trust,

which are not imposed by statute.

5

Unfortunately, there is no end in sight to the problems with the Indian Trust Funds. The Chief

Information Officer at the Bureau of Indian Affairs overseeing the accounting of the Indian Trust

Funds wrote as recently as February 23, 2001, that “trust reform is slowly, but surely imploding

at this point in time.” 

Mismanagement by the Department of the Interior is not limited to American Indians and
6Department of the Interior, Office of Inspector General, “Independent Auditor’s Report on the

Department of the Interior Annual Report for Fiscal Year 2000,” 01-I-257 (February 28, 2001).

7

Ibid.

8

Ibid.

9

Ibid.

64

Alaskan Natives. In fact, the Department’s IG stated that he will continue to “focus on

management improvements needed in the administration of various federally funded programs”

under the jurisdiction of the Office of Insular Areas. These include grant programs that distribute

federal funds to island territories like Guam, American Samoa, the U.S. Virgin Islands, and the

Commonwealth of the Northern Mariana Islands. The IG wrote recently that “the insular area

governments experience difficulties in accurately accounting for expenditures, collecting taxes,

and other revenues, controlling the level of expenditures, and delivering program services.”6

Some of the mismanagement the IG found included the following:

• A low-income housing program administered by the Virgin Islands Housing Authority

wasted substantial federal funds because of duplicate payments to a contractor and

because it could not account for $1.1 million in Housing and Urban Development funds.7

• The Republic of Palau failed to complete 22 funded projects valued at $48.3 million and

allowed the discharge of pollutants into coastal waters because it had not begun a sewage

treatment plant expansion, even though it had $5.25 million in federal funds to do it.8

• An audit by the IG of a contract with Guam found that Guam’s government had

“expended $4.3 million, obligated $1.1 million, and retained an additional $802,810 for

noneducational purposes” even though the purpose of the contract was education. In

addition, according to the IG, Guam’s Department of Education “used $35,075 for

noneducational purposes and did not use $3.5 million of contract funds in a timely

manner.”9

These problems are emblematic of Interior’s financial management problems.

Financial Management

Although the Department of the Interior received a clean opinion on its financial statements for

the second year in a row, that simply means it could balance its books at the end of the year. The

accomplishment disguises the fact that, as the agency’s IG wrote, “The preparation of reliable

financial statements as required by [law] continues to be a major challenge facing the Department
10Department of the Interior, Office of Inspector General, “Top Ten Management Challenges for the

Department of the Interior” (December 1, 2000).

11Ibid.

12Ibid.

13Ibid.

14Department of the Interior, Office of Inspector General, “Top Ten Management Challenges for the

Department of the Interior” (December 1, 2000).

65

and its bureaus.”10 In addition to the issues listed above, some of the problems confronting the

Department include:

• Despite the fact that Interior has jurisdiction over 450 million acres of land and about 1.5

billion acres of the Outer Continental Shelf, the Department’s inventory system does not

have complete and accurate information on the lands within its control or the land rights

that come with that property.11

• The Department had great difficulty confirming that it engaged in $11.3 billion worth of

transactions with other federal agencies. After asking other agencies to assist in the

confirmation of these transactions, the Department was able to figure out what had

happened in all transactions, except $71 million worth.12

• The Bureau of Indian Affairs was owed $6.7 million in delinquent debts that had been

outstanding for more than 180 days.13

Mismanagement of Computer Technology

As at most federal agencies, the management of computer technology at the Interior Department

often wastes federal resources. In his most recent letter to the Governmental Affairs Committee,

the IG at the Interior Department described the system under development at the Bureau of Land

Management. The IG wrote, “Our prior listing of management challenges identified [the Bureau

of Land Management’s] lack of an automated lands and minerals records system as a separate

management problem area. After [the Bureau] spent almost $440 million from fiscal years 1983

through 1999 on developing the Automated Land and Mineral Records System, the system has

not been deployed because of significant deficiencies. Developing an adequate system is

expected to take several years and continues to be a major challenge facing the Department.”14

In addition to poor management of major computer projects, the Department also has a difficult

time managing privacy and security issues. For instance:

• According to the IG, the Bureau of Land Management and the National Park Service were
15Senate Governmental Affairs Committee Press Release, “Administration Compromises Citizens’ Privacy: 

Thompson Reveals Agency Policy Violations and Breaches of Computer Security That Leave Citizen Privacy at

Risk” (October 20, 2000).

16Patrick Thibodeau, “Federal Agencies Get Poor Grades for Security,” Computerworld (September 18,

2000), p. 20.

17Department of the Interior, Office of Inspector General, “Semiannual Report to the Congress” (October

2000).

18General Accounting Office, “Park Service: Agency is not Meeting Its Structural Fire Safety

Responsibilities,” T-RCED-00-253, (May 2000).

66

found to use information-collecting devices called “cookies” on their Web sites without

informing the public. These “cookies” are placed in a computer’s system to identify the

computer of the person visiting the Bureau’s site and track that user's use of the Internet. 

Both agencies were violating government policy on privacy because the Web sites’

privacy policies failed to mention cookies entirely.15

• In September 2000, the House Subcommittee on Government Management, Information,

and Technology gave the Interior Department an “F” in information security.16

Poor Attention to Health and Safety

The Department of the Interior is responsible for protecting the health and safety of the

increasing number of recreational visitors to its lands and facilities, as well as its own workforce.

In 1999, national parks were visited by more than 280 million people, the Bureau of Land

Management’s public lands had about 75 million visits, the Fish and Wildlife Service’s National

Wildlife Refuge System had about 36 million visits, and the Bureau of Reclamation’s water

projects created water-based recreation opportunities for about 90 million visitors. Accordingly,

ensuring employee and visitor safety is clearly a priority. Unfortunately, the Department often

has difficulty meeting that challenge.

Although the Secretary of the Interior is chiefly responsible for the maintenance of federal land

and facilities under the Department’s jurisdiction, the Secretary is authorized to contract with

private organizations to run and maintain the properties. In one investigation, the IG found raw

sewage flowing directly into a privately-run federal reservoir—Lake Berryessa. Also at Lake

Berryessa, the IG found “mobile homes . . . ‘perched’ over eroding lake embankments, posing a

significant safety risk.” In another investigation, the IG found that batteries were improperly

stored—or dumped—at Canyon Ferry reservoir in Helena, Montana.17 

According to GAO, more than 1,400 fires have occurred at National Park Service structures since

1990, killing five people, injuring many others, and resulting in millions of dollars in property

losses.18 As early as 1998, the Park Service recognized the danger. An internal Park Service

report stated, “[S]ooner or later the [National Park Service] stands to be seriously embarrassed (at
19Ibid.

20General Accounting Office, “Performance and Accountability Series: Major Management Challenges

and Program Risks: Department of the Interior,” GAO-01-249 (January 2001).

21Ibid.

22Department of Interior, Office of Inspector General, “Special Report on the Cost of Construction of

Employee Housing at Grand Canyon and Yosemite National Parks, National Park Service,” 97-I-224 (December 6,

1996).

67

a minimum) by the catastrophic loss, either of an irreplaceable historic structure or collection, or

of human life, from a structural fire.” And as recently as May 2000, GAO reported that structural

fire safety was a low priority for the Park Service, and that serious deficiencies in the safety

program remain. As a result, “the safety of park visitors, employees, buildings and artifacts [is]

being jeopardized: [t]hey are vulnerable to fire that could cause damage, destruction, and severe

injury and even the loss of life.” Park Service officials concede the conditions cited by GAO are

typical of those throughout the 379-unit system.19 

Poor Maintenance of Facilities

The risks to health and safety are largely the result of aging properties and facilities poorly

maintained by the Department of the Interior. Adequate maintenance of the Department’s large

and aging inventory of buildings, structures, facilities, and equipment continues to be one of the

most challenging issues facing the Department. The Department is responsible for maintaining a

wide variety of assets, including schools, office buildings, bridges, dams, irrigation systems,

roads, and historic buildings and structures. The backlog of needed maintenance for these

properties and facilities will continue to mushroom. In fact, the Department reported that as of

September 30, 1999, the cost of the backlogged maintenance ranged from $7.8 billion to $13.7

billion. Reviews conducted by the IG, GAO, and the bureaus show that the Department has not

been able to effectively carry out its maintenance responsibilities or even develop a reliable

estimate of the extent of the backlog.

GAO found that the National Park Service has insufficient information about the condition of

properties within its responsibility. According to GAO, “Frequently, baseline information about

natural and cultural resources is incomplete or nonexistent, making it difficult for park managers

to clearly ascertain the condition of resources and whether resources are deteriorating, improving,

or staying the same.”20 A recent report by GAO shows 20 structures on Ellis Island, New York,

that are in a “seriously deteriorating condition,” some of which have “leaking roofs and peeling

walls.”21 Another area of concern, according to the IG, is the maintenance of National Park

Service employee housing. The National Park Service itself has said that many of its housing

units are in “poor” condition and that the “substandard housing” put its employees at “physical

risk.”22
23Department of the Interior, Office of Inspector General, “Survey Report on the Use of the

Governmentwide Purchase Card,” 99-i-375 (March 30, 1999).

24Ibid.

68

Procurement, Contracts, and Grants

In 1999, the Interior Department spent in excess of $3 billion on goods and services and 

provided an additional $2 billion to states and Indian tribes in grants and other types of federal

assistance. This has traditionally been an area susceptible to waste, fraud, and abuse. 

One particular area of concern is the Department’s new credit card program, which accounted for

more than $300 million of the Department’s expenditures in fiscal year 2000. In a recent

investigation by the IG, it was discovered that Department employees were circumventing the

rules and regulations regarding the use of the credit card.23 For instance:

• Many credit card statements were not checked to verify that items purchased were

actually for valid government purposes.

• Some cardholders allowed non-cardholders to use their cards.

• Many cardholders included in the review did not adequately safeguard their purchase

cards.

The examples of abuses discovered in the IG’s investigation are numerous:24

• One employee purchased more than $5000 in services for water treatment and duct

cleaning. However, the IG could not verify that this was a valid government purpose.

• Once cardholder made three transactions, valued at $1,518, but no documentation existed

for the purchases and the employee could not remember what was purchased.

• One Office of Aircraft Services supervisor approved 26 transactions, valued at $61,325,

even though there were no invoices and/or receipts for 12 purchases, totaling $42,833.

• An Office of Aircraft Services employee used a credit card to purchase a $654 service,

which was described as “services to provide helicopter.” However, a letter from the 

vendor requesting payment referred to the service as, “[t]he job that I almost did.” 

According to the IG, “the vendor was paid for a service that was not provided to the

Office of Aircraft Services.”
1General Accounting Office, “Observations on the Department of Justice’s Fiscal Year 1999 Performance

Report and Fiscal Year 2001 Performance Plan,” GAO/GGD-00-155R (June 30, 2000), p. 1-2.

2

Ibid.

3General Accounting Office, “Major Management Challenges and Program Risks: Department of Justice,”

GAO-01-250 (January 2001), pp. 28-29; General Accounting Office, “Drug Control: DEA’s Strategies and

Operations in the 1990s,” GAO/GGD-99-108 (July 1999).

X. Department of Justice

Overall, [the Justice Department’s] progress in achieving desirable program

outcomes cannot be readily determined since the agency has yet to develop

performance goals and measures that can objectively capture and describe

performance results. 

U.S. General Accounting Office1

As the nation’s chief law enforcement agency, the Department of Justice is charged with 

protecting the public from violence and criminal activity, such as drug smuggling and acts of

terrorism. The Department helps state and local governments improve their ability to prevent

and control crime as well. The Department enforces the nation’s civil rights laws. It also is

responsible for preventing illegal immigration and helping those who lawfully migrate to the

United States. The Department has an annual budget of over $21 billion and a staff of nearly

110,000. Its major components include the Immigration and Naturalization Service, the Federal

Bureau of Investigation, the Drug Enforcement Administration, and the U.S. Marshals Service.

The GAO and the Department’s IG have reported on a number of performance and management

problems at the Justice Department. One overriding problem is that the Department does a poor

job of explaining what is it trying to accomplish and what it actually is accomplishing with the

tax dollars entrusted to it. GAO reported last year that it could not determine what Justice

achieved in its key areas of responsibility because of the Department’s lack of meaningful

performance measures.2 For example:

• The Justice Department’s Drug Enforcement Administration is the federal agency

primarily responsible for combating illegal drugs, which cost our society about $100

billion annually. To help it do this job, Congress substantially increased the agency’s

funding and staff. The Drug Enforcement Administration’s budget (over $1.5 billion for

2000) has more than doubled since 1993, and its staff increased by about 20 percent

during the same period. However, the agency has not developed meaningful goals and

measures that can be used to judge its performance and hold it accountable. Therefore,

there is no way of knowing whether the agency, with all its staff and funding, has made

any difference in reducing the entry of illegal drugs.3

• Likewise, GAO found it impossible to determine whether the billions spent on the Justice

Department’s efforts to reduce illegal immigration along the southwest border of the
4General Accounting Office, “Major Management Challenges and Program Risks: Department of Justice,”

GAO-01-250 (January 2001), p. 17; General Accounting Office, “Illegal Immigration: Southwest Border Strategy

Results Inconclusive; More Evaluation Needed,” GAO/GGD-98-21 (December 1997).

5Department of Justice, Office of Inspector General, “Management and Administration of the Community

Oriented Policing Services Grant Program,” 99-21 (July 1999).

70

United States were achieving results because the Department had no strategy by which its

performance could be judged.4

The Department’s own IG also has criticized the Department’s poor efforts to measure its

performance and to be held accountable for what it does. In one case, the Department actually

submitted misleading performance information to Congress and the public:

• The Justice Department’s Community Oriented Policing Services (“COPS”) program is

an $8.8 billion grant program begun in 1994 that was designed to put 100,000 additional

police officers on America’s streets. Last year, Justice reported that the COPS program

“brought the ranks of funded community police officers to 103,720, exceeding the

President’s goal to fund 100,000 cops by the year 2000.” However, the IG noted that the

real goal of the COPS program was to have 100,000 new officers on the street, not just

“funded.” The IG reported that Justice would not come close to actually deploying

100,000 new officers for some time, and that it was unlikely that 100,000 additional

officers would even be “funded as that term is commonly understood” by 2000.5

In addition to its lack of performance accountability, the Justice Department suffers from a series

of core management problems that have been highlighted repeatedly by GAO and the IG. Many

of these problems are concentrated at the Department’s most troubled component agency, the

Immigration and Naturalization Service. Justice also has several department-wide management

deficiencies. The following problem areas are described in more detail below:

C The Immigration and Naturalization Service;

C Information technology management;

C Financial management; 

C Forfeited assets management; and

C Staffing. 

Immigration and Naturalization Service

The Immigration and Naturalization Service is a poster child for mismanagement in the federal

government. Congress has repeatedly expressed concern about the agency’s ability to perform its

functions, and has repeatedly increased its funding and staff resources in an effort to bolster its

performance. The agency’s $4.3 billion budget for fiscal year 2000 represented an increase of

187 percent over 1993, and its staff increased over 80 percent during this period to nearly 33,000

employees. Unfortunately, there is little to show for this investment. GAO observes:
6General Accounting Office, “Major Management Challenges and Program Risks: Department of Justice,”

GAO-01-250 (January 2001), p. 13-14.

7Department of Justice, Office of Inspector General, “Top Ten Management Challenges for the

Department of Justice” (December 1, 2000), p. 7-9.

71

Despite the significant increase in resources, INS [the Immigration and

Naturalization Service] continues to face challenges in achieving its intended

results. Those challenges are related to INS’ organizational structure and

program implementation efforts, such as controlling the border, reducing alien

smuggling and unauthorized alien employment, and addressing aliens’ failure to

appear for removal hearings. In addition, INS continues to have problems

successfully developing and fielding information technology that is critical to its

operations.

Proposals to restructure INS have been issued as a result of several critics’

conclusion that “mission overload” has impeded INS from succeeding at either of

its primary functions [combating illegal immigration and assisting legal

immigration].6

Two of the IG-designated top 10 management problems at the Justice Department center on the

Immigration and Naturalization Service. They are border control and removal of illegal aliens.7

Border control. The physical integrity of this country’s borders is a critical challenge for the

Department. Within the Immigration and Naturalization Service, the Border Patrol faces

significant enforcement challenges along the southwest border and the northern border to stem

the tide of illegal aliens, drugs, and terrorists. Each year, the Immigration and Naturalization

Service apprehends approximately 1.5 million aliens attempting to enter the United States

illegally or aliens who are in the United States illegally.

The Border Patrol lacks performance goals to judge its success in controlling U.S. borders, nor

does it have target dates for improvements. The IG’s recent review of the Border Patrol’s

enforcement efforts along the northern border found that northern border sectors are encountering

organized criminal activity more often than Border Patrol offices along the southwest border. 

The IG also found that the level of illegal activity along the northern border is likely much

greater than the Border Patrol can document, given the general lack of intelligence information

relating to the northern border and the limited number of agents available to patrol the area.

