U.S. GOVERNMENT PRINTING OFFICE

WASHINGTON : 

1

56–866 CC 1999

Union Calendar No. 95

106th Congress, 1st Session – – – – – – – – – – House Report 106–170

MAKING THE FEDERAL GOVERNMENT

ACCOUNTABLE: ENFORCING THE MANDATE FOR EFFECTIVE FINANCIAL

MANAGEMENT

SECOND REPORT

BY THE

COMMITTEE ON GOVERNMENT REFORM

together with

MINORITY VIEWS

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

JUNE 7, 1999.—Committed to the Committee of the Whole House on the

State of the Union and ordered to be printed
(II)

COMMITTEE ON GOVERNMENT REFORM

DAN BURTON, Indiana, Chairman

BENJAMIN A. GILMAN, New York

CONSTANCE A. MORELLA, Maryland

CHRISTOPHER SHAYS, Connecticut

ILEANA ROS-LEHTINEN, Florida

JOHN M. MCHUGH, New York

STEPHEN HORN, California

JOHN L. MICA, Florida

THOMAS M. DAVIS, Virginia

DAVID M. MCINTOSH, Indiana

MARK E. SOUDER, Indiana

JOE SCARBOROUGH, Florida

STEVEN C. LATOURETTE, Ohio

MARSHALL ‘‘MARK’’ SANFORD, South

Carolina

BOB BARR, Georgia

DAN MILLER, Florida

ASA HUTCHINSON, Arkansas

LEE TERRY, Nebraska

JUDY BIGGERT, Illinois

GREG WALDEN, Oregon

DOUG OSE, California

PAUL RYAN, Wisconsin

JOHN T. DOOLITTLE, California

HELEN CHENOWETH, Idaho

HENRY A. WAXMAN, California

TOM LANTOS, California

ROBERT E. WISE, JR., West Virginia

MAJOR R. OWENS, New York

EDOLPHUS TOWNS, New York

PAUL E. KANJORSKI, Pennsylvania

PATSY T. MINK, Hawaii

CAROLYN B. MALONEY, New York

ELEANOR HOLMES NORTON, Washington,

DC

CHAKA FATTAH, Pennsylvania

ELIJAH E. CUMMINGS, Maryland

DENNIS J. KUCINICH, Ohio

ROD R. BLAGOJEVICH, Illinois

DANNY K. DAVIS, Illinois

JOHN F. TIERNEY, Massachusetts

JIM TURNER, Texas

THOMAS H. ALLEN, Maine

HAROLD E. FORD, JR., Tennessee

JANICE D. SCHAKOWSKY, Illinois

———

BERNARD SANDERS, Vermont

(Independent)

KEVIN BINGER, Staff Director

DANIEL R. MOLL, Deputy Staff Director

DAVID A. KASS, Deputy Counsel and Parliamentarian

CARLA J. MARTIN, Chief Clerk

PHIL SCHILIRO, Minority Staff Director

SUBCOMMITTEE ON GOVERNMENT MANAGEMENT, INFORMATION, AND TECHNOLOGY

STEPHEN HORN, California, Chairman

JUDY BIGGERT, Illinois

THOMAS M. DAVIS, Virginia

GREG WALDEN, Oregon

DOUG OSE, California

PAUL RYAN, Wisconsin

JIM TURNER, Texas

PAUL E. KANJORSKI, Pennsylvania

MAJOR R. OWENS, New York

PATSY T. MINK, Hawaii

CAROLYN B. MALONEY, New York

EX OFFICIO

DAN BURTON, Indiana HENRY A. WAXMAN, California

J. RUSSELL GEORGE, Staff Director and Chief Counsel

BONNIE HEALD, Director of Communications and Professional Staff Member

J. LAWRENCE MALENICH, Professional Staff Member

MASON ALINGER, Clerk

FAITH WEISS, Minority Counsel
(3)

LETTER OF TRANSMITTAL

HOUSE OF REPRESENTATIVES,

Washington, DC, June 7, 1999.

Hon. J. DENNIS HASTERT,

Speaker of the House of Representatives,

Washington, DC.

DEAR MR. SPEAKER: By direction of the Committee on Government Reform, I submit herewith the committee’s second report to

the 106th Congress. The committee’s report is based on a study

conducted by its Subcommittee on Government Management, Information, and Technology.

DAN BURTON,

Chairman.