The IG also noted that most of the world’s prominent terrorist organizations have established

operational bases in Canada, and these organizations help facilitate the illegal transit of their

members into the United States. In addition, during the last 5 years several suspected terrorists

have been involved in smuggling incidents or have applied for entry into the United States from

Canada. For example, a Palestinian man convicted on charges of planning to bomb the New

York City subway system had been previously arrested and released three times while trying to
8Department of Justice, Office of Inspector General, “Semiannual Report to the Congress” (September 30,

2000), p. 4-5; Department of Justice, Office of Inspector General, “An Investigation of the Immigration and

Naturalization Service’s Citizenship USA Initiative” (July 31, 2000). 

9General Accounting Office, “Major Management Challenges and Program Risks: Department of Justice,”

GAO-01-250 (January 2001), p. 17-18.

72

enter the United States illegally from Canada. Finally, large quantities of marijuana and cocaine

are smuggled into the United States from Canada each year.

Removal of illegal aliens. According to the IG, the Immigration and Naturalization Service’s

program to deport illegal aliens is “largely ineffective.” The Service is successful in deporting

only about 11 percent of non-detained aliens after final deportation orders have been issued. 

Aliens who are convicted felons are inappropriately granted voluntary departure. The Service

lacks an effective departure verification system and therefore has no way of knowing whether

illegal aliens granted voluntary departure have actually left the country. The Service has failed to

identify many deportable criminal aliens, including aggravated felons, or to initiate deportation

proceedings for them before they are released from prison. The Service also lacks an

enforcement policy that specifically targets aliens who overstay their visas.

Both the IG and GAO have reported on other major problems at the Immigration and

Naturalization Service. For example:

C The IG issued a comprehensive report that found the Immigration and Naturalization

Service had compromised the integrity of the naturalization process during a 1996 effort,

known as “Citizenship USA,” that was designed to reduce the huge backlog of citizenship

applications. More than one million people were granted citizenship under this effort. 

However, the Service did not carefully review their qualifications; inconsistently applied

its standards for good moral character and English language ability; and did not conduct

adequate criminal history background checks.8

According to GAO, management and operational problems at the Immigration and Naturalization

Service hamper its ability to combat the growing problem of alien smuggling. The Service’s

investigative efforts are fragmented. In several border areas, multiple anti-smuggling units exist

that operate automomously, overlap in jurisdiction, and report to different Service officials. The

Service also lacks staff to perform intelligence functions, and it lacks an agency-wide case

tracking system to monitor and manage investigations.9 

Information technology management

According to the IG, two more of the 10 most serious problems at the Department involve

information technology management. One is the Department’s general weakness in planning and
10Department of Justice, Office of Inspector General, “Top Ten Management Challenges for the

Department of Justice” (December 1, 2000), p. 1-4.

11Ibid., p. 1.

12Ibid., p. 2; Department of Justice, Office of Inspector General, “The Rafael Resendez-Ramirez Case: A

Review of the INS’ Actions and the Operation of Its IDENT Automated Fingerprint Identification System,” Special

Report (March 2000).

73

implementing information technology projects. The other is computer security.10

Information systems planning and implementation. Information systems provide critical support

for many of the Department’s operations. However, the IG has identified critically important

computer systems in the Department that were poorly planned, experienced long delays in

implementation, or did not provide timely, useful, or reliable data. For example, the Immigration

and Naturalization Service continues to make huge investments (more than $2 billion through the

next several years) in automation systems that, up to now, have yielded dubious results. For

example:

• After spending $813 million on its automation programs, the Immigration and

Naturalization Service still can’t track the status of its projects to determine whether

progress is acceptable. As a result, project costs continue to spiral upward with no

baselines against which actual costs can be compared. Also, the Service’s staff can’t

adequately explain how funds are spent. Over a 14-month period, at least seven

automation projects experienced significant unexplained delays. In short, the

Immigration and Naturalization Service continues to spend hundreds of millions of

dollars on automation initiatives without being able to explain what the money was spent

on or what it accomplished.11

These computer problems limit the ability of the Immigration and Naturalization Service to do its

job and, consequently, can affect public safety:

• The IG reported problems in the design and implementation of the Service’s $85 million

automated fingerprint identification system used to identify and track criminal aliens,

known as “IDENT.” According to the IG, these problems contributed to the Service’s

failure to hold Rafael Resendez-Ramirez, a Mexican national with an extensive criminal

record. Known as “the railway killer,” Resendez was accused of committing multiple

murders in the United States. He had been apprehended and released by the Service

seven times while crossing the border illegally. The IG found that none of the Service

employees who were contacted by other law enforcement agents seeking him had placed

a lookout for him in IDENT. Furthermore, IDENT was not integrated with the FBI’s

automated fingerprint system.12

The IG’s concerns about the Justice Department’s information systems are not limited to the
13Department of Justice, Office of Inspector General, “Top Ten Management Challenges for the

Department of Justice” (December 1, 2000), p. 3.

14Ibid., p. 3-4.

74

Immigration and Naturalization Service:

• An IG special report issued in July 1999 examined how the Department handled FBI

intelligence information related to its Campaign Finance Investigation and raised

questions about how the FBI maintains its databases. The Department’s Campaign

Finance Task Force used the FBI’s Automated Case Support system and other FBI

databases to obtain information on individuals and organizations they had under

investigation. However, problems in the way information was entered or searched in the

databases, together with the way that search results were handled within the FBI, resulted

in incomplete data being provided to the Task Force. In addition, many FBI personnel

were not well versed in the use of the FBI’s databases.13

Computer systems security. The GAO has designated computer security a government-wide

“high-risk” problem. This makes it one of the areas throughout the federal government most

vulnerable to fraud, waste, abuse, and mismanagement. Like many agencies, the Justice

Department has major shortcomings in computer security. 

The continuing development of more powerful computers, databases and networks has brought

with it new threats to the security of the Department’s systems and data. In September 2000, the

Chairman of the House Government Reform Committee’s Subcommittee on Government

Management, Information and Technology gave the Department an “F” for its computer security

efforts. In addition, the Department has listed computer security as a material weakness since

1991. Past IG audits have disclosed serious problems in computer security that could lead to the

compromise of sensitive systems and data. In 2000, the IG issued computer security audit reports

on the Drug Enforcement Administration Firebird System, the Office of Community Oriented

Policing Services’ Case Management System, and the Immigration and Naturalization Service’s

I-94 system. These reviews found that select computer controls were inadequate to protect the

systems and their sensitive data from unauthorized use, loss, or modification.14

Financial management

For 1999 and again for 2000, the Department failed to receive an “unqualified” (or “clean”)

opinion on its financial statements. It received “qualified” opinions because of weaknesses at the

Immigration and Naturalization Service. Most components of the Department tend to view the

financial statements as an end-of-the-year assignment and often meet their responsibilities only

by hiring a significant number of contractors. They don’t have regularly functioning systems

capable of providing accounting information needed to manage their operations on a day-to-day

basis. One nagging problem that affects several components involves the implementation of new
15Ibid., p. 4-5.

16Department of Justice, Office of Inspector General, “Immigration and Naturalization Service Collection

of Fees at Land Border Ports of Entry,” 00-05 (February 2000). 

17Department of Justice, Office of Inspector General, “Top Ten Management Challenges for the

Department of Justice” (December 1, 2000), p. 10.

75

financial systems. Most Department components work with commercial “off-the-shelf”

software, but are having problems making the software function. It is imperative that these

components solve these software problems if the Department is to improve its financial

management.15 

Financial management weaknesses expose the Department and its operations to fraud and abuse. 

For example, the IG reported on serious control weaknesses in the Immigration and

Naturalization Service’s multi-million fee collection program at ports of entry into the United

States. The IG reported that cashiers could easily steal cash simply by failing to ring it up on

cash registers. Furthermore, employees responsible for handling cash were not held accountable

for shortages, and managers could not account for cash register tapes documenting thousands of

transactions.16 

Improving financial management is particularly important in light of the increase in grant

programs administered by the Justice Department, such as the $8.8 billion COPS program. The

IG has identified grant management as another “Top 10” problem at the Department. According

to the IG, the Department’s multi-billion dollar grant programs are at high risk of fraud. For

example: 

• Justice provides State Criminal Alien Assistance Program grants to state and local

governments to help defray the cost of incarcerating undocumented criminal aliens

convicted of felonies. An IG audit of the program found that the five states reviewed

received overpayments for unallowable inmate costs and ineligible inmates. The

aggregate cost of these overpayments totaled about $19.3 million. 

• In another case, a former acting police chief was convicted of multiple counts of wire

fraud by filing false and misleading documentation to obtain a COPS grant. He hired

himself as the principal partner and also hired his wife and daughter. None of them

performed any work under the grant. He obtained more than $100,000 in grant funds,

which he spent on personal items such as automobiles and home improvements.17 

Asset forfeiture program

The Justice Department and the Treasury Department operate separate programs to store and

dispose of so-called “forfeited assets,” i.e., property such as cars and weapons that law

enforcement officers confiscate because they were used in criminal activity. The combined value
18General Accounting Office, “High-Risk Series: An Update,” GAO-01-263 (January 2001), p. 46-47.

19General Accounting Office, “Asset Forfeiture: Historical Perspective on Asset Forfeiture Issues,”

GAO/T-GGD-96-40 (March 19, 1996), p. 7-9.

20General Accounting Office, “Major Management Challenges and Performance Risks: Department of

Justice,” GAO-01-250 (January 2001), p. 15.

21Department of Justice, Office of Inspector General, “Top Ten Management Challenges for the

Department of Justice” (December 1, 2000), p. 10-11.

76

of assets in these two programs is more than $1 billion. They also hold large amounts of illegal

drugs and weapons that have not been assigned monetary values. 

GAO has listed management of forfeited assets by the two Departments as a high-risk problem,

dating back to 1990.18 GAO points out that better controls are needed over property seized,

primarily illegal drugs and weapons. Also, the two Departments have consistently ignored

legislation dating back to 1988, as well as a GAO recommendation dating back to 1991, that

called on them to develop a plan to consolidate the management of their separate programs. This

would improve the efficiency of the programs and save the taxpayers money. Currently, both

Departments maintain separate facilities at the same locations to store the same kinds of

property.19

Staffing

The Department continues to have problems attracting and retaining qualified employees for jobs

ranging from Border Patrol agents to information technology professionals. During the last five

years, the Immigration and Naturalization Service experienced problems in recruiting, training,

and deploying large numbers of new Border Patrol agents. The Border Patrol failed to reach its

annual staffing goals for most of those years. For example, it achieved an increase of only 369

new agents in 1999, falling well short of its Congressionally mandated goal of 1,000 new

agents.20 The Bureau of Prisons also must continue to address the significant challenge of hiring

and training enough correctional officers and other staff to safely and effectively operate their

new and expanded facilities.21
1Department of Labor, Office of Inspector General, “Semiannual Report to Congress” (March 31, 2000), p.

9.

2Department of Labor, Office of Inspector General, “Top Ten Management Challenges for the Department

of Labor (December 1, 2000).

XI. Department of Labor

We remain concerned about the ease with which these [worker benefit]

programs continue to be defrauded by claimants and medical providers, as well

as about systemic weaknesses that lead to waste of program funds.

Patricia A. Dalton

Acting Inspector General

United States Department of Labor 1

The Department of Labor is responsible for promoting the welfare and economic security of the

nation’s workforce and ensuring that workplaces are safe. The Department oversees a wide array

of activities that affect more than 100 million workers and more than 10 million employers. 

These activities are managed through a decentralized agency structure that includes 22

headquarters offices, more than 1,000 field offices, and shared program responsibility with

numerous state organizations and as many as 14 federal entities.

The Department must carry out these responsibilities in a rapidly changing environment. Slow

workforce growth and increasing retirements by baby boomers, for example, will likely result in

tight labor markets continuing in the future. Employers are responding to these changes by

seeking more highly skilled workers and creating new types of work arrangements.

The Department of Labor faces a number of systemic and long-standing management problems. 

On December 1, 2000, Patricia A. Dalton, the Department’s Acting IG, provided Senator Fred

Thompson, Chairman of the Senate Committee on Governmental Affairs, with an assessment of

the most serious management challenges facing the Department. The challenges, which are

discussed below, were chosen because they are considered “to be vulnerable to fraud, waste,

abuse, and mismanagement:”2

• Effectiveness of the Welfare-to-Work Initiative;

• Quality of program and cost data;

• Security of pension assets;

• Protection of worker benefit funds;

• Stewardship over information technology resources;

• Targeting of the Dislocated Workers Program; and

• Integrity of electronic benefit claims management.
3Department of Labor, Office of Inspector General, “Semiannual Report to the Congress” (September 30,

2000), p. 36.

4

Ibid., p. 84.

5Department of Labor, Office of Inspector General, “Semiannual Report to the Congress” (September 30,

2000), p. 35.

78

In addition to these systemic problems, other studies have identified cases of either criminal or

inappropriate behavior on the part of individuals.

• The former lead accountant and bookkeeper for a center in Seattle, Washington was

sentenced last June to imprisonment for two and a half years for embezzling federal

funds. The center receives approximately 55 percent of its funding from the Department

through grants. An investigation revealed that the accountant issued checks drawn on the

center’s travel and payroll accounts to himself and members of his family, including his

daughter who received approximately $350,000.3

• Last June, a former claims examiner and former investigator entered a guilty plea to

charges of theft of government property for diverting approximately $161,000 in Federal

Employees’ Compensation Act funds of a deceased claimant into the investigator’s own

bank account.4

Effectiveness of the Welfare-to-Work Initiative

As part of the national welfare reform initiative, the Welfare-to-Work program was enacted in

1997 to help long-term welfare recipients move into meaningful work. The success of the

initiative hinges not only on the effectiveness of the Department’s management and the quality of

services provided, but also on its ability to capture, report, and respond to the results of its efforts

on behalf of eligible individuals.

In 1998 and 1999, audits were conducted of the program’s grantees to assess their progress,

identify vulnerabilities, and recommend corrective action. Additional audits were done in fiscal

year 2000. The IG questioned the capability of two grantees to deliver the program described in

their grant applications. The Department has since acted to terminate both grants. 

• Problems were identified with the Washington Alliance, including vendor agreements

that were awarded without competition; vendor costs and staff salaries that appear

unreasonable; and enrollment levels that are lower than those targeted in its performance

goals. The identified problems demonstrated that the Alliance was not operating its

program according to either the approved grant agreement or the applicable regulations.5

• During a survey of the Devereaux Corporation’s competitive grant program, it was

determined that the Corporation had neither the experience nor past performance record

that were presented in the grant application and which formed the basis for the award. In
6Department of Labor, Office of Inspector General, “Post-Award Survey of Devereaux Corporation,” 03-

00-006-03-386 (May 22, 2000).

7Department of Labor, Office of Inspector General, “Top Ten Management Challenges for the Department

of Labor” (December 1, 2000).

8

Ibid.

79

addition, the approved grant budget included excessive and questionable costs; staff

salaries appeared unreasonable; and the Devereaux Corporation incurred questionable

transportation and travel costs.6 

Three years into Welfare-to-Work, it is time to assess the program’s effectiveness in preparing

participants for lasting employment leading to self-sufficiency. However, the ability to properly

measure the program’s success is hampered by questions about the consistency and quality of

performance data reported by states and other grantees. Based on the early stages of a study, it

appears that the grantees are confused about the definitions of the performance information

required to be reported; this suggests that data are being reported inconsistently across grantees.7

Moreover, the reporting requirements themselves are in a state of flux. Changes enacted in late

1999 eliminated the participant and financial reporting requirements of the original legislation. 

Instead, the Secretary of Labor, in consultation with the Secretary of Health and Human Services,

states, and localities, was instructed to establish requirements for the collection, maintenance,

and reporting of this information. The Department originally expected to publish the new

reporting requirements early in 2000, but they still have not been finalized. 

Quality of Program and Cost Data

Important initiatives are under way to improve the quality of program and cost data, which serve

as the basis for determining whether federal programs and operations are achieving their intended

results. The Department, however, is limited in its ability to access, or control the quality of,

data used to determine the effectiveness of its programs. This includes difficulties associated

with ensuring the quality of the data provided by states and other sources, where 90 percent of

the Department’s budget is actually spent. For example, audits have disclosed weaknesses in the

Department’s monitoring of the quality of data submitted by grantees and subgrantees. Assuring

the reliability of data reported by states is also a problem for the Veterans’ Employment and

Training Service, which operates most of its programs through the State Employment Security

Agencies.8 In the employment and training area, it is particularly important to know whether

programs have helped individuals to become self-sufficient by obtaining long-term employment. 

Security of Pension Assets
9

Ibid.

10Department of Labor, Office of Inspector General, “Semiannual Report to the Congress” (March 31,

2000), p. 9.

11Department of Labor, Office of Inspector General, “Top Ten Management Challenges for the

Department of Labor” (December 1, 2000).

80

The security of pension assets is a priority of the Department. This includes ensuring that

weaknesses, vulnerabilities, and criminal activity are identified and addressed. One area of

concern involves private pension plans, which serve as an attractive target to organized crime

elements, corrupt pension plan officials, and individuals who influence the investment activity of

pension assets. Recently, labor racketeering investigations involving the investment of pension

plan monies that are jointly administered by labor union representatives and management

representatives have elevated the IG’s concern over the security of the assets in this segment of

the pension plan universe.9

Investigations have uncovered criminal enterprises perpetrated by financial and investment

service providers to the nation’s pension plans. These investigations have revealed abuses by

investment advisors and pension plan administrators who have the opportunity and ability to

structure complex financial schemes to conceal their criminal activity. The IG is concerned that

abuses by financial investment service providers can result in larger dollar losses because they

typically provide investment or financial advice to more than one plan.