(III)
4

C O N T E N T S

Page

I. Summary of oversight findings and recommendations ............................... 1

A. Introduction .......................................................................................... 1

B. Overview of investigation .................................................................... 3

C. Findings ................................................................................................ 4

1. Material deficiencies in financial information ........................ 4

2. Material control weaknesses in financial systems .................. 5

3. Noncompliance with laws and regulations .............................. 6

4. Year 2000 challenge .................................................................. 6

D. Recommendations ................................................................................ 7

1. Continued oversight .................................................................. 7

2. Incentives ................................................................................... 8

3. Strengthen oversight role of Inspectors General .................... 8

4. Strengthen President’s role ...................................................... 9

II. Report on the committee’s oversight review ................................................ 10

A. Background .......................................................................................... 10

1. Need for effective financial management ................................ 10

2. Federal financial management legislation .............................. 10

3. Importance of effective internal controls ................................. 15

B. Results of the governmentwide and related agency audits .............. 17

1. Oversight hearings held by subcommittee .............................. 17

2. Financial management grades ................................................. 22

III. Conclusions ..................................................................................................... 25

APPENDIXES

Appendix A.—Basis for agency financial management grades ............................ 27

Appendix B.—Major Federal financial management legislation ......................... 29

Appendix C.—Federal Financial Management Improvement Act ....................... 34

Appendix D.—List of witnesses .............................................................................. 40

VIEWS

Minority views of Hon. Henry A. Waxman, Hon. Jim Turner, Hon. Tom

Lantos, Hon. Robert E. Wise, Jr., Hon. Major R. Owens, Hon. Edolphus

Towns, Hon. Paul E. Kanjorski, Hon. Patsy T. Mink, Hon. Carolyn B.

Maloney, Hon. Eleanor Holmes Norton, Hon. Chaka Fattah, Hon. Elijah

E. Cummings, Hon. Dennis J. Kucinich, Hon. Rod R. Blagojevich, Hon.

Danny K. Davis, Hon. John F. Tierney, Hon. Thomas H. Allen, Hon. Harold

E. Ford, Jr., and Hon. Janice D. Schakowsky ................................................... 42

(V)
5

ABBREVIATIONS

BAPA Budget and Accounting Procedures Act of 1950

CFO Chief Financial Officer

DOD Department of Defense

FASAB Federal Accounting Standards Advisory Board

FFMIA Federal Financial Management Improvement Act of 1996

FMFIA Federal Managers’ Financial Integrity Act of 1982

GAGAS Generally Accepted Government Auditing Standards

GAO General Accounting Office

GMRA Government Management Reform Act of 1994

GPRA Government Performance and Results Act of 1993

HCFA Health Care Financing Administration

HHS Department of Health and Human Services

IRS Internal Revenue Service

OMB Office of Management and Budget

SFFAC Statement of Federal Financial Accounting Concepts

SFFAS Statement of Federal Financial Accounting Standards

SGL Standard General Ledger

SSA Social Security Administration

(VII)
1 Clause 1(h) (4) and (6) rule X of the Rules of the House of Representatives, 106th Congress.

Union Calendar No. 95

106TH CONGRESS REPORT " ! HOUSE OF REPRESENTATIVES 1st Session 106–170

MAKING THE FEDERAL GOVERNMENT ACCOUNTABLE:

ENFORCING THE MANDATE FOR EFFECTIVE FINANCIAL

MANAGEMENT

JUNE 7, 1999.—Committed to the Committee of the Whole House on the State of

the Union and ordered to be printed

Mr. BURTON, from the Committee on Government Reform

submitted the following

SECOND REPORT

On May 19, 1999, the Committee on Government Reform approved and adopted a report entitled ‘‘Making the Federal Government Accountable: Enforcing the Mandate for Effective Financial

Management.’’ The chairman was directed to transmit a copy to the

Speaker of the House.

I. SUMMARY OF OVERSIGHT FINDINGS AND RECOMMENDATIONS

A. INTRODUCTION

The Committee on Government Reform (the ‘‘committee’’) has

primary legislative and oversight jurisdiction with respect to ‘‘Government management and accounting measures generally,’’ as well

as ‘‘overall economy, efficiency, and management of Government

operations and activities, including Federal procurement.’’ 1 The

committee also has the responsibility:

[T]o determine whether laws and programs addressing

subjects within the jurisdiction of [the] committee are

being implemented and carried out in accordance with the

intent of Congress [through the] review and study on a

continuing basis the application, administration, execution,

and effectiveness of laws and programs addressing subjects

within its jurisdiction. [The committee shall review and

study] any conditions or circumstances that may indicate
2

2 Ibid., Clause 2(b)(1) (A) and (C).

the necessity or desirability of enacting new or additional

legislation addressing subjects within its jurisdiction.2

Pursuant to this authority, the Subcommittee on Government Management, Information, and Technology (the ‘‘subcommittee’’) convened six oversight hearings to explore:

• the implementation of laws related to Federal financial management in executive departments and agencies and, in particular, the second year of full implementation of the Chief Financial Officers Act of 1990 (CFO Act), as expanded by the

Government Management Reform Act of 1994 (GMRA) and as

amended by the Federal Financial Management Improvement

Act of 1996 (FFMIA);

• the extent to which Federal executive departments and agencies have successfully applied the requirements of these laws;

• the need for congressional action to improve financial management in the Federal Government; and

• options for congressional actions that would effectively bring

about such improvement.

Billions of taxpayer-provided dollars are being lost each year to

fraud, waste, abuse, and mismanagement in hundreds of programs

within the Federal Government. Audits continue to show that most

agencies have significant weaknesses in controls and systems. As

a result of these weaknesses, Federal decisionmakers do not have

reliable and timely performance and financial information to ensure adequate accountability, manage for results, and make timely

and well-informed judgments.

In the late 1980s, Congress recognized that one of the root causes

of this loss was that the Federal Government’s financial management leadership, policies, systems, and practices were in a state of

disarray. Financial systems and practices were obsolete and ineffective. They failed to provide complete, consistent, reliable, and

timely information to congressional decisionmakers and agency

management.

In response, Congress passed a series of laws designed to improve financial management practices and to ensure that tax dollars are spent for the purposes that Congress intends. Each executive agency covered by the CFO Act—or specified by the Office of

Management and Budget [OMB]—is required to prepare and have

audited a financial statement covering all accounts and associated

activities of each office, bureau, and activity within the agency.

Furthermore, consolidated governmentwide financial statements

must be prepared and audited annually. In addition, Federal agencies are required to conform to promulgated Federal Government

accounting and systems standards, and to use the Federal standard

general ledger.

Despite the passage and implementation of these laws, there has

been limited progress. Much remains to be done before the Federal

Government’s financial management systems and practices provide

reliable, timely financial information on a regular basis.
3

3The consolidated financial statements of the U.S. Government for fiscal years 1997 and 1998

cover the executive branch as well as parts of the legislative and judicial branches of the Federal

Government. Government-sponsored enterprises and the Federal Reserve System are excluded. 4The 24 Federal agencies covered by the requirements of the CFO Act are the following 14

Cabinet Departments: Agriculture, Commerce, Defense, Education, Energy, Health and Human

Services, Housing and Urban Development, Interior, Justice, Labor, State, Transportation,

Treasury, and Veterans Affairs; and various independent agencies, including: Environmental

Protection, National Aeronautics and Space, International Development, Federal Emergency

Management, General Services, National Science, the Nuclear Regulatory Commission, Personnel Management, the Small Business, and Social Security. 5The U.S. Government Standard General Ledger provides a standard chart of accounts and

standardized transactions that agencies are to use in all their financial systems. 6OMB Circular No. A–127, ‘‘Financial Management Systems,’’ July 1993, prescribes the financial management systems policies and standards for executive agencies to follow in developing,

operating, evaluating, and reporting on financial management systems. Circular A–127 references the series of publications entitled Federal Financial Management Systems requirements,

issued by the Joint Financial Management Improvement Program, as the primary source of Governmentwide requirements for financial management systems. 7The Comptroller General of the United States and the Director of the Office of Management

and Budget issued a comprehensive set of accounting standards that became fully effective in

fiscal year 1998.

B. OVERVIEW OF INVESTIGATION

March 31, 1998 marked a significant milestone in the implementation of financial management reform legislation. The Chief Financial Officers Act of 1990, Public Law 101–576, as expanded by

the Government Management Reform Act of 1994, Public Law 103–

356, required—for the first time—the preparation and audit of consolidated financial statements of the Federal Government for fiscal

year 1997, and each year thereafter.3 GMRA required that the

General Accounting Office [GAO] issue an audit report no later

than March 31 of each year on the consolidated financial statements for the preceding fiscal year.

The GMRA also required that, starting March 1, 1997, and each

year thereafter, all 24 Federal agencies that are subject to the requirements of the CFO Act must submit audited financial statements to the Director of OMB.4 These 24 agencies were responsible

for approximately 97 percent of the total Federal outlays during fiscal year 1997.