Protection of Worker Benefit Funds

The Department administers several programs designed to provide and protect the benefits of

workers. They include the Unemployment Insurance Program, the Federal Employees

Compensation Act, and the Black Lung Disability Trust Fund. Protection of such benefits is

critically important because such programs affect the lives of millions of workers and retirees and

involve billions of taxpayer dollars. In March 2000, the IG “identified serious vulnerabilities”

within these programs.10 Examples of waste, fraud, abuse, and mismanagement for each of these

programs is presented in the following sections.

Unemployment Insurance Program. The Unemployment Insurance Program provides cash

benefits to persons who become unemployed involuntarily. Within this important program,

however, a number of schemes have been identified including “fraudulent employer schemes,

internal embezzlement schemes, fraudulent interstate claims, and the fraudulent collection of

benefits by illegal aliens using counterfeit or unissued Social Security numbers.”11 Furthermore,

investigations have disclosed that the ability to file electronic and mail claims presents

individuals with the opportunity to defraud multiple states from a single location. 

In addition, systemic weaknesses pose problems for the program, including loss of contributions

due to the inability of states to search for hidden wages by employers who misclassify workers as
12U.S. Department of Labor, Office of Inspector General, “Semiannual Report to the Congress”

(September 30, 2000), p. 50.

13Ibid., p. 48.

14Ibid.

15Ibid., p. 47.

16Ibid.

17Ibid., p. 46.

81

independent contractors, employers who fail to report all wages paid, or employers who

misrepresent their claims experience. Examples include:

• A Brooklyn, New York, man collected at least $68,000 in fraudulent benefits by filing

claims using false names and Social Security numbers in New York and New Jersey

between November, 1992, and March, 1999.12

• A Williamsport, Pennsylvania, man created a false company on the Internet which he then

used to file $188,000 in false claims.13

• A Seattle, Washington, woman collected at least $71,000 in fraudulent Unemployment

Insurance benefits by filing claims for benefits against three fake businesses she had

created, as well as one genuine company. At the same time, the woman also was

collecting $700 a month in federally-funded childcare assistance based on “employment”

at one of the fictitious businesses.14

• A Fort Myers, Florida, man used a false Social Security number and fabricated multiple

fictitious employers in various states to obtain Unemployment Insurance benefits for a

seven-year period prior to 2000. At the same time, he received workers compensation

benefits from Ohio by claiming an on-the-job injury at his fictitious company, Admiral

Sales, Inc. This bogus claim bilked the program for $113,000 in benefits.15

• A Pennsylvania man bilked the state’s Unemployment Insurance program by registering a

fictitious record company with the state’s Department of Labor and Industry. Then he

and two accomplices submitted phony W-2 wage and tax statements and bogus pay stubs

from Pot of Gold Records to obtain benefits fraudulently. The trio even deposited a

counterfeit benefit check into their bank account. The group collected more that

$300,000 in fraudulent benefits between 1993 and 2000. The ringleader of the group was

also found to have passed himself off as a landlord to the Philadelphia Housing Authority

in order to obtain fraudulent Section 8 rental assistance payments.16

• A Las Vegas, Nevada, man illegally collected at least $230,500 in fraudulent

Unemployment Insurance benefits from four different states between September, 1996,

and November, 1999. The man established 13 fictitious companies and submitted bogus

interstate claims based on false reported wages for 36 fictitious claimants using the names

and Social Security numbers of dead people, and then collected the claims by mail from

California, Massachusetts, Texas, and Nevada.17
18Ibid., p. 60.

19Ibid.

20Ibid.

21Ibid., p. 59.

22Ibid., p. 85.

23Ibid., p. 56.

82

Federal Employees’ Compensation Act. The Federal Employees’ Compensation Act provides

compensation and medical care for federal employees who suffer job-related injury, disease, or

death. Among the areas where fraud is likely are medical providers who bill the government for

services that were not rendered, charge multiple times for the same procedure, bill for nonexistent illnesses or injuries, or overcharge for services. In addition, claimants may defraud the

program by reporting false injuries, recovering but continuing to claim benefits, or failing to

report, or under-reporting, their outside employment income to the program agency.

Some recent examples include:

• A Phoenix, Arizona, letter carrier collected $87,000 in workers compensation benefits

based on a job-related injury to his neck and left arm. At the same time, he failed to

report employment as the business advisor and principal investor in Ceramics, Etc., of

which his girlfriend was sole proprietor. 18

• A former fire fighter at the Newport, Rhode Island, Naval Air Station collected $98,000

in workers compensation benefits at the same time he was doing business as Excalibur

Maintenance, Inc.19

• A Glenville, Georgia, man was found to have illegally collected $111,000 in federal

workers compensation benefits based on the claim of an on-the-job injury in 1976. While

collecting the benefits, the man earned income operating a family farm.20

• A Wilmington, Delaware, former letter carrier was found to have bilked the federal

workers compensation program of $455,000 over a 23-year period. The man collected

the disability benefits at the same time he was employed supervising archeological digs

and expeditions and appraising various antique items and Civil War memorabilia for

Archeological Excavations, Inc.21

• A Parker, Colorado, employee of the Office of Workers Compensation Programs stole

approximately $161,000 in payments by diverting benefits paid to a dead claimant into

her own bank account. After the claimant had died in 1995, the case worker changed the

designation for electronic funds transfers on his benefit checks to her own bank account.22

• A Whispering Sands, New Mexico, physician was found to have defrauded workers

compensation programs and other insurance entities by submitting false and excessive

billings. The doctor made $23 million in restitution payments as a result of the case.23
24Ibid., p. 57.

25Ibid., p. 58.

83

Black Lung Disability Trust Fund. The Department administers the Black Lung Disability Trust

Fund to provide disability benefits and medical services to eligible workers in the coal mining

industry, when a mine operator cannot be determined liable for providing such benefits. 

The IG expressed concern with the escalating indebtedness of the trust fund. This debt results

from advances provided to the program, which have become an annual necessity for the trust

fund. Currently, the excise taxes are sufficient to pay benefits and administrative costs; however,

the trust fund must continue to borrow from the Treasury to pay the interest due on past

advances.

Management’s annual projections of future receipts and outlays indicate that cumulative

borrowings from Treasury could total $32.3 billion or more by 2040. According to estimates, the

excise tax collections by 2040 would cover less than 30 percent of the interest that is accruing

and annual advances will exceed $1.2 billion per year. If current operating conditions continue,

the Department has acknowledged that a change in the statutory operating structure of the trust

fund will be necessary to meet its obligations.

Also, investigations continue to find fraud within this program both among medical providers

who bill for services that are either not provided or not needed and beneficiaries who collect

benefits to which they are not entitled. Some examples include the following:

• A Grundy, Virginia, doctor was found to have illegally bilked the Black Lung Trust Fund,

Medicare, and Medicaid by routinely prescribing a two week dosage of a pain medication,

and then requiring the patient to return at the end of the period for a second unnecessary

examination, for which the doctor then billed various medical assistance programs. The

doctor paid $100,000 in restitution for his crimes, as well as losing his medical license.24

• A Lee County, Virginia, doctor affiliated with the Lee County Virginia Community

Hospital conspired with a hospital administrator to bilk federal medical assistance

programs, including the Black Lung Trust Fund by leasing medical equipment owned by

the doctor’s company to the hospital at inflated prices, in part to cover the cost of

kickback payments made to the hospital administrator. The hospital was bankrupted as a

result of their scheme. 25

Stewardship over Information Technology Resources

Agencies are required to develop and implement an agency-wide information security program,

emphasizing the need for agencies to plan for future information technology needs as well as to

analyze their current practices to determine their efficiency and effectiveness.
26Department of Labor, Office of Inspector General, “Streamlining EFAST and Development of EMS,”

17-98-001-12-001 (March 27, 1998).

27Department of Labor, Office of Inspector General, “Dislocated Workers Program in a Growing

Economy,” 04-00-002-03-340 (June 29, 2000).

84

The Department of Labor currently operates 65 mission-critical information systems. It relies on

these systems to monitor and analyze the nation’s labor market and economic activities, manage

workforce services, and protect and compensate American workers. Past studies have noted

increased risks for computer crimes and other interruptions made possible by the Internet and lax

internal controls. This work has also shown that the Department’s systems have been deficient in

the areas of general controls and security. The Department needs to assure that all of its major

systems are secure against threats and loss of assets.

Further, the Department has begun its planning for future information technology needs by

embarking upon a multi-million dollar systems upgrade. It is paramount for the Department to

ensure that this new architecture is implemented in a careful and well thought-out process. The

Department needs to ensure that agencies will be able to seamlessly exchange data both within

the Department and externally with stakeholders. Clearly this is a much-needed ability. For

example:

• An audit of the development of the Pension Welfare Benefits Administration’s new

Employee Retirement Income Security Act information system identified numerous

software errors and miscues in delivering a workable system after a $2 million

investment. As a result of recommendations by the IG, the Pension Welfare Benefits

Administration terminated its development effort.26

Targeting of the Dislocated Workers Program

The Department provides retraining and support services to dislocated workers. These services

are provided to eligible dislocated workers, including those who have been terminated or laid off,

who have received a notice of termination or layoff, who are long-term unemployed or

self-employed, or who are displaced homemakers.

The IG conducted an audit in 2000 to determine whether the policies and practices under the

program resulted in the serving of the targeted population. It was found that programs were not

predominantly serving persons who were victims of plant closings or mass layoffs. It was also

found that in 35 percent of the cases, program participants were ineligible, documentation was

insufficient to establish their eligibility, or available evidence caused them to question whether

they were persons whom Congress intended the program to serve.27 The audit disclosed that the

funding formula, which is based on various unemployment measures rather than on the number

of dislocated workers in an area, may not distribute funds to where they are most needed. Where

funds were allocated to localities with relatively few dislocated workers, some entities relaxed

the eligibility criteria in order to spend the available funds. Further, the audit revealed that
28Department of Labor, Office of Inspector General, “Top Ten Management Challenges for the

Department of Labor” (December 1, 2000).

85

program data reported by states was often incomplete or in error.

The Integrity of Benefit Programs Must be Ensured in an Electronic Environment

State Employment Security Agencies administer the Unemployment Insurance and Job Service

programs at the state level. The state agencies are currently upgrading and modernizing their

operations to offer customers telephone and Internet access to selected services including

Unemployment Insurance claims filing, employer registration, employer wage and tax reporting,

and appeals filing. In addition, the Federal Employees’ Compensation Act program is

automating all of its casework. Managers expect to enter all medical bills, records, and payments

to create electronic files for all claims. This initiative, if implemented correctly, will enable the

program to handle claims with more accuracy and efficiency.

The use of automated procedures and Internet communications has the potential to broaden the

range of services, increase hours of operation, and reduce administrative costs. However, there

need to be adequate procedures in place to prevent the misuse of these systems. Recent casework

has suggested that the use of automated procedures brings with it the potential for unauthorized

activity that can contribute to fraud and result in monetary losses for the program.28 Therefore,

the Department must utilize a comprehensive, integrated approach of oversight and enforcement

to address the increased potential for fraud that accompanies electronic claims and thereby ensure

the integrity of the automated programs. 
1Beth Dickey, “NASA: The Few, The Tired,” Government Executive Maagazine (April 1, 2001).

2NASA Strategic Plan (1998).

3

Ibid.

XII. National Aeronautics and Space Administration (NASA)

NASA’s aging workforce and facilities are being stretched to their limits as the

agency attempts to keep running regular shuttle trips to build the International

Space Station while at the same time launching more and more “faster, better,

cheaper” missions to discover the origins of the universe. In February, the

Aerospace Safety Advisory Panel, a group chartered by Congress to keep an eye

on NASA, wrote of the agency’s “tendency to ‘make do’ with job losses and

infrastructure deficiencies, relying instead on short-run fixes . . . . Yet, with

infrastructure, as with workforce, sustained shortfalls in these resources will

eventually compromise NASA’s ability to carry out its challenging mission.

Government Executive Magazine1

NASA calls itself “an investment in America’s future.”2 In its strategic plan, NASA compares

itself to “explorers, pioneers, and innovators . . . boldly expand[ing] frontiers in air and space to

inspire and serve America and to benefit the quality of life on Earth.”3 Indeed, from its

beginning, NASA’s exploration of space has captured the imagination of the American people

and the world. NASA has accomplished great scientific and technological feats in air and space,

and the technology it has developed has been adapted for many non-aerospace uses by the private

sector. NASA remains a leading force in scientific research and in stimulating public interest in

aerospace exploration, as well as science and technology in general.

Nonetheless, because of its size and the complexity of its operations, NASA suffers from some

substantial management problems. According to NASA’s IG, the agency’s worst management

problems include the following:

C Mismanagement of information technology and security;

C Poor management of contracts and major projects; and

C Poor financial management.

Most Americans still identify NASA as the federal agency responsible for putting a man on the

moon, as well as for achieving some of the most spectacular scientific achievements in human

history. However, NASA is also well known for great failures. 

Information Technology

Like many other projects run by NASA, the procurement and administration of computers and

other information technology (IT) are subject to mismanagement. This mismanagement has a
4National Aeronautics and Space Administration, Office of Inspector General, “Audit of Advanced X-Ray

Astrophysics Facility,” IG-99-016 (March 24, 1999).

5National Aeronautics and Space Administration, Office of Inspector General, “Electronic Commerce:

NASA’s Acquisition of Office Supplies,” IG-00-008 (February 23, 2000). 

6

Ibid.

87

detrimental effect on other projects planned by NASA. For instance, according to the IG,

NASA’s mismanagement of the development of software delayed the launch of the Chandra XRay Observatory, a mission that is “intended to observe the universe in four electromagnetic

spectrum regions: visible, infrared, gamma ray, and x-ray.” According to the IG, this delay will

“increase contract costs by an estimated $28.8 million.”4

NASA’s inability to harness the efficiencies that come from information technology also affect

smaller parts of its operations, like the acquisition of office supplies. In an analysis by the IG,

NASA centers were found to be paying in some cases up to 600% more for office supplies than

they should simply because they weren’t taking advantage of e-commerce—using the Internet to

buy what they needed. For instance, NASA’s Marshall Space Flight Center paid just $1.47 for a

pack of AA batteries, while Langley Research Center paid more than ten dollars for the exact

same batteries! Goddard Space Flight Center paid just $17 for a box of ordinary copy paper, but

Johnson Space Center paid more than $57. Office supplies purchased in a year totaled more than

$17 million. The portion of waste clearly fell in the millions. Below is a breakdown of some of

the products purchased by NASA facilities and the variation in price they paid, from the highest

to the lowest, just because some of them weren’t using the Internet to save money.5

Sample of 15 Office Supply Items an the Variation in Price Paid by NASA6

Product Description Lowest Price Highest Price Difference

AA Batteries (8/Pack) $1.47 $10.79 634%

Pad of Engineer Computation Paper $0.72 $5.03 599%

AAA Batteries (8/Pack) $1.12 $5.74 413%

3" Binder $1.13 $4.95 338%

Roll of Tape $0.59 $1.69 186%

Mechanical Pencil (12/Box) $8.16 $22.61 177%

Computer Disk (10/Box) $2.34 $5.84 150%

Address Labels for Laser Printer (2000/Box) $13.12 $28.68 119%

Pocket Folders $0.44 $0.88 100%

Toner for Laserjet Printer $55.60 $92.23 66%

Hanging Folder (Box) $4.48 $7.09 58%
7National Aeronautics and Space Administration, Office of Inspector General, “Semiannual Report to the

Congress” (September 30, 2000).

8National Aeronautics and Space Administration, Office of Inspector General, “Computer Hacker

Charged,” 2001-039 (February 14, 2001). 

88

NASA, like most federal agencies, also has difficulty protecting its computers from hackers. 

According to both GAO and the IG, NASA systems are vulnerable to unauthorized access, and

information contained in its computers is not secure. In its most recent semiannual report,

NASA’s IG wrote:

The host security audits identified vulnerabilities that increase the probability that an

intruder could access NASA system and application software, data, and information if

network and perimeter controls are successfully circumvented. Examples of such

vulnerabilities include inadequate:

C Security monitoring to identify that an unauthorized user is attempting to access

or has obtained access. 

C Password management.

C Protection of critical system directories and files.

C Implementation of vendor-supplied security options.

C Control over powerful system capabilities that could allow a user to bypass

security and auditing controls.

7

The IG also found that “NASA did not have security plans for many of its . . . systems and many

of its computers that host publicly accessible Web sites.” The IG elaborated, “In fact, major

elements of one of NASA’s five major IT investments did not have security plans, contingency

plans, or risk assessments.” This means that the agency failed to consider the risks to its systems

and thus, hadn’t put the right procedures in place to protect its computer systems.