Fiscal year 1997 also marked the first year of implementation of

the Federal Financial Management Improvement Act of 1996, Public Law 104–208. The purpose of FFMIA is to ensure that agency

financial management systems comply with Federal financial management system requirements, applicable Federal accounting

standards, and the U.S. Government Standard General Ledger

(standard general ledger) 5 in order to provide uniform, reliable,

and useful financial information. FFMIA required that beginning

with the fiscal year ending on September 30, 1997, auditors for

each of the 24 major departments and agencies named in the CFO

Act must report, as part of their annual audits, whether the agencies’ financial systems comply substantially with Federal financial

systems requirements,6 applicable Federal accounting standards,7

and the standard general ledger at the transaction level. FFMIA

also required the GAO to report on agency implementation of

FFMIA by October 1, 1997, and each year thereafter.

It is imperative that these acts are implemented successfully.

They form the basis for the data used in measuring program performance under the Government Performance and Results Act,

Public Law 103–62 (Results Act). Thus, at a minimum, strong congressional oversight is needed to achieve the primary goal of all
4

8 ‘‘Financial Audit: 1998 Financial Report of the United States Government,’’ GAO/AIMD–99–

130, Mar. 31, 1999. 9 Ibid., p. 1.

these laws: a Federal Government that is accountable to the American taxpayers.

C. FINDINGS

The fiscal year 1998 annual audit reports for the 24 Federal departments and agencies, required under the CFO Act, as expanded

by GMRA, were due to be filed with the OMB on March 1, 1999.

In addition, the GAO issued a second annual audit report on the

consolidated financial statements of the Federal Government on

March 31, 1999. Based on the investigation and oversight hearings

conducted by the subcommittee and the governmentwide audit conducted by the GAO, the committee finds as follows:

1. Material deficiencies in Federal financial information continue

Similar to the previous year, the GAO was unable to render an

opinion on the 1998 consolidated financial statements of the Federal Government. In addition, the GAO report 8 articulated the

broad array of financial management problems faced by the Federal Government. It again confirmed that at least tens of billions

of taxpayer dollars are being lost each year to fraud, waste, abuse,

and mismanagement in hundreds of Federal programs. Government financial management remains in disarray. Its financial systems and practices are obsolete and ineffective, and they do not

provide complete, consistent, reliable, and timely information to the

President, congressional decisionmakers, and department and

agency management.

The GAO report provided a synopsis of significant weaknesses

found in financial systems, problems with fundamental recordkeeping, incomplete documentation, and weak internal controls, including computer controls. These weaknesses prevent the Federal

Government from accurately reporting a large portion of its assets,

liabilities, and costs. According to the GAO, ‘‘these deficiencies affect the reliability of the consolidated financial statements and

much of the underlying financial information.’’ And, more important, these problems ‘‘. . . also affect the Federal Government’s

ability to accurately measure the full cost and financial performance of programs and effectively and efficiently manage its operations.’’ 9

Major problems prevented the GAO from being able to form an

opinion on the reliability of the governmentwide financial statements. These problems included the Federal Government’s inability

to: • account for and report on billions of dollars worth of property, equipment, materials, supplies and stewardship assets;

• estimate the cost of most Federal credit programs and related loans receivable, and loan guarantee liabilities;

• estimate and reliably report material amounts of environmental and disposal liabilities, and their related costs;

• determine the amount of various reported liabilities, including post-retirement health benefits for military employees, accounts payable, and other liabilities;
5

10 As of the date of this report, 6 of the 24 agencies required to issue audited financial statements by Mar. 1, 1999, had not done so. 11 A material weakness, as defined by the American Institute of Certified Public Accountants

in its Statements of Auditing Standards and in the Comptroller General’s Government Auditing

Standards, is a condition in which the design or operation of one or more of the internal control

components does not reduce to a relatively low level the risk that errors or irregularities in

amounts that would be material to the financial statements may occur and not be detected

promptly by employees in the normal course of performing their duties. 12Other unpaid assessments consist of amounts for which (1) neither the taxpayer nor a court

has affirmed that the amounts are owed and (2) the Government does not expect further collections due to factors such as the taxpayer’s death, bankruptcy, or insolvency.

• accurately report major portions of the net costs of Government operations;

• determine the full extent of improper payments that occur in

major programs, which are estimated to involve billions of dollars annually;

• ensure that all disbursements are properly recorded; and • prepare the Federal Government’s financial statements, including balancing statements that involve billions of dollars in

transactions between governmental entities, and properly and

consistently compile the information in the financial statements.