With such a vast amount of sensitive information, NASA should do a better job of protecting

itself. But the risk to NASA is not just hypothetical. In several cases, NASA has suffered

attacks from outside. For example:

• A juvenile computer hacker known as “skalir” was charged with two counts of computer

abuse in the Second Judicial Court, Children’s Court Division, State of New Mexico,

County of Bernalillo. “Skalir” was charged after allegedly hacking into a NASA

government computer system. The computer system was compromised, system files were

modified, and illegal accounts were added.8

• A juvenile allegedly broke into NASA computer systems located at the Jet Propulsion

Laboratory in Pasadena, CA, and the Goddard Space Flight Center in Greenbelt, MD. The

youth allegedly broke into an Energy Department computer system located at Sandia

National Laboratories in Albuquerque, NM, that same month. The youth allegedly

defaced Web pages by altering system files and uploading new files to display images
9National Aeronautics and Space Administration, Office of Inspector General, “Computer Hacker Arrested

for Allegedly Hacking into at Least Three NASA Computer Systems and One Department of Energy Computer

System,” 2001-045 (March 12, 2001). 

10National Aeronautics and Space Administration, Office of Inspector General, “Computer Hacker Pleads

Guilty,” 2001-018 (December 7, 2000). 

11National Aeronautics and Space Administration, Office of Inspector General, “Semiannual Report to the

Congress” (September 30, 2000).

12General Accounting Office, “Major Management Challenges and Program Risks: National Aeronautics

and Space Administration,” GAO-01-258 (January 2001).

89

relating to the hacking group “Electronic Souls.”9

• Raymond J. Torricelli was charged with gaining unauthorized access to two computers at

NASA’s Jet Propulsion Laboratory in Pasadena, California. He also allegedly had

unauthorized possession of credit card numbers, user names, and passwords for additional

computer systems. As a result of a guilty plea, Torricelli faces a maximum sentence of 27

years in prison and fines totaling $950,000.10

These cases exemplify the danger to NASA’s information technology infrastructure. But they

pale in comparison to the vulnerabilities that exist throughout NASA. In fact, according to a

recent audit by the IG, “the Space Station could be susceptible to receiving unauthorized

command and control instructions.”11 Although NASA is attempting to assess the need for

stronger authentication requirements, it’s clear they haven’t paid enough attention to managing

their information technology and ensuring its security.

Poor Management of Contracts and Major Projects

NASA projects are extremely complex. They require an immense amount of attention to detail. 

In its work toward the completion of these projects, NASA spends more than $12 billion

annually. Unfortunately, it does not always spend that money in an efficient manner. For

example, according to GAO, the initial cost estimate for the International Space Station was $5.2

billion. The expected completion date was originally 2002. Today, the estimated cost to

complete the space station is $9 billion, and the project is not expected to be complete until 2006. 

In its most recent analysis of NASA’s management of the International Space Station and other

contracts, GAO wrote, “[T]he agency’s contract management function remains a high-risk

area.”12

According to the IG, even though NASA knows about poor management of the Space Station, it

continues to pay exorbitant and undeserved rewards to the contractors. The IG reported that the

Boeing Corporation’s estimate of the cost of its work was unrealistically low and that NASA

knew this. Despite continued cost overruns and schedule slippages, NASA awarded Boeing $16
13National Aeronautics and Space Administration, Office of Inspector General, “ Semiannual Report to the

Congress” (September 30, 2000).

14Source: NASA (http://mars.jpl.nasa.gov/missions/past/polarlander.html).

15Ibid.

16Ibid.

17General Accounting Office, “Space Transportation: Progress of the X-33 Reusable Launch Vehicle

Program,” GAO/T-NSIAD-99-243 (September 29, 1999).

90

million in “unearned incentive fees.”13 Although the agency eventually got that money back, the

project will continue to suffer from cost overruns and delayed implementation. 

In some cases, NASA’s projects fail completely, even after immense effort and great expense. 

For example:

• The Mars Polar Lander, launched in January 1999, was to be the first-ever landing in the

polar regions of Mars. Regrettably, communications were lost as the lander began its

entry into the Martian atmosphere on December 3, 1999. Flight controllers spent several

weeks searching for the spacecraft to no avail. The lander was equipped with cameras, a

robotic arm and instruments to measure the composition of Martian soil. The cost of this

failed project was $120 million.14 A NASA investigation of potential reasons for the

failure found that “one team used English units (e.g., inches, feet and pounds) while the

other used metric units for a key spacecraft operation. This information was critical to

the maneuvers required to place the spacecraft in the proper Mars orbit.”15

• The Mars Microprobe Mission, also known as Deep Space 2, was the second deep-space

technology-validation mission in NASA’s New Millennium Program. The two Deep

Space 2 microprobes hitched a ride to Mars aboard the Mars Polar Lander with the goal

of penetrating into the Martian subsurface to detect water ice. Unfortunately, no word was

ever received from the probes. Their cost was $29.6 million.16

• After spending billions to develop the X-33, a space travelling airplane, NASA decided to

cancel the project entirely. As early as 1999, GAO wrote, “because of problems in

developing technologies for the X-33, the program will not meet some of its original cost,

schedule, and performance objectives.” GAO added, “Costs have increased, the test

vehicle's first flight was delayed by 16 months, and some performance objectives—such

as a speed reduction from Mach 15 to Mach 13.8—were reduced.”17

Without sufficient attention and planning, NASA’s numerous and expensive projects will be

subject to delay, cost overruns, and, in the worst case, failure. 
18Letter from Congressman James Sensenbrenner (WI), Chairman, House Science Committee, to NASA

Administrator Daniel Goldin (July 6, 2000).

19National Aeronautics and Space Administration, Office of Inspector General, “Semiannual Report to the

Congress” (September 30, 2000).

20Ibid.

21NASA Office of the Inspector General News Release, “Former NASA Employee Indicted,” 2001-033,

(February 1, 2001).

91

Financial Management 

NASA has received clean opinions on its annual financial statements for seven years in a row. 

NASA says it can balance its books. However, recent disclosures show that this may not be the

case. In fact, last year it was found that NASA made a $590 million error on its financial

statements that went undetected even by the auditors whom NASA had paid to check the

agency’s books. In a letter to NASA Administrator Dan Goldin, House Science Committee

Chairman James Sensenbrenner wrote, “NASA provided a written explanation admitting that

these errors were made. This regrettable circumstance brings into question the overall integrity

of NASA’s financial management system.”18 GAO is currently investigating the extent of

discrepancies in NASA’s annual financial statements.

Poor financial management is why contracts and projects are consistently over budget and

behind schedule. It’s why different parts of NASA pay too much for office supplies. It’s why

improper payments can go undetected, leaving NASA vulnerable to waste, fraud, and abuse. 

Some of the cases where the perpetrator of fraud was detected include the following:

• The IG found that seven employees of a NASA subcontractor ordered “substantial

quantities of building supplies for their personal use and were paid kickbacks by the

supplier in return for their orders,” which were paid by NASA. These individuals were

sentenced on January 9, 2001.19

• The IG also found one contractor who purchased a home and an automobile with NASA

funds.20

• Tracy A. Carpenter, a former NASA employee at Goddard Space Flight Center, allegedly

transferred $148,321 from the NASA Accounting system into her personal account.21

These are just a few of the cases ongoing at NASA. Unfortunately, NASA often spends tax

dollars for things other than what was intended. According to the IG, NASA management has

not ensured that funds have been used for their intended purposes. The IG reviewed 36

expenditures totaling about $44.8 million. Astonishingly, $44.7 million may have been charged

to the wrong account. According to NASA, many of these expenditures may have been against

the law.
1General Accounting Office, “Major Management Challenges and Risks: Small Business Administration,”

Performance and Accountability Series, GAO-01-260 (January 2001), p. 6.

2

Ibid.

3

Small Business Administration, Office of Inspector General, “Top Ten Management Challenges for the

Small Business Administration” (December 1, 2000). 

XIII. Small Business Administration

[The Small Business Administration] is confronting several major performance

and accountability challenges that affect its ability to efficiently deliver services.

David M. Walker

Comptroller General of the United States 1

The U.S. Small Business Administration was established in 1953 to assist small businesses from

startup through the many stages of growth. Its two major goals are helping small businesses

succeed and helping Americans recover from disasters.

The agency carries out these functions primarily through the following offices: the Office of

Capital Access, the Office of Entrepreneurial Development, the Office of Government

Contracting and Business Development, and the Office of Disaster Assistance. The Office of

Capital Access has several loan programs that assist small businesses, including the so-called

Section 7(a) program. The Office of Entrepreneurial Development provides counseling and

expertise to new entrepreneurs. The Office of Government Contracting and Business

Development administers programs that assist small businesses with federal procurement

opportunities. Technical and procurement assistance to eligible businesses are provided through

programs that include the Section 8(a) program.

In the wake of hurricanes, floods, earthquakes, wildfires, tornadoes and other physical disasters,

the Office of Disaster Assistance is authorized to make both physical disaster loans and

economic injury disaster loans. The disaster program is the only program within the agency for

entities other than small businesses. As of September 30, 2000, the total loan portfolio was about

$52 billion, of which about $7 billion was for disaster loans.2

On December 1, 2000, Phyllis K. Fong, the Small Business Administration’s IG, provided

Senator Thompson, Chairman of the Senate Committee on Governmental Affairs, with an

assessment of the most serious management challenges facing the Small Business

Administration.3 The challenges, which are discussed below, include the following:

• Information systems for loan monitoring and financial management;

• Information systems security;

• Human capital management strategies;

• Business loan purchase processes;
4

Ibid.

93

• Lender oversight;

• Rules for 8(a) Business Development; and 

• Loan fraud.

Loan monitoring and financial management systems

The Small Business Administration’s current system for monitoring loans is not efficient.

The agency needs to ensure that its planned systems for loan monitoring, lender oversight, and

financial management are developed, integrated, and implemented efficiently and effectively, so

that intended objectives are achieved and numerous risks are minimized.

The Small Business Administration’s goals depend heavily on new information systems. To

achieve these goals, the agency has engaged in a set of systems development and acquisition

projects, collectively referred to as the Systems Modernization Initiative. To support its credit

programs, the agency is developing the Loan Monitoring System. Another major component is

the Joint Accounting and Administrative System, which is intended to address procurement and

grants management, human resources, accounting, budgeting, and financial operations and

reporting. This multi-million dollar initiative is currently scheduled for completion in 2003.

Under the Loan Monitoring System, information such as loan volume, origination quality,

delinquency rates, default rates, and recoveries should be more readily available and accurate,

and provide for better analyses. This system should also provide information that will allow the

agency to more easily identify lenders with potential problems and provide better oversight of

lenders’ actions.

The Joint Accounting and Administrative System is intended to help the agency address a

number of financial and administrative deficiencies. For example, flaws in the current financial

reporting system have been reported as a significant weakness.4 The new system should allow

for the integration of program and accounting data to provide more timely and accurate financial

reports and enhance program analysis. It should also provide for increased accountability over

transactions and compliance with the federal financial management system requirements.

Information systems security

The Small Business Administration’s programs and activities depend heavily on computerized

systems. The agency is engaged in several initiatives, such as paperless loan applications, that

will increase its reliance on such systems. While information technology can result in a number

of benefits, such as information being processed quickly and communicated almost

instantaneously, it also increases the risk of fraud, inappropriate disclosure of sensitive data, and

disruption of critical operations and services.
5

Ibid.

6

Ibid.

7

Ibid.

94

GAO has designated information security as a government-wide high risk area because of

growing evidence indicating that controls over computerized operations are not effective and

risks are increasing. An audit disclosed that while the Small Business Administration has made

significant progress in this area, improvements are still needed in the areas of entity-wide security

program and planning, access controls, application software development and program change

controls, system software, segregation of duties, and service continuity.5

Human capital management strategies

Managing and investing in human capital has emerged as an important issue throughout the

federal government. Human capital management is especially important for the Small Business

Administration. Over the last decade, the agency has made major changes in its delivery of

goods and services. For example, the agency now uses public-private partnerships to perform the

loan origination, servicing, and liquidation functions that federal personnel formerly handled. At

the same time, the agency has decreased its workforce by more than 20 percent.6

While the agency has taken steps to better manage its human capital activities, including

activities in workforce planning, leadership, talent development, and fostering a performance

culture to meet this challenge, more remains to be done.

Business loan purchase processes

A 1997 report on business loan guaranty purchases found that the Small Business Administration

did not consistently apply its procedures when purchasing guaranties. The audit found that 29%

of the decisions either were not supported by sufficient documentation or resulted in claims being

paid when they should have been denied or reduced. A statistical projection of the audit results

indicated that an estimated $102.9 million in purchases was not supported by sufficient

documentation, and guaranties totaling up to $16.2 million should not have been honored.

Audit reports issued in FY 2000 on four early defaulted loans showed that lenders did not

originate the loans in accordance with the agency’s requirements or prudent lending practices. 

Two loan guarantees were purchased even though the lenders did not properly evaluate

discrepancies in financial information or adequately secure the loan, or had already reimbursed

the borrower for ineligible expenses. The audits also showed that the lender for the two other

loans did not properly evaluate cash flow or obtain support showing that the loan proceeds were

used for authorized purposes. The lender withdrew his request for a guaranty purchase on one of

the loans and the other loan is being reviewed.7
8

Ibid.

9

Ibid.

95

Lender oversight

Private lenders are performing an increasing percentage of the loan underwriting, servicing, and

liquidation functions that were previously performed by Small Business Administration staff. To

ensure compliance with requirements, the agency should continue to refine its newly designed

lender oversight program, increase its ability to identify lenders needing improvements in their

performance, and ensure that borrowers comply with the terms of the loan agreement.

An audit on Section 7(a) loan processing issued in 1999 found that “lenders did not consistently

comply with 22 key processing procedures. Of 240 loans reviewed, 170 procedural problems

were noted for 118 loans. The deficiencies involved ineligible purposes of loans, lack of

repayment ability, and use of proceeds for an unapproved or ineligible purpose. The audit results

showed that 26 loans . . . totaling $7 million had deficiencies that could cause the agency to

question part or all of the guaranty if a purchase request were received from a lender. Four of five

deficiencies with requirements occurred when the agency had limited or no oversight of lenders’

processing and disbursing actions. According to agency guidelines in place at the time, district

offices should have visited each lender annually unless a waiver was justified. Out of 147 lenders

in our sample, only 44 . . . received field visits by district office personnel during fiscal years

1996 and 1997.”8

In 1998, GAO reported that in the five district offices they visited, the agency had not performed

an on-site review of about 96 percent of the lenders in the past 5 years. In some cases, there was

no evidence that lenders who had issued the agency’s loans for 25 or more years had ever

received an on-site review. GAO concluded that the agency had no systematic means, without

conducting periodic on-site reviews, to ensure that lenders’ actions did not increase the risk of

loss to the agency.9

Lender monitoring is particularly important as the agency moves from direct involvement in loan

approvals to increased reliance on participating lenders to perform loan origination, servicing,

and liquidation. Yet, the agency does not have a comprehensive system to capture and

summarize performance measurement data for lender and loan monitoring. Information on loan

volume, loan origination, delinquency rates, default rates, and liquidation is not readily available.

Comprehensive reporting and analysis of such information in a consistent and integrated manner

would allow the agency to better identify lenders with potential problems and provide

appropriate oversight.

Rules for 8(a) Business Development

This program is intended to be used exclusively for business development purposes to help small
10Ibid.

11Ibid.

12Ibid.

13Ibid.

96

businesses owned by “socially” and “economically” disadvantaged persons compete on an equal

basis. To ensure that its participants benefit from the business development aspects of the

program, the agency restricts the amount of a federal contract that may be performed by a

non-participant. IG audits, however, have found that many non-8(a) companies benefit from the

program. Audits, especially involving computer parts, have found instances where 80 percent or

more of the contract costs are realized by large computer manufacturers.10

Loan fraud

Obtaining additional background information from loan agents and business loan borrowers

could reduce the incidence of fraudulent loans. While the fraud identified thus far is a small

percentage of the total portfolio, the dollar amounts are significant.

Loan Agents: Loan agents provide referral and loan application services to prospective

borrowers or lenders for a fee. Some agents have been involved in a variety of fraudulent

schemes, such as submitting false tax returns or other financial data, using fictitious names on

forms, and conspiring with borrowers to submit false loan packages.11 These schemes, which

have been copied from one fraudulent agent to another, have resulted in borrower defaults that in

turn caused loan purchases by the Small Business Administration and, ultimately, losses to the

taxpayers.

Criminal investigations have been initiated involving approximately $90 million in loan

applications handled by 18 loan agents over the last five years. Allegations involving loan agents

continue to be reported.12 Also, because the Internet allows ready access to a national audience,

dishonest loan agents can expand the scope of their fraudulent activities.

The agency and the IG have agreed that it would be helpful if a database linking loans to

individual agents is maintained. When the agency identifies a circumstance of potential fraud, it

would be able to identify other loans packaged by the same individual and thus would be able to

more readily locate other loans where similar fraud may have occurred. 

Borrowers in Business Loan Programs: Audits have shown that borrowers who do not disclose

their criminal histories have higher rates of default on loans than those who either disclose their

records or have no criminal histories.13 The agency performs name checks to help identify

individuals with criminal histories but does not have authority to routinely perform full criminal
14Ibid.

15Small Business Administration, Office of Inspector General, “Semiannual Report to the Congress”

(September 30, 2000).

16Small Business Administration, Office of Inspector General, “Applicant Character Verification in SBA’s

Business Loan Program” (April 2001).

97

background checks. Consequently, the agency cannot always identify individuals with criminal

histories and this may result in higher losses.

Past studies have revealed problems with the accuracy of the criminal history information

provided by loan applicants. To determine the extent of the problem, the IG initiated several

investigations. The first showed that almost 12 percent of the defaulted loans involved

borrowers who failed to disclose their criminal records. A number of audits have also

documented misrepresentation by borrowers of their criminal histories. An audit of 240 loans

found that eight percent of the 429 borrowers failed to disclose their criminal records.14 For

example:

The owner of a now defunct photo studio was indicted in August 2000 charging that he

falsely stated in an application for a guaranteed loan that he was a U.S. citizen and that

he did not have any prior criminal convictions. In fact, he had been convicted of

smuggling and was a federal fugitive wanted on a parole warrant. Further, records

showed that he was not a citizen, but rather a legal resident alien facing deportation.

15

Most recently, an audit by the IG revealed “that, on average, nearly 1 out of every 11 loans

guaranteed by SBA contained a false statement by one or more borrowers. The sample further

revealed that loans in which applicants lie about their criminal record are 1.3 times as likely to

become non-performing and result in the purchase of the guaranty by SBA.”16
1Council on Foreign Relations and the Center for Strategic and International Studies, “State Department

Reform,” Independent Task Force Report (February 2001).

2

Ibid.

XIV. Department of State

Essential to coming to terms with the new world is being able to ensure that our

foreign policy apparatus and people are fully up to the task. And here is the

problem: a good portion of the apparatus, especially the Department of State,

simply falls short in mission, organization, and skills relative to what is needed

to navigate sensibly through the new international universe.

The Honorable Frank C. Carlucci, Chairman

Report of the Task Force on State Department Reform1

The State Department is the diplomatic arm of the federal government and works to advance the

Unites States’ objectives throughout the world—greater freedom, more security and more

prosperity. Among its key duties, the State Department promotes peace and stability in regions

of vital interest to the United States; works to create jobs at home by opening markets abroad;

helps developing nations establish stable economic environments that provide investment and

export opportunities for the United States; and brings nations together to address global problems

such as cross-border pollution, the spread of communicable diseases, terrorism, nuclear

smuggling, and humanitarian crises. 

The State Department manages the nation’s diplomatic relations with about 180 countries, and

also maintains relations with many international organizations. Thus, there are more than 250

offices under the management of the State Department throughout the world. In the United

States, about 5,000 professional, technical, and administrative civil service employees work

alongside foreign service officers serving at home.

The State Department suffers some of the worst management problems in government. 

According to the State Department IG, those problems include the following:

C Worldwide security;

C Financial management;

C Human resources; and 

C Plan Columbia.

In February 2001, the Council on Foreign Relations and the Center for Strategic and International

Studies prepared a report on the state of management at the Department of State and the effect

that mismanagement has on American diplomacy. In an introductory memorandum to President

Bush, the task force wrote, “The apparatus of U.S. foreign policy making and implementation

that you have inherited is in a state of serious disrepair. The Department of State suffers from

long-standing mismanagement, antiquated equipment, and insecure facilities.”2 This statement is
3

Ibid.

4Department of State, Office of Inspector General, “Top Ten Management Challenges for the State

Department” (December 15, 2000).

99

supported by innumerable reports and investigations completed by both the State Department IG

and the GAO.

Worldwide Security

An increased focus on the security of State Department facilities in the United States and abroad

is the result of the 1998 bombings of the embassies in Nairobi, Kenya and Dar es Salaam,

Tanzania. Recent lapses in security at State Department headquarters—the theft of a laptop

computer containing classified information and the discovery of “bugs” near the Secretary of

State’s office—have also heightened attention to the safety and security of U.S. facilities

everywhere. A number of reports have recommended substantial security upgrades. 

Notwithstanding this renewed attention, however, the task force report states:

The Department of State’s infrastructure, both overseas and at home, is dilapidated and

insecure. Overseas facilities, including embassy buildings, are in a serious state of

disrepair. They frequently do not meet [safety] standards. Nearly 25 percent of all posts

are seriously overcrowded. A total of 88 percent of all embassies do not fulfill

established security standards, and many require major security upgrades. U.S.

personnel stationed overseas cannot be expected to fulfill their missions effectively if they

must operate in shabby and insecure facilities.3

The IG shares the concerns expressed in the task force report. In a recent letter to the

Governmental Affairs Committee, the IG wrote:

A June 2000 IG report found that none of the 42 embassies evaluated met all of the

physical security standards. Actions have been taken or are underway to correct those

items that the Department can quickly fix, such as improving the local guard service,

lighting or alarms at the chancery. A program of sustained capital investment is essential

to ensure the safety of the diplomatic infrastructure in the future. However, such a

program will not immediately alter the circumstances of personnel overseas.4

Some of the specific instances of security vulnerabilities uncovered by the IG include the

following:

• Even after suffering major terrorist attacks and receiving Department resources to

upgrade facilities, the IG testified before Congress that “both interim facilities still faced

problems at the time of our May 1999 security evaluation. Embassy Dar es Salaam

lacked sufficient emergency power for security systems such as exterior security lights,
5

Statement of Jacquelyn L. Williams-Bridgers, State Department Inspector General, before the House

Committee on International Relations (May 17, 2000).

6

Ibid.

7

Ibid.

8

“State Dept. Computers Vulnerable,” Government Executive Magazine (March 24, 1998).

9Brian Friel, “Council Urges Overhaul of State Department Management,” Government Executive

Magazine (February 14, 2001).

100

alarms, and vehicle barriers. Embassy Nairobi needed to reduce the risk of exposure

presented by the placement of large glass windows in the front of the interim chancery

building and provide a secondary exit point from the compound.”5

• International Broadcasting Bureaus at Germany and Prague had “numerous physical and

procedural security deficiencies.” In Germany, the International Broadcasting Bureau’s

tower was easily accessible in an open field. In Prague, the Radio Free Europe/Radio

Liberty office building “lacks setback and is situated between two busy streets.”6

• Although the Department provided $118.5 million to establish an emergency and

evacuation radio program, the IG found that “at the posts visited, the installation of the

[radio] equipment did not necessarily translate into an operating emergency radio

network.” The IG continued, “Post officials were often unfamiliar with how to use the

radio equipment, and new emergency and evacuation procedures incorporating the new

equipment had not yet been put in place.”7

As with physical security, the State Department suffers from a major inability to protect

classified information from unauthorized disclosure. In March 1998, Department officials shut

down its computer systems after investigators found data indicating that an unauthorized person

had used computers at two undisclosed overseas posts. As a result of this October 1997

intrusion, the two posts were limited in their access to the network, which forced the State

Department to circulate delicate information on paper via courier.8

According to the task force report, State Department communications and technology equipment

are so outdated that personnel in some facilities cannot e-mail each other. Most overseas posts

either operate on obsolete classified systems or have no classified connection to the rest of the

government.9 In addition, GAO investigators, with assistance from a major accounting firm,

succeeded in breaking into State networks by dialing in from modems. The investigators also

thwarted building security and walked into areas where there were unattended computers and

servers. A user identification and password were taped to one computer. Once inside State’s

networks, GAO investigators reported, they “were able to access sensitive information. In

addition, [they] could have performed system administration actions that would have allowed
10General Accounting Office,“Computer Security: Pervasive Serious Weaknesses Jeopardize State

Department Operations,” AIMD-98-145, May 19, 1998.

11Letter from State Department of Inspector General Jacquelyn L. Williams-Bridgers to Chairman, Senate

Committee on Governmental Affairs (December 15, 2000).

12Leonard G. Birnbaum & Company, Certified Public Accountants, “Independent Auditors Report:

Department of State” (March 1, 2001).

101

[them] to download, delete and modify these data, add new data, shut down servers, and monitor

network traffic.” The systems that GAO penetrated held performance appraisals, international

financial data, travel arrangements, e-mail, and passwords.10

Financial Management

Although the State Department got a clean opinion on its most recent financial

statements—meaning it could balance its books—financial management at the Department is not

good. The Department cannot produce timely, accurate, and reliable financial information on a

regular basis. The Department accounts for over $5 billion in annual appropriations and over

$20 billion in assets. However, at any point in time, the State Department does not know how

much its programs cost, how much money it has, or to whom it owes money. According to the

IG, despite progress made by the State Department, “there are concerns with: (1) the security of

the domestic mainframe computers and the Paris Accounting and Disbursing System; (2) the

inadequacy of internal controls over the management of unliquidated obligations, and the

inadequacy of the Department’s financial and accounting system, which is both an internal

control weakness and an issue of noncompliance with several laws and regulations; and (3)

overseas regional accounting and disbursing systems.”11

In its audit of the State Department’s financial statements, the firm of Leonard G. Birnbaum and

Co. highlighted a number of problems with the Department’s financial management.12 Those

problems include the following:

• “[I]nformation system networks for domestic operations are vulnerable to unauthorized

access. Consequently, other systems, including the Department’s financial management

systems, which process data using these networks, may also be vulnerable.”

• In some cases, the Department could not reconcile its balances with the Department of the

Treasury, which keeps a record of funds available to the State Department. There was a

difference of $162 million between what Treasury thought the State Department had

available and what the State Department thought it had available.

• State Department records indicate that it owes $3.5 million on past orders. However,

according to the auditor’s report, much of that is for items that were ordered but never

delivered. 
13Department of State , Office of Inspector General, “Semiannual Report for October 1, 1999 to March 31,

2000” (April 28, 2000).

14Ibid.

15Ibid.

16Ibid.

102

Because of its financial mismanagement, the State Department leaves itself open to fraud and

waste. In some cases, the Department catches people who are attempting to defraud it. In many

others, however, waste, fraud, and abuse go undetected. Some of the reports made by the IG

include the following:

• A State Department employee submitted and received payment for fraudulent claims in

excess of $29,000.13

• A State Department contractor billed the U.S. Government $92,538 for insurance

premiums on a policy that did not exist. The contractor had received approval to obtain

the policy but never obtained it.14

• The spouse of a former Ambassador submitted a false voucher for reimbursement of

$1,637 for damage to items included in a shipment of household belongings. The items

the spouse claimed were damaged had been purchased for an amount significantly less

than the value that the spouse claimed they were worth.15

• The International Institute of Wisconsin spent $46,626 in federal grant money on airfare

for individuals who did not participate in its programs, on “excess working meals,” on an

“unreasonable amount of tickets for sporting events,” and on unsupported salaries and

benefits. For example, the Institute used grant funding to purchase $375 of alcohol

(which is expressly prohibited), 30 tickets to a Milwaukee Bucks game, and 50 tickets to

a Milwaukee Brewers game for ten program participants, and it inappropriately

distributed many of the tickets to non-participants of the exchange program. Further, at

one dinner for twelve program participants, the Institute also inappropriately paid for the

meals of 68 additional “guests.”16

Human Resources

Like many federal agencies, the State Department has difficulty hiring and retaining the people it

needs to achieve its mission. According to the task force report:

The Department of State’s human resource practices and administrative policies are

dysfunctional. The department’s “up-and-out” promotion system is having the

unintended effect of forcing qualified personnel out of the service. Its antiquated

recruitment process is unable to meet the department’s workforce needs in both number
17Council on Foreign Relations and the Center for Strategic and International Studies, “State Department

Reform,” Independent Task Force Report (February 2001).

18Brian Friel, “State Department to Cut Middle Management,” Government Executive Magazine (March 1,

2001).

19Department of State, Office of Inspector General, “Monthly Report” (July 2000) (Available at

HTTP://oig.state.gov/pdf/july00.pdf.

103

and skill. The department’s lack of professional training opportunities for its personnel,

its inattention to the family needs of its overseas personnel, and its inflexible grievance

system have become major incentives for employees to seek work elsewhere.17

The President’s most recent budget blueprint made the same point:

Current personnel policies and workforce planning threaten the department’s ability to

recruit and retain the highest possible caliber workforce. The Department of State will

create and implement policies to ensure that it recruits, hires, and retains foreign and

civil service officers with the right skills needed to fulfill the Department’s strategic and

performance goals.18

Plan Columbia

According to the State Department’s “Narcotics Control Report,” Plan Columbia is an integrated

strategy focusing on the peace process, the economy, the counternarcotics strategy, justice reform

and human rights protection, and democratization and social development in Columbia. Its $1.3

billion price tag supplements ongoing U.S. counternarcotics programs totaling $330 million that

were in place before Plan Columbia was initiated. Under Plan Colombia, the U.S. is supposed to

support justice sector reform and alternative development projects and will provide equipment,

training, and technical assistance to the Colombian antinarcotics police and the military to

increase their capability to eradicate illicit coca and opium poppy cultivation and to conduct

interdiction operations. According to the State Department IG, however, Plan Columbia “has

had little measurable impact.” In its monthly report, the IG wrote the following:

Despite spending over $100 million on the increased [drug] eradication efforts during

FY 1997-99, the results of the spray program are discouraging. Although the data

indicates that the spray program has had the effect of moving cultivation from one region

to another, it is uncertain whether the current program has decreased the supply of drugs

from Colombia. Furthermore, the [State] Department’s efforts have had little

measurable impact on the availability of drugs in the United States.19

GAO has also said that Plan Columbia “will take years to produce results.” Despite U.S. and

Colombian efforts, the illegal narcotics threat from Colombia continues to grow and become

more complex. Although U.S.-provided assistance has enhanced Colombian counter-narcotics

capabilities, it has sometimes been of limited utility because of long-standing problems in

planning and implementing assistance. For example, helicopters that State provided to the
104

National Police and the military lacked sufficient spare parts and adequately trained personnel to

operate and maintain them for conducting counter-narcotics operations. In addition, the

Colombian National Police, which has a questionable history on human rights, has not always

documented its use of counter-narcotics assistance, and U.S.-provided helicopters and fuel have

been diverted for purposes other than counter-narcotics missions.
1

Statement of the Honorable Don Young, Chairman, House Committee on Transportation and

Infrastructure regarding Department of Transportation (DOT) Inspector General report on airline customer service. 

(February 7, 2001).

2

Secretary of Transportation, “Leading the Way to Transportation Excellence in the 21st Century” (May

2000).

XV. Department of Transportation

I . . . . don’t have to explain the problems or the challenges that lie ahead for our

transportation sectors. I am sure that you are all fully aware or our crumbling

infrastructure and the costly, time-consuming gridlock that we face every day as we

attempt to move about this country. 

Congressman Don Young

Chairman

House Committee on Transportation 

and Infrastructure1

According to the Department of Transportation’s annual performance report, in the year 2000

Americans traveled 2.6 trillion miles on America’s highways in their 215 million vehicles. They

traveled in the air for 17.6 million hours. And they get around the nation’s waterways in their

12.3 million recreational watercraft.2 It is the Department of Transportation’s responsibility to

ensure that the nation’s air, sea and highway travel systems are safe and reliable. 

The Department of Transportation accomplishes its mission with almost $60 billion in tax

dollars. It manages ten different organizations, including the Federal Aviation Administration,

the Federal Highway Administration, the Federal Railroad Administration, and the United States

Coast Guard. The Department employs more than 1,000,000 people and is considered one of the

best managed agencies in the federal government. Nevertheless, like most federal agencies, the

Department suffers significant waste, fraud, and abuse.

According to GAO and the Department’s IG, the Department of Transportation suffers from the

following major problems:

• Poor attention to transportation safety;

• Airline flight delays and cancellations;

• Oversight of major highway and airport projects;

• Poor computer security; and

• Insufficient financial accountability.

Poor Attention to Transportation Safety

As this report makes clear, the waste of taxpayer dollars is an epidemic in the federal

government. However, far more critical is the safety of the citizens. In the case of air travel, it is

the federal government’s responsibility to maintain the safety of the skies in which airplanes fly. 
3Department of Transportation, Office of Inspector General, “Semiannual Report to the Congress”

(September 30, 2000).

4Department of Transportation, Office of Inspector General, “Actions to Reduce Operational Errors and

Deviations Have Not Been Effective,” AV-2001-011 ( December 15, 2000).

5

Ibid.

6

Ibid.

7

Ibid.

106

Unfortunately, recent evidence shows that American skies aren’t getting safer, they’re getting

less so.

According to the IG’s most recent semiannual report, the risk of airplane runway collisions is

increasing. The number of near misses on the ground increased 34%, from 230 in 1995 to 321 in

1999. Operational errors by air traffic controllers, which the IG describes as letting planes get

too close to each other in the air, increased 51%, from 764 in 1996 to 1154 in 1999.3 Operational

errors and near-misses are not acceptable in air travel, and an increase should not be tolerated. 

Unfortunately, the Department isn’t doing enough about it. According to a recent report by the

IG, “[the Federal Aviation Administration] must approach reducing operational errors with a

sense of urgency.”4 That report described the need to do better:

While operational errors, which occur mostly in midair, can pose a serious safety risk,

the true extent of the safety risk remains unknown because [the Federal Aviation

Administration] does not determine the severity of every incident. For example, the

severity of operational errors can vary from an incident that does not pose an immediate

safety threat, such as when two airplanes are headed in the same direction with 4 miles

of separation, to an incident that is only seconds away from a head-on-collision.