The oversight hearings held by the subcommittee on financial

management at key executive branch agencies explored specific

problems and potential solutions specific to each agency. Based on

the Inspectors General 1998 financial audit reports of the 18 CFO

Act departments and agencies that had filed their reports as of the

date of this report, only 8 could prepare financial statements that

were reliable in all material respects based on the results of independent audits.10

2. Material control weaknesses continue to exist in Federal financial

systems

The General Accounting Office reported several pervasive material weaknesses in internal controls across the Federal Government.11 These material weaknesses contributed to the deficiencies

described above. In addition, these weaknesses have resulted in the

Federal Government’s inability to safeguard Federal assets from

unauthorized acquisition, use, or disposition; to ensure that transactions are executed in accordance with the laws governing use of

budget authority and other laws and regulations; or to ensure the

reliability of financial statements.

Specifically, the GAO found widespread computer control weaknesses and material weaknesses in controls related to the Federal

Government’s tax-collection activities. The GAO stated in its report

that ‘‘serious computer security weaknesses expose the Government’s financial and other sensitive information to inappropriate

disclosure, destruction, modification, and fraud.’’

With respect to tax collection activities, the GAO reported that

‘‘the Federal Government continues to have material weaknesses in

controls related to its tax-collection activities that affect its ability

to efficiently and effectively account for and collect the Government’s revenue.’’ The GAO further reported that ‘‘serious financial

management system deficiencies affect the Federal Government’s

ability to effectively manage its taxes receivable and unpaid assessments.12 The lack of appropriate subsidiary systems to track the
6

13 ‘‘Financial Audit: 1998 Financial Report of the United States Government,’’ GAO/AIMD–99–

130, Mar. 31, 1999, p. 32. 14 Ibid., pps. 33–34. 15For the past several decades, information systems have typically used two digits to represent the year, such as ‘‘98’’ for 1998, in order to conserve electronic data storage and reduce

operating costs. In this format, however, the year 2000 is indistinguishable from the year 1900

because both are represented as ‘‘00.’’ As a result, if not modified, computer systems or applicastatus of taxpayer accounts affects the Government’s ability to

make informed decisions about collection efforts. This weakness

has resulted in the Government pursuing collection efforts against

individual taxpayers who had already paid their taxes in full. The

Federal Government also continues to be vulnerable to loss of tax

revenue due to weaknesses in preventive controls over disbursements of tax refunds. The Government does not perform sufficient

up-front verification procedures to ensure the validity of amounts

claimed by taxpayers as overpayments prior to making disbursements for refunds.’’ 13

The prevalence of weak internal controls in Federal Government

systems is exemplified by the fact that only 5 of the 18 CFO Act

agencies that filed reports did not have material weaknesses found

by auditors during the course of their audits of fiscal year 1998 financial statements.

3. A pervasive noncompliance with laws and regulations continues

Also contributing to the Federal Government’s financial management problems were instances of material noncompliance with laws

and regulations. The GAO reported that ‘‘tests for compliance with

selected provisions of laws and regulations related to financial reporting disclosed that . . . the Federal Government makes improper payments on major programs such as Medicare.’’ Further,

most agencies were not in compliance with FFMIA, which requires

auditors to report whether agencies’ financial management systems

comply substantially with Federal accounting standards, financial

systems requirements, and the Government’s standard general

ledger at the transaction level.

The GAO also reported that ‘‘the majority of Federal agencies’ financial management systems do not meet systems requirements.

They cannot provide reliable financial information for managing

day-to-day Government operations or hold managers accountable.

For many agencies, the preparation of financial statements requires considerable reliance on ad hoc programming and analyses

of data produced by inadequate financial systems that are not integrated, reconciled, and often require significant adjustments.’’

‘‘For example, the DOD Inspector General reported that the Defense Department recorded more than $1.5 trillion in adjustments

to component financial statements that were not supported by adequate audit trails or sufficient evidence to determine their validity.’’ 14 Auditors reported that only 3 of the 18 agencies that had

filed their 1998 audited financial statements complied with FFMIA

requirements.

4. Year 2000 computing challenge still poses a significant threat to

Federal financial systems

A final factor affecting financial management in the Federal Government was the year 2000 computing crisis.15 This critical issue
7

tions that use dates or perform date- or time-sensitive calculations may generate incorrect results beyond 1999. 16 ‘‘Financial Audit: 1998 Financial Report of the United States Government,’’ GAO/AIMD–99–

130, Mar. 31, 1999, p. 35.

has been the subject of extensive oversight by the subcommittee.

According to the GAO, ‘‘while much has been accomplished in addressing the Year 2000 challenge, risks remain. Our reviews of

Federal Year 2000 programs have found uneven progress; some

major agencies are behind schedule