5

But these incidents are not hypothetical. In fact, the IG’s report details specific cases where

operational errors put airline passengers at direct risk of a catastrophic accident. For example:

• In July 1999, an operational error occurred over Atlanta when one airplane, at an altitude

of 23,400 feet, came within approximately 1200 feet laterally and 400 feet vertically of

another airplane. A collision was avoided only after the crew took evasive action as a

result of an on-board alarm system.6

• In April 2000, an operational error occurred when an air traffic controller allowed two jet

airliners to “lose separation” and approach each other head on at 39,000 feet. According

to the IG, the planes were “less than 20 seconds from a midair collision.” Again, the

crews took evasive action as a result of an on-board alarm system.7
8

Ibid.

9Katy Saldarini, “The 100 most dangerous federal work sites,” Government Executive Magazine

(September 28, 1999).

10Department of Transportation, Office of Inspector General, “Semiannual Report to the Congress”

(September 30, 2000), p. 25.

11Department of Transportation, Office of Inspector General, “Air Carrier Flight Delays and

Cancellations,” CR-2000-112, (July 25, 2000).

12Ibid.

107

• The IG’s report recounts one instance in Philadelphia where a military cargo plane came

within 100 feet another airplane, and another instance in Los Angeles where a

commercial cargo plane came within 200 feet of colliding with another airplane.8

Unfortunately, air travel is not the only place the Department of Transportation has a problem

with safety. Of the 100 most dangerous federal work sites of 1999, 5 are located at Department

of Transportation facilities.9 And a recent report by the IG shows that the U.S. Coast Guard

doesn’t know how many lives it saves. According to the IG, “The U.S. Coast Guard is using

inaccurate data to measure its performance in reducing recreational boating fatalities, our audit

found. The Coast Guard also has not established criteria for monitoring the effectiveness of state

recreational boat safety programs. . . . ”10 

Airline Flight Delays and Cancellations

In addition to serious threats to passenger safety, improvement is needed in the timeliness and

reliability of air travel. According to the Federal Aviation Administration itself, flight delays

have increased 58% since 1999 (from 236,802 to 374,116). The number of times passengers had

to sit on the runway for more than an hour increased 130% since 1995. And because the agency

doesn’t measure flight delays correctly, the IG reports that the “actual extent of delays is much

greater.”11 In addition to frustrating the traveling public, delays to commercial flights cost

airlines more than $3 billion a year.12 

Unfortunately, according to the agency’s IG, the Department can’t get figure out why the delays

are happening in the first place. The IG wrote recently:

The Air Transport Association, for example, blames [the Federal Aviation

Administration] and weather for most delays. In contrast, the Federal Aviation

Administration points to weather and flight volumes as the main factors. The lack of

consistent and complete causal data has only fueled this debate, with no one system
13Department of Transportation, Office of Inspector General, “Air Carrier Flight Delays and

Cancellations,” CR-2000-112 (July 25, 2000).

14Timothy B. Clark, “Overlooking Oversight,” Government Executive Magazine (April 2001).

15Department of Transportation, Office of Inspector General, “October 2000 Finance Plan for the Central

Artery/Tunnel Project Boston, Massachusetts,” IN-2001-009 (November 29, 2000).

16Ibid.

17“The Fleecing of America,” ABC News (November 2000).

108

possessing a full picture of the causes of flight delays and cancellations.13

Notwithstanding the confusion about the causes of delays and cancellations, the Transportation

IG has concluded that, in addition to the weather, five factors contribute to flight delays and

cancellations: increased number of flights, air carrier scheduling practices, increased use of

regional jets, the practice of allowing planes to land before a gate becomes available, and

equipment failures and management practices of the Federal Aviation Administration.

Oversight of Major Highway and Airport Projects

One of the federal government’s worst managed construction projects is in Boston. According to

the IG, Boston’s Central Artery — the so-called “Big Dig” — is the most expensive

infrastructure project in the nation’s history. One expert called it “the greatest public works

scandal of modern times.”14 Unfortunately, its cost continues to rise and is now estimated at

$13.6 billion — an increase of more than five times the original estimate of $2.6 billion. The IG

has found that project managers have failed to disclose cost trends in finance plans and

manipulated data to prevent detection, with the most recent finance plan understating

construction costs by almost $1 billion.15 And the IG has reported additional problems with that

project:

• According to the IG, the Massachusetts Turnpike Authority’s lack of diligence has

directly resulted in $1.4 billion in additional costs for the Boston Central Artery project.16

• The Massachusetts Turnpike Authority is purchasing $300 bed springs for residents

whose sleep is disturbed by ongoing Boston Central Artery project construction.17

Boston’s Central Artery, despite its reputation as the worst managed highway project in the

nation’s history, is not the only case where the Department of Transportation mismanaged a

project. Examples abound:

• According to the IG, the cost of New York City’s redevelopment of Penn Station has

risen to $768 million—more than twice the original estimate. And it’s currently
18Department of Transportation, Office of Inspector General, “Pennsylvania Station Redevelopment

Project,” RT- 2000-081 (April 19, 2001).

19Department of Transportation, Office of Inspector General, “Key Safety, Modernization, and Financial

Issues,” AV-2000-072 (April 11, 2000). 

20General Accounting Office, “Major Management Challenges and Program Risks: Department of

Transportation,” GAO-01-253 (January 2001).

21Department of Transportation, Office of Inspector General, “Report on Headquarters Computer Network

Security,” FI-2000-124 (September 24, 2000).

109

scheduled to be completed in 2005, 6 years later than planned. According to those who

plan to use the station, it will need more than $800 million in safety improvements.18

• It is unclear when the FAA’s new satellite-based navigation system (Wide Area

Augmentation System) will be up and running. But the cost of that system has grown

from $508 million in 1994 to $2.9 billion in 2001.19 

The prospects for improvement are not good. In its recent analysis of the entire Department,

GAO wrote:

Over the years, many large-dollar highway and transit projects have incurred cost

increases and schedule delays. From 1998 through 2003, [Transportation] is expected

to provide at least $198 billion for highway and transit projects through programs

financed largely from the Highway Trust Fund. . . . [The Federal Transit Authority] may

not have the resources it needs after fiscal year 2001 to adequately oversee the

significant number of new transit projects requiring oversight . . .”20

Poor Computer Security

As at many other federal agencies, the security of information contained in the Department’s

computers is at risk. As of September 2000, the IG had identified several computer system

weaknesses and vulnerabilities at the Department:

• Department computers were accessible by unauthorized users. The IG gained

unauthorized access from the Internet to about 270 computers located within the

Department’s private networks.21

• The Department’s computers were vulnerable to insider attack—another type of threat. 

The IG found approximately 900 computers located throughout Transportation

headquarters that could be accessed by unauthorized insiders, such as employees,

contractors, and grantees. In a previous audit, the IG identified employees who had
22Ibid.

23Ibid.

24Ibid.

25Department of Transportation, Office of Inspector General, “Computer Security Controls of Financial

Management System,” FE-2000-098 (May 23, 2000).

26Ibid.

27General Accounting Office, “Major Management Challenges and Program Risks: Department of

Transportation,” GAO-01-253 (January 2001).

110

embezzled funds through stolen passwords, in one case as much as $600,000.22

• Internet users were able to bypass the Department’s “firewall” security and gain access to

the Department’s private network because 13 public web servers were inappropriately

placed on Transportation’s private networks.23

• The Department’s Web sites were vulnerable to attack. Transportation has about 240

Web servers for public access through its Home Page. Of the 119 Web servers reviewed

by the IG, 41 were rated as highly vulnerable.24

But the Department of Transportation’s computer security vulnerabilities are not limited to its

headquarters. The IG also found major computer security problems at the Federal Transit

Administration. According to the IG:

• The Federal Transit Administration maintained passwords that should have expiration

dates but did not, and it allowed unlimited guesses at passwords.25

• Computer rooms were not secure.

• Appropriate background checks for the Federal Transit Administration and contractor

employees were not performed.26

Poor Financial Accountability

Unfortunately, the Department of Transportation was unable to balance its books this year. 

Because of poor financial management at the Federal Aviation Administration, Transportation’s

management of federal dollars remains a major problem. According to GAO, “[S]ystems

deficiencies affected [the Department’s] ability to prepare its financial statements and account for

liabilities.”27 

To assess whether the Department was adequately fulfilling its financial responsibilities, the IG
28Department of Transportation, Office of Inspector General, “Closeout and Payment Processes for CostReimbursable Contracts,” FI-2001-018 (January 23, 2001).

29Ibid.

30Ibid.

31Department of Transportation, Office of Inspector General, “Closeout and Payment Processes for CostReimbursable Contracts,” FI-2001-018 (January 23, 2001), p. 2.

32Department of Transportation, Office of Inspector General, “Report on Design of the Cost Accounting

System for Research and Acquisitions,” FI-2001-013 (December 18, 2000).

111

audited 40 separate contracts. The IG found that:

• Twenty-nine contracts, totaling about $62 million, were paid without making certain that

the payments made by the Department were allowed. Of the 13 contracts, over $3 million

of the sample, 11 were not audited as required. After the IG audited one of the contracts,

$62,000 was returned to Transportation.28

• The rates at which contractors were billing the Department were not appropriately

adjusted for 21 of the 40 contracts totaling $25 million. In some cases, this resulted in

overbilling. For example, for one contract in which rates were not properly reviewed and

adjusted, the contractor had to return about $10,000 of overbilled costs.29

• Of the 40 contracts examined, 8 of them, totaling about $5 million, had little oversight

throughout the life of the contracts.30

• The IG found that “[the Department] did not close contracts in a timely manner, resulting

in funds remaining [on the books] for as long as 12 years. At least $35.4 million no

longer represented valid liabilities. ”31

• The Federal Aviation Administration incorrectly paid about $63 million annually in

overhead cost because the cost accounting system did not appropriately account for

overhead costs.32

Of the different organizations within Transportation, the Federal Aviation Administration is a

particular problem. According to GAO, which put the Federal Aviation Administration’s

financial management on its list of areas of the federal government most susceptible to waste,

fraud, and abuse, “[The Department’s] financial management weaknesses have been particularly

troublesome at [the Federal Aviation Administration] because of their longstanding nature and

the agency’s slow progress in resolving them.” GAO continued, “Until [the Federal Aviation

Administration] has financial and management systems and related procedures and controls that

provide reliable information, the agency will continue to be at high risk of waste, fraud, abuse,
33General Accounting Office, “Major Management Challenges and Program Risks: Department of

Transportation,” GAO-01-253 (January 2001).

34Department of Transportation, Office of Inspector General, “Semiannual Report to the Congress” (March

2000).

112

and mismanagement.”33 

But the Federal Aviation Administration is not the only Transportation agency with problems. 

The IG identified overpayments as a major problem at the Federal Highway Administration. 

According to the IG, the Federal Highway Administration made 42 duplicate payments to the

State of Georgia, totaling $1.6 million, resulting from weaknesses in the Administration’s poor

billing process. 34
1General Accounting Office, “Major Management Challenges and Program Risks: Department of the

Treasury,” GAO-01-254 (January 2001), p. 10.

2Department of the Treasury, Office of Inspector General, “Top Ten Management Challenges for the

Department of the Treasury” (December 1, 2000).

XVI. Department of the Treasury

Certain significant financial systems weaknesses; problems with fundamental

record keeping and financial reporting; incomplete documentation; and weak

internal controls; including computer controls, have undermined the U.S.

government’s ability to obtain an opinion on the reliability of its financial

statements for the 3 years that we have reported on these statements.

David M. Walker

Comptroller General of the United

States1

The Department of the Treasury’s mission is to promote a prosperous and stable economy;

manage the government’s finances; protect our financial systems and lenders; and foster a safe

and drug-free America. The Department is organized into 13 bureaus and 12 offices. They

include the U.S. Customs Service; the Bureau of the Public Debt; the Financial Management

Service; the Bureau of Alcohol, Tobacco, and Firearms; and the Internal Revenue Service.

The Department of the Treasury faces a number of systemic and long-standing management

problems. On December 1, 2000, IG Jeffrey Rush provided Senator Fred Thompson, Chairman

of the Senate Committee on Governmental Affairs, with an assessment of the most serious

management challenges facing the Department.2 The most serious challenges, which are listed

below, are summarized in the following sections:

• Information security;

• Treasury’s information technology investment management;

• Money laundering/bank secrecy;

• Trade enforcement and narcotics interdiction;

• Revenue protection;

• Financial management at Treasury; and

• Safety and soundness of the banking industry.

In addition to these systemic problems, other studies have identified cases of either criminal or

inappropriate behavior by individuals:

• An official at the Bureau of Alcohol, Tobacco, and Firearms retired on July 31, 2000,

after an investigation revealed that he had misused government equipment and official

travel to conduct business related to a non-profit organization he founded. The official,

who had a telephone for the organization installed on a support staff member’s desk, also
3Department of the Treasury, Office of Inspector General, “Semiannual Report to the Congress” 

(September 30, 2000), p. 17.

4

Ibid., p.17.

5

Ibid.

6

Ibid., p. 18.

7

Ibid., p. 19.

8Department of the Treasury, Office of Inspector General, “Top Ten Management Challenges for the

Department of the Treasury” (December 1, 2000).

114

directed his staff to perform work on government time for a private company owned by a

personal friend.3

• A Senior Research Specialist resigned after it was revealed that he improperly used his

official position, time and government resources. The analyst gathered and solicited

information about the Church of Scientology and acted as an unpaid consultant to

members of a group opposed to Scientology while on official duty. He also actively

assisted in the creation of an Internet web site designed to discredit members of the

Church of Scientology while on official duty.4

• A maintenance employee at the Philadelphia Mint was stealing coins from the Mint.5

• An employee with the Office of the Comptroller of the Currency received reimbursement

payments for travel that was never taken. Specifically, he entered false data into the Time

and Travel Reporting System; funds were then electronically deposited into his personal

bank account.6

• A Time and Attendance Clerk for the Office of the Comptroller of the Currency falsified

her own time and attendance records between 1997 and 1998. As a result of her

falsifications, she was paid approximately $23,000 in overtime pay for time that she did

not work. 7

Information Security

Protecting information and data from unauthorized access is critical to ensure the integrity of

Treasury’s law enforcement and financial operations. As information becomes more accessible

through the Internet, threats to security increase. These threats have resulted in various initiatives

to improve the government’s infrastructure. One initiative, Presidential Decision Directive 63,

requires the development of a reliable and secure information system.

Such a system is essential to protect Treasury’s information infrastructure from physical and

electronic threats. Although Treasury has achieved some of its security goals, more needs to be

done. For example, audits have found significant, long-standing weaknesses in the U.S. Customs

Service’s ability to maintain continuity of operations as well as overall security and access

control.8 As a result of these issues, the IG issued a “7-Day” letter to the Secretary of the
9

 The law requires the IG to report to the Secretary of the Department whenever a particularly serious

deficiency in the operations of the Department becomes apparent. Under the same provision of law, the Secretary is

then required to transmit a report to the appropriate committees or subcommittees of Congress within 7 calendar

days. 

10Department of the Treasury, Office of Inspector General, “Top Ten Management Challenges for the

Department of the Treasury” (December 1, 2000).

11Ibid.

115

Treasury on May 26, 2000, who in turn notified Congress.9 The letter recommended that the

Customs Service take immediate steps to develop its alternative site for continuity of operations

and install detection software to reduce the risk of unauthorized Internet access. Financial

statement audits have identified Electronic Data Processing general control weaknesses at other

Treasury bureaus as well, most notably the Financial Management Service.

Treasury’s Information Technology Investment Management

The Treasury Department invests nearly $2 billion annually on information technology. The law

requires the Department to improve capital planning, investment controls, project management,

systems development, and performance measurement in this area. Treasury’s weaknesses in

effectively managing major investments have been well documented over the past several years

for such systems as the Internal Revenue Service Tax System Modernization and the Customs

Automated Commercial Environment initiative. Last year, the Inspector General issued a report

noting that Departmental practices needed improvement if they were to be able to provide

executive direction and effective management over information technology investments.10

Money Laundering/Bank Secrecy

It is estimated that criminals launder hundreds of billions of dollars globally each year. GAO

recently reported that the nation’s largest bank “failed to follow federal guidelines to prevent

money laundering and allowed as much as $800 million in suspicious Russian funds to flow

through 136 accounts.”11 GAO also reported that a second bank allowed $600 million in

suspicious Russian funds to flow through 100 accounts because of lax enforcement. The Office

of the Comptroller of the Currency should uncover such instances of money laundering through

its examinations of national banks for safety, soundness and compliance. In an audit of the

Office, however, the IG identified the need to strengthen examination procedures in several

areas. The IG found that examiners did not always perform a complete examination, which

should include (1) following up on indicators of suspicious activity and (2) performing sufficient

reviews of high-risk accounts.

The IG’s work on Customs’ strategic money laundering initiatives has revealed opportunities for

expanding its intelligence capabilities. The IG also determined that Customs’ “Report of

Transportation of Currency or Monetary Instruments” was outdated. Certain travelers checks,
12Ibid.

13Ibid.

14Ibid. (An entry summary is a formal declaration provided by each importer or broker that supplies details

on what is being imported, how much is being imported, and the duties or fees associated with these imports. It also

identifies the appropriate harmonized tariff schedule code.)

116

money orders, and foreign bank drafts, were not required to be reported even though they had

been categorized as reportable instruments under revised regulations.12

Narcotics Interdiction and Trade Enforcement

The Customs Service ensures that goods and people entering and leaving the United States do so

in accordance with U.S. laws. It is also largely responsible for preventing the entry of illegal

narcotics into the country. Its inspection, investigative, intelligence, canine, marine, and air

interdiction activities are key to the Office of National Drug Control Policy’s national supply

reduction strategy.

Despite years of concerted effort, drug smuggling continues unabated. As an indicator of the

magnitude of the illicit drug trade, over 1,120 tons of cocaine entered the United States during

fiscal year 1999. For the same period, the Customs Service reported that it had seized 172 tons

of cocaine.13 Audits by the IG have disclosed that the Customs Service needs better narcotics

examination criteria, better targeting systems, and more consistency in the performance and

reporting of narcotics examinations.

In fiscal year 2001, the Customs Service expects to process 25 million entry summaries valued at

$1.3 trillion, 503 million persons, and 149 million conveyances. However, the automated system

that the Customs Service uses to process merchandise is outdated. The system also has

significant control weaknesses. For example, the IG recently issued a report detailing a

programming flaw in the Air Automated Manifest System that can allow merchandise and

contraband, including narcotics, to enter the county without Customs inspection, thereby

compromising Customs enforcement efforts.14

The Customs Service recognizes that its ability to process the growing volume of imports, while

improving compliance with trade laws, depends heavily on its modernization of the trade

compliance process and related supporting automated systems. The success of this effort is

contingent on how well and how soon the Customs Service is able to implement the Automated

Commercial Environment, the Service’s information technology project to facilitate the

movement of goods into and out of the United States. 

Revenue Protection

In fiscal year 1999, the Customs Service collected approximately $22.0 billion, while the Bureau
15Ibid.

16Ibid.

17Department of the Treasury, Office of Inspector General , Office of Audits, Fiscal Year 2000

Consolidated Financial Statements, OIG-01-050 (February 2001).

117

of Alcohol, Tobacco and Firearms collected another $12.1 billion, making them the nation’s

second and third largest sources of revenue, respectively.15 The IG believes that the Customs

Service could significantly reduce lost revenue through its planned large-scale systems

improvements. This is a major challenge, but when system improvements are completed,

Customs should be in a much better position to handle electronic commerce and control the tens

of billions it collects annually in duties, excise taxes, and fees.

The Bureau of Alcohol, Tobacco and Firearms can further strengthen its controls to ensure all

alcohol, tobacco, and firearms excise taxes are collected. For example, the IG found that a lack

of controls resulted in the Bureau being “unable to locate file documentation supporting the

tax-free status of 149 tobacco export shipments with a tax value of $65.6 million. Also, [the

agency] closed 350 shipments with an excise tax value of $21.3 million that either lacked

documentation to support exportation or had inadequate documentation. In addition, [the

agency] had not timely resolved about 25,500 notices of removal with a potential tax liability of

$59 million. This was a follow-up to a September 1999 audit that found similar problems with

tax-free exports of distilled spirits.”16

Financial Management at Treasury

The Treasury Department is responsible for preparing the U.S. government’s financial

statements, which are audited by GAO. GAO has reported that the federal government is not

able to properly and consistently compile financial statements, identify and eliminate

intragovernmental transactions, or reconcile the results of operations in the financial statements

with the budget results. Inaccurate or incomplete financial information provided to Treasury by

other federal agencies causes many of these problems. Concerted and coordinated efforts are

needed at the Treasury Department and other federal agencies to address these problems.

• The Department’s fiscal year 2000 consolidated financial statements identified two

material weakness, two reportable conditions, and five instances where the Department

was not in compliance with existing laws and regulations.17

Safety and Soundness of the Banking Industry

With combined assets exceeding $7.2 trillion, commercial banks and thrifts are important in

domestic and world economies. The banking system serves the financial needs of commerce,
18Department of the Treasury, Office of Inspector General, “Top Ten Management Challenges for the

Department of the Treasury” (December 1, 2000).

19Ibid.

20Ibid.

118

local communities, and individuals. These needs are met through a vast array of financial

services ranging from credit systems to payment systems to over-the-counter exchanges. Clearly,

a safe and sound banking system is a precondition for stability within our financial system.

The Treasury Department regulates and supervises a substantial portion of the banking system. 

With combined assets of over $4.2 trillion, Treasury’s regulated banks and thrifts account for

over 58 percent of total industry assets. In addition, regulated national banks account for the vast

majority of the off-balance-sheet assets, also known as financial derivatives, which are estimated

to exceed $35 trillion.18

For nearly a decade the banking industry has experienced record profits, and bank failures

continue to be minimal with less than 10 per year since 1995. However, for the second quarter of

calendar year 2000, the banking industry’s earnings not only declined but also were the lowest

since 1997.19 In addition to economic factors, banks are experiencing added regulatory and

supervisory challenges. Recent legislation lifted decades-old restrictions on affiliations between

banks, securities firms, and insurance companies. With these changes, additional supervisory

challenges may arise in other areas such as money laundering, financial privacy, and the

expanded sharing of regulatory responsibility under the new law’s functional regulation

provisions.

The IG’s review of the failure of Keystone National Bank identified areas where bank

examination procedures could be strengthened. Keystone’s failure is expected to cost the Bank

Insurance Fund over $700 million. Yearly examinations of Keystone from 1992 through 1999

repeatedly uncovered unsafe and unsound banking practices and regulatory violations.20

Enforcement actions, however, proved ineffective in getting Keystone to fully address its

operating problems. Also, the IG observed excessive reliance was placed on third- party

information, such as the annual independent financial audits.
21Department of the Treasury, Treasury Inspector General for Tax Administration, “Top Ten Management

Challenges for the Internal Revenue Service” (December 1, 2000).

119

Internal Revenue Service (IRS)

While the examples above describe the general state of mismanagement at the Treasury

Department, a closer examination of its major component - the Internal Revenue Service -

reveals how dangerous the situation in the Department has become. In fact, Comptroller David

Walker recently wrote that,

IRS lacks reliable cost and operational information to measure the effectiveness of its tax

collection and enforcement programs and to judge whether it is appropriately allocating

its staff resources among competing management priorities.

The Internal Revenue Service has the responsibility for collecting taxes, processing tax returns,

and enforcing the nation’s tax laws. The IRS is a large, complex, decentralized organization with

about 100,000 people in 10 service centers, 3 computing centers, and numerous other field

offices that it operates throughout the United States. The agency is currently undergoing a

reorganization that is significantly affecting the roles and responsibilities of these offices. In

fiscal year 2000, the agency collected over $2 trillion in taxes, processed over 210 million tax

returns, and paid about $194 billion in refunds to taxpayers.

In January 2001, GAO updated their “high-risk list.” These are the areas of the federal

government that are particularly susceptible to fraud, waste, abuse, or mismanagement. Six of

the areas on the list apply to the IRS: strategic human capital management, information security,

IRS tax systems modernization, IRS financial management, earned income credit

noncompliance, and collection of unpaid taxes. Clearly, the IRS faces a number of systemic and

long-standing management problems. 

On December 1, 2000, David C. Williams, the Treasury Department’s IG for Tax

Administration, provided Senator Fred Thompson with an assessment of the most serious

management challenges facing the Department.21 The worst areas include the following:

• Modernization of the Internal Revenue Service;

• Financial Management;

• Security of the Internal Revenue Service’s Information Systems;

• Providing Quality Customer Service Operations;

• Revenue Protection - Minimizing Tax Filing Fraud;

• Taxpayer Protection and Rights.

In addition to these systemic problems, other studies have identified cases of either criminal or

inappropriate behavior by individuals.
22Department of the Treasury, Treasury Inspector General for Tax Administration, “Semiannual Report to

the Congress” (September 30, 2000), p. 30.

23Ibid., p. 30.

24Ibid., p. 31.

25Ibid., p. 33.

26Department of the Treasury, Treasury Inspector General for Tax Administration, “Top Ten Management

Challenges for the Internal Revenue Service” (December 1, 2000).

120

• In March 2000, an employee of the IRS pled guilty to unauthorized inspection of tax

return information. The employee accessed the account of a relative without

authorization or for official business.22

• In June 2000, an employee was sentenced to 12 months probation after pleading guilty to

one count of unauthorized use of a government computer. The employee accessed a tax

account.23

• An investigation revealed that an employee was receiving free dental treatment from a

dentist in exchange for abating approximately $20,000 in tax penalties and interest, and

lowering the dentist’s monthly tax installment payment from $5,000 to $3,000 per

month.24

• In January 2000, an employee received $3,000 in U.S. Postal money orders as payment on

a taxpayer’s liability. The employee did not process the remittances. Instead, in late July,

the employee provided the money orders to the employee’s landlord as partial payment on

overdue rent.25

Modernization of the Internal Revenue Service

Modernization of the IRS includes the restructuring of the organization and the modernization of

technology. On October 1, 2000, the Service achieved its first milestone by putting into effect a

new organizational structure that should ultimately serve taxpayers better and support the

employees in an improved work environment. This structure is far from complete. Modernizing

the IRS is a long-term effort, with probably a decade remaining of updating technology,

revamping business practices, and refining measures of organizational performance. Risks will

remain throughout the process.

Modernization of IRS’s technology is crucial to implementing this effort. The modernization of

computer systems and the security of taxpayer information have been major concerns over the

past several years. For more than a decade, at a cost of $4 billion, the IRS has been attempting to

modernize its antiquated tax systems.26
27General Accounting Office, “Financial Audit: IRS’ Fiscal Year 2000 Financial Statements,” GAO-01-

394 (March 2001), p. 6.

28Ibid., p. 87.

29Ibid., p. 93.

121

Financial Management

Financial management also continues to be a concern. The agency’s financial systems still

cannot produce the reliable information necessary to prepare financial statements in accordance

with federal accounting standards. GAO rendered an unqualified opinion on the IRS’s Fiscal

Year (FY) 2000 statements. However, according to GAO, “IRS’s approach to obtaining this

unqualified opinion on its fiscal year 2000 financial statements relied heavily on costly, timeconsuming processes, statistical projections, external contractors, substantial adjustments, and

monumental human efforts that extended well after the September 30, 2000 fiscal year-end.”27

Based on examples from the financial audit of the IRS’s Fiscal Year 2000 financial statements,

these efforts are falling far short of what is required to prepare the IRS for the next century. 

GAO found that IRS’s records contained errors and that there were significant delays in

recording activity in taxpayer accounts. During their statistical sample of unpaid tax

assessments, GAO found the following problems:28

• Significant delays—of up to 12 years—in recording payments made by taxpayers to

related taxpayer accounts. Some payments were not recorded at all in related taxpayer

accounts. Some of these delayed or unrecorded payments were made in the late 1980s.

• Delays in updating information in taxpayer accounts. In two cases, IRS’s failure to input

or reverse information resulted in refunds that should not have ben issued because the

taxpayer had other outstanding tax liabilities. In each of these cases, the inappropriate

refund was more than $4,000.

• Input errors. A deceased individual’s estate sent a payment of $68 million to IRS in

January 1999, but the IRS recorded the payment to the wrong taxpayer account. The

taxpayer’s estate was actually owed a refund of almost $7 million. This input error was

not corrected until almost 2 years later. Consequently, IRS did not pay the refund to the

estate for nearly 2 years after it was owed.

There were also significant deficiencies in the IRS’s treatment of equipment:29

• The IRS was unable to locate 35 items (16 percent) in a sample of 220 items taken from

their property records. The items included computers, monitors, printers, and computer

software. IRS later determined that 23 of these items had been disposed of months

earlier, but that their records had not been updated to reflect the disposal. Also, 14 of 219
30General Accounting Office, “Internal Revenue Service: Progress Continues But Serious Management

Challenges Remain,” GAO-01-562T (April 2, 2001).

31General Accounting Office, “Financial Audit: IRS’ Fiscal Year 2000 Financial Statements,” GAO-01-

394 (March 2001), p. 99.

122

sample items (6 percent) selected at 22 sites could not be traced to IRS’s records.

• At 18 of the 22 buildings that were visited, there were inaccurate property records

consisting of either items not at the site as recorded, or items at the site but not on the

records.

• Error rates of 32 and 25 percent, respectively, existed in a sample of beginning and

ending balances of undelivered orders. These errors were primarily due to goods and

services having been received but not deducted from undelivered orders. Of one

undelivered order from fiscal year 2000 totaling $7.9 million for computer equipment,

approximately $3.4 million of the equipment had been delivered but had not been

removed from the undelivered orders balance.

In another case, it was determined that IRS was not complying with their own hiring policies. 

Last year, GAO reported that the IRS was hiring individuals and allowing them access to cash,

checks, and other taxpayer data before it received satisfactory results of their fingerprint checks. 

In response, IRS issued a new policy in April prohibiting the hiring of applicants in any IRS

office until fingerprint checks were completed. However, GAO found that 145 of the 2,526 staff

hired from the time the policy was issued through September 30, 2000, began working before

IRS received the results of their finger print checks.30

Finally, GAO reported that IRS continues to be unable to determine the specific amount of

revenue it actually collects for three of the government’s four largest revenue sources—Social

Security, Hospital Insurance, and individual income taxes. In addition, IRS continues to be

unable to determine the collections for the Highway Trust Fund or other trust funds that receive

excise tax receipts at the time payments are received.31 

Security of the Internal Revenue Service’s Information Systems

The IRS Commissioner has stated that protecting taxpayer information and the systems used to

deliver services to taxpayers is key to the success of a customer-focused Internal Revenue

Service. In the past, the security of taxpayer data has been problematic, particularly in the area of

unauthorized browsing of taxpayer records. As the primary revenue collector for the United

States, the IRS is a target for both terrorists and hackers. This threat has increased over the last

few years as more computers are being linked together. Disgruntled employees also represent a

major threat, particularly with the turmoil that the IRS is experiencing during its reorganization

process. Information security will be a continuous challenge to the IRS as long as computer
32Department of the Treasury, Treasury Inspector General for Tax Administration, “Top Ten Management

Challenges for the Internal Revenue Service” (December 1, 2000).

33General Accounting Office, “Information Security: IRS Electronic Filing Systems,” GAO-01-306

(February 2001). 

34Department of the Treasury, Treasury Inspector General for Tax Administration, “Top Ten Management

Challenges for the Internal Revenue Service” (December 1, 2000).

35Department of the Treasury, Treasury Inspector General for Tax Administration, Testimony by the

Honorable David C. Williams before the Subcommittee on Oversight, House Committee on Ways and Means (April

3, 2001).

123

systems exist. New security vulnerabilities are always being discovered as new technology and

equipment are added. Access control weaknesses also continue to be a perennial problem for the

IRS.32

• During last year’s tax filing season, the IRS did not take adequate steps to protect the

security of electronic filing systems and electronically transmitted taxpayer data. As a

result, unauthorized individuals, both inside and outside the IRS, could have gained

access to the IRS electronic filing systems and viewed and modified taxpayer data.33

Providing Quality Customer Service Operations

The IRS has invested heavily in technology but has not significantly improved telephone service

to taxpayers. The agency centralized the management of the toll-free telephone system, invested

in new technology, committed significant enforcement resources to answering telephones, and

expanded the hours of operation in an effort to better serve taxpayers. Nevertheless, in 1999, the

IRS did not provide an increased level of quality telephone service to taxpayers in an economical

manner.

In addition, the IRS’s performance in providing toll-free telephone service compares unfavorably

with private sector organizations recognized as providing “world class” service. The level of

service provided to taxpayers on the 3 main telephone lines declined from 73 percent in the

prior-filing season to 51 percent in 1999, and almost 16 million more taxpayers received busy

signals. Also, during the first 6 months of fiscal year 1999, the accuracy of answers to tax law

questions, as self-reported by the IRS, declined from 79 percent to 72 percent. For the same

period, total labor costs increased by over $30 million from the prior fiscal year, even though 1.4

million fewer calls were answered.34

A recent investigation by the IG, however, demonstrates the need for improvement. Over a fourday period during this year’s tax filing season, auditors from the IG “made 368 random test calls

to the IRS’ toll-free number and were unable to gain access 37% of the time. When successful in

getting through, the IRS incorrectly responded 47% of the time.”35
36Internal Revenue Service, “Compliance Estimates for Earned Income Tax Credit Claimed on 1997 Tax

Returns” (August 2000).

124

Revenue Protection - Minimizing Tax Filing Fraud

The IRS must continually seek opportunities to protect revenue and minimize tax-filing fraud in

its programs and operations. In August 2000, the Service released its most recent Earned

Income Credit compliance study. The study’s central finding is that an estimated $7.8 billion

(25.6 percent) should not have been paid. These results show that the IRS needs to continue to

be innovative and aggressive in its compliance efforts.36

The IRS still faces significant challenges in the business tax return arena. Despite extensive

efforts it has made to detect and stop fraudulent claims, relatively little effort has been made to

systematically identify refund schemes involving business returns and associated credits. A few

business schemes have been identified but it has generally been through labor intensive manual

procedures. The IRS is concerned that fraudulent refund claims may be expanding to include

business returns and that scheme perpetrators continue to develop new methods to defraud the

system. The IG is concerned that current controls may be bypassed and, as a result, has initiated

a review in this area.

Taxpayer Protection and Rights

The IG has reported improvement in the IRS’s compliance with many provisions of the IRS

Restructuring and Reform Act. Yet some provisions of that Act need continued monitoring

because the IRS is not in full compliance. These include restricting the use of enforcement

statistics to evaluate IRS employees, not designating taxpayers as illegal tax protesters, providing

proper and timely notice that a federal tax lien has been filed, and not improperly withholding

information in response to taxpayers’ written requests for information.
1General Accounting Office, “High-Risk Series: An Update,” GAO-01-263 (January 2001), p. 79.

2Department of Veterans Affairs, Office of Inspector General, “Top Ten Management Challenges for the

Department of Veterans Affairs” (November 28, 2000).

XVII. Department of Veterans Affairs

A national nursing shortage could aversely affect [the Department’s] efforts to

improve patient safety in [Department] facilities and put veterans at risk.

David M. Walker

Comptroller General of the United States 1

The Department of Veterans Affairs is the nation’s second largest department in terms of

staffing. Its mission is to serve America’s veterans and their families by providing health,

disability, education, and housing benefits, as well as interment and memorial services. There

are an estimated 24.8 million veterans.

As of last year, the Department had approximately 204,100 employees. It maintains facilities in

every state of the Union, the District of Columbia, the Commonwealth of Puerto Rico, Guam,

and the Phillippines. Approximately 187,000 of its employees work in the health care system. 

Health care is funded at approximately 43 percent of the budget and is provided to an average of

58,100 inpatients daily. Slightly more than 40 million episodes of care are estimated for

outpatients. There are 172 hospitals, 766 outpatient clinics, 134 nursing home units, and 40

domiciliaries. Veteran benefits, including compensation benefits, pension benefits, and life

insurance, are funded at almost 55 percent of the VA’s budget.

The Department of Veterans Affairs suffers from several systemic and long-standing

management problems. On November 28, 2000, Richard J. Griffin, the Department of Veterans

Affairs IG, provided Senator Fred Thompson, Chairman of the Senate Committee on

Governmental Affairs, with an assessment of the most serious management problems facing the

agency.2 The challenges, which are discussed below, include the following:

 

• Health care quality management and patent safety;

• Claims processing, appeals processing, and timeliness and quality of compensation and

pension medical examinations;

• Inappropriate benefit payments;

• Security of systems and data;

• Debt management;

• Workers Compensation costs; and

• Procurement practices.

In addition to these systemic problems, other studies have identified cases of either criminal or
3Department of Veterans Affairs, Office of Inspector General, “Semiannual Report to the Congress”

(September 30, 2000), p. 17.

4

Ibid., p.18.

5

Ibid.

6

Ibid., p. 19.

7

Ibid., p. 25.

126

unethical behavior by individuals. For example:

• A registered nurse at a medical center diverted controlled substances from the medical

center for his own use.3

• A pharmacy technician was arrested with four shopping bags filled with pharmaceuticals

and controlled substances that were stolen from a medical center. The drugs had a value

of more than $21,000.4

• A registered nurse diverted more than 60 doses of controlled substances from Department

supplies for personal use.5

• A former warehouse worker stole $20,000 in computer equipment from the Department.6

• A company charged the Department for installing adaptive equipment into vans sold to

disabled veterans. In fact, the equipment was never installed.7

Health Care Quality Management (QM) and Patient Safetv

One of the most serious challenges facing the Department is the need to maintain a highly

effective health care program. In too many cases, health care facilities are antiquated; waiting

times for treatment are at times excessive; there is a problem with cleanliness; and there is not

enough patient privacy. This is further complicated by the need to ensure high-quality, safe

patient care in an environment that is rapidly evolving to an outpatient setting from the traditional

inpatient care.

One of the principal issues that continues to present a management challenge is the Veterans

Health Administration’s inability to provide consistent clinical quality and safety. To complicate

this problem, managers have not prescribed any consistent staffing patterns for medical center

quality management departments throughout the country. Thus, no two medical centers’ quality

management departments focus on the same issues in the same way. These differences impede

the Department’s ability to identify and correct unsatisfactory practices. Reports from the IG

detail a variety of problems:

• “The physical environment of the operating room is unacceptable. Several employees

told us that the operation room was not clean. Inspectors confirmed these conditions.
8Department of Veterans Affairs, Office of Inspector General, “Combined Assessment Program Review,”

00-00025-37 (April 3, 2000), p. 9.

9Department of Veterans Affairs, Office of Inspector General, “Combined Assessment Program Review,”

00-01199-72 (May 25, 2000), p. 7.

10Ibid., p. 11.

11Ibid.

12Ibid., p. 15.

13Department of Veterans Affairs, Office of Inspector General, “Combined Assessment Program Review,”

00-00933-88 (June 19, 2000), p. 5.

127

They found that water leaks had damaged the ceilings and walls. The walls have peeling

paint that is easily dislodged by touch. The floors are badly rutted and stained, and

therefore difficult to keep clean. Nursing employees told us that they had raised these

issues, but that they did not believe managers had made repairs a high priority.”8

• “Patients were located in the hallway, with oxygen tubing running across the floors of

patients rooms and the hallway, creating a falling hazard for employees. This latter

hazard also created the potential for accidentally disconnecting the patient from the

oxygen source.9

• The Nutrition and Food Service, which provides food to one Veterans Affairs hospital

“shares the loading dock with the Environmental Management Service’s hazardous waste

containers. Dirty Environmental Management Service and red biohazard carts are located

next to the area where food is transported to the kitchen.”10

• “Inspectors observed cooking equipment that needed to be cleaned, sitting on open racks.

Bulk frozen food items were lying on carts, and the carts themselves were blocking egress

from the Canteen. The refrigerators contained uncovered, open food containers.

Inspectors also observed instances in which employees did not wash their hands between

handling customers’ money and handling food.” 11

• “Medication security was inadequate in some areas of the medical center. Unauthorized

employees could readily access a . . . medication room . . . and a medication refrigerator

 . . . was found to be unlocked. Reviews . . . revealed numerous incidents of unsecured

medications on the inpatient units. Inspectors found outdated medications in a room . . .

even though the room is not designated as a medication room.”12

• “[L]ack of sufficient staffing in clinical support services such as Radiology, Pharmacy,

and Pathology and Laboratory Medicine Service, as well as a general lack of clerical

support, has greatly impacted upon the facility’s ability to deliver timely, quality services

in the primary care setting and has contributed to longer waiting times and delayed patient

treatment.” 13

• “Over 35 specialty clinics across the system exceed 30-day wait times for appointments,

and some appointment wait times approach 1 year. Further, both Urgent Care and

emergency room personnel reported that they often experience delays in obtaining results
14Ibid., p. 9.

15Department of Veterans Affairs, Office of Inspector General, “Combined Assessment Program Review,” 

00-01202-107, (August 18, 2000), p. 4.

16Department of Veterans Affairs, Office of Inspector General, “Combined Assessment Program Review,”

00-02003-108 (August 18, 2000), p. 8.

17Department of Veterans Affairs, Office of Inspector General, “Combined Assessment Program Review,” 

00-01225-109 (August 31, 2000), p. 10.

128

of ‘stat’ laboratory tests, reportedly often due to technical problems, which further

exacerbates the problem of patient waiting times.”14

• “Cleanliness, safety of non-patient areas, and patient privacy . . . need management

attention. We found [a nursing home care unit] dirty and it had a detectable pungent odor

on the day of our survey. . . . The congregate bath was on the main hall. It afforded little

privacy, as the door was propped open with only a curtain in place.”15

• “[It] appeared that three nursing home unit patients did not receive their evening meal

trays, and clinicians assembled their meals from other patients’ trays. . . . In another

instance, employees told us that a diabetic patient had been inappropriately given sugar

packets and jelly. The Nutrition Services’ quality control monitor on meal tray errors

showed that tray errors increased from 6 percent in April to 24 percent in May 2000. . . . 

We reviewed the food service galley . . . and found bananas that were overripe and

infested with fruit flies. These bananas had been washed and prepared for patients.

Several food service employees told us that it was not uncommon for Nutrition Service to

accept poor quality produce.”16

• “Local policy required the presence of a gynecology attendant to chaperone all pelvic

examinations in the Women Veterans’ Treatment Program. In addition to chaperoning

pelvic examinations, the attendant’s duties included preparing pap smears and culture

slides. We found that managers had not ensured that a trained gynecology attendant

would be consistently available to assist physicians during pelvic examinations. . . . We

also found that when untrained attendants were used to provide these services, the

laboratory tests were often invalid because of improper specimen preparation. Invalid

test results require that patients return to the clinic to repeat the procedure, and often

cause unnecessary anguish and inconvenience for the patients.” 17

Claims Processing, Appeals Processing, and Timeliness and Quality of Compensation and

Pension Medical Examinations

The Veterans Benefits Administration needs to improve the processing and timeliness of benefits

claims processing. Numerous studies have addressed timeliness and quality issues with their

compensation and pension claims processing system. The system is used for the overall

administration of almost $23 billion in compensation and pension payments to veterans annually.
18Department of Veterans Affairs, Office of Inspector General, “Top Ten Management Challenges for the

Department of Veterans Affairs” (November 28, 2000).

19General Accounting Office, “Major Management Challenges and Program Risks: Department of

Veterans Affairs,” GAO-01-255 (January 2001), p. 27.

20U.S. Department of Veterans Affairs, Office of Inspector General, “Top Ten Management Challenges for

the Department of Veterans Affairs” (November 28, 2000). 

129

Claims processing: The Veterans Benefits Administration is struggling with timeliness of claims

processing. It faces a high workload backlog and unacceptably long time to process claims. The

number of pending compensation claims for fiscal year 2000 averaged about 360,000, and it took

about 185 days for claims to be processed.18

Appeals Processing: According to GAO, the average time to resolve veterans’ appeals of claims

decisions continue to exceed 2 years in 1999.19 Large claims backlogs have continued to impact

the Department’s ability to provide veterans with timely service; in some cases, veterans have

had to wait years for decisions on their claims.

Timeliness and Quality of Medical Examinations: Disability benefit payments are based, in part,

on interpretations of medical evidence by the Veterans Benefits Administration disability rating

specialists. That evidence is developed by physicians or private contractors through examination

of the veteran. Proper medical examination services are important because the Administration

cannot complete payment on veterans’ disability claims until examination results are received. 

When a medical examination is not performed correctly, the veteran’s claim is delayed until

another examination is scheduled and completed. This usually results in significant claim

processing delays. While management had made some changes to this process, little

improvement had been made.20

Inappropriate Benefit Payments

The Veterans Benefits Administration needs to develop and implement an effective method to

identify inappropriate benefit payments. Recent audits found that the appropriateness of

payments has not been adequately addressed. Some of the problem areas are described below.

Payments to incarcerated veterans: A review found that Department officials did not implement

a systematic approach to identify incarcerated veterans and dependents and adjust their benefits

as required by the law. Of 527 veterans randomly sampled from the population of veterans

incarcerated in 6 states, the Department had not adjusted benefits in over 72 percent of the cases

requiring adjustment, resulting in overpayments totaling $1.8 million. Projecting the sample

results nationwide, the IG estimates that about 13,700 incarcerated veterans have been, or will

be, overpaid about $100 million. Additional overpayments totaling about $70 million will be

made over the next 4 years to newly incarcerated veterans and dependents if the Department does
21Ibid. 

22Department of Veterans Affairs, Office of Inspector, “Semiannual Report to the Congress” (September

30, 2000), p. 31.

23Department of Veterans Affairs, Office of Inspector General, “Top Ten Management Challenges for the

Department of Veterans Affairs” (November 28, 2000). 

24Ibid.

130

not establish a systematic method to identify these prisoners.21

Payments to deceased beneficiaries: The Veterans Benefits Administration needs to develop and

implement a more effective method to identify deceased beneficiaries and to terminate their

benefits, in order to avoid situations like the following:

• One woman failed to notify the Department of the death of her mother, a beneficiary who

was receiving compensation benefits. The woman allowed the Department to continue to

electronically deposit the funds into a bank account she had shared with her mother,

thereby receiving $78,500 in inappropriate payments. She was later indicted and charged

with five counts of theft.22 

Benefit overpayments due to unreported beneficiary income: An audit found that opportunities

exist for the Department to accomplish the following goals: significantly increase the efficiency,

effectiveness, and amount of potential overpayments that are recovered; better ensure program

integrity and identification of program fraud; and improve delivery of services to beneficiaries. 

The potential monetary impact of these findings to the Department was $806.3 million. Of this

amount, the IG estimated potential overpayments of $773.6 million associated with benefit

claims that contained fraud indicators, such as fictitious Social Security numbers.23

Benefit overpayment risks due to internal control weaknesses: Three employees embezzled

nearly $1.3 million by exploiting internal control weaknesses in the benefit program. An

assessment identified 18 categories of vulnerability involving numerous technical, procedural,

and policy issues.24

Security of Systems and Data

The Department needs to improve physical and electronic security over its information

technology resources. The Department requires automated data processing of transactions

valued at over $28 billion annually and maintenance of over 40 million sensitive veteran records. 

Security risk increases as data is shared among the Department’s organizations. Multiple

architectures and complex mission-specific systems throughout the Department increase the risk
25Ibid.

26Department of Veterans Affairs, Office of Inspector, “Semiannual Report to the Congress” (September

30, 2000), p. 20.

131

of inappropriate access and misuse of sensitive data.25

Debt Management

As of September 1999, debt owed to the Department totaled over $3.2 billion. This debt had

resulted from home loan guaranties, direct home loans, medical care cost fund receivables,

compensation and pension overpayments, and educational benefits overpayments. The IG has

issued 15 reports over the last 6 years, addressing the Department’s debt management activities. 

The recurring themes are that the Department should be more aggressive in collecting debts,

improve debt avoidance practices, and streamline and enhance credit management and debt

establishment procedures. Through improved collection practices, the Department can increase

receipts from delinquent debt by tens of millions of dollars each year.

Workers Compensation Costs

The Federal Employees’ Compensation Act provides benefits for disability or death resulting

from an injury sustained in the performance of duty. The Department of Labor administers the

program for all federal agencies. The benefit payments have two components— salary payments

and payments for medical treatment for the specific disability. Medical treatment includes all

necessary care, including hospitalization.

An audit in 1998 concluded that the program was not effectively managed and that by returning

current claimants to work who are no longer disabled, the Department could reduce future

payments by $247 million. The IG also identified 26 potential fraud cases from a random

sample. Based on the sample results, it was estimated there were over 500 fraudulent cases. In

1999, the IG completed an audit of high-risk areas in the Department’s Workers Compensation

Program. The audit found that Veterans Health Administration was vulnerable to abuse, fraud,

and unnecessary costs associated with program claims in three high-risk areas reviewed (dual

benefits, non-Department employees, and deceased claimants). The IG estimated that the

Veterans Health Adminstration has incurred or will incur about $11.2 million in unnecessary

costs associated with claims in these high-risk areas.

For example, a former nurse was convicted on charges of submitting a false statement in order to

receive workers’ compensation benefits to which she was not entitled. She claimed she was

unable to work due to an injury even though she was earning income working at her husband’s

home improvement business.26

Procurement Practices
27Department of Veterans Affairs, Office of Inspector General, “Combined Assessment Program Review,”

00-01199-72 (May 25, 2000), p. 39.

28Department of Veterans Affairs, Office of Inspector, “Semiannual Report to the Congress” (September

30, 2000), p. 20.

132

The Department spends over $5.1 billion annually for supplies, services, construction, and

equipment. It faces major challenges to implement a more efficient and effective acquisition

effort. The Department must also ensure that adequate levels of medical supplies, equipment,

pharmaceuticals, and other supply inventories are on hand on a daily basis to satisfy demand.

Inventories above those levels should be avoided so funds that could be used to meet other needs

are not tied up in excess inventories.

Historically, procurement actions are at high risk for fraud, waste, abuse, and mismanagement. 

Vulnerabilities and business losses associated with theft, waste and damage of information

technology are known to be significant. Recent reviews have identified the following serious

problems with the Department’s contracting practices and acquisitions.

Inventory management: Excessive inventories are being maintained, unnecessarily large quantity

purchases are occurring, inventory security and storage deficiencies exist, and controls and

accountability over inventories need improvement. At any given time, the value of the Veterans

Health Administration-wide excess medical supply inventory was $64.1 million, 62 percent of

the $103.8 million total inventory. Audits at four locations found that about 48 percent of the

$1.7 million pharmaceutical inventory were excess. Another audit at five locations concluded

that 48 percent of prosthetic supply inventories were excessive. According to the IG:

We tested inventory levels. . . . The results of our tests revealed wildly inaccurate

inventory data. . . . We found that, because of inaccuracies . . . , important supply items

needed for patient care and maintained in stock for issue were expired or near

expiration. . . . [D]uring our tour of . . . operations, we identified two other items . . . that

had already expired. One of these two items had expired 15 months earlier, and one had

expired 19 months earlier.

27

Purchase card use: There are significant vulnerabilities in the use of purchase cards. Work

requirements have been split to circumvent competition requirements and some goods and

services have been acquired at excessive prices and without regard to actual needs. Risk will

escalate as purchase card use increases throughout the Department. 

• A former administrative clerk was arrested on charges of allowing individuals to use

Government credit cards for personal use.

28

• A former respiratory therapist was sentenced to supervised probation and community

service after it was disclosed he used a Government purchase card to buy over $4,900
29Ibid., p. 20.

133

worth of household appliances and other items for personal use.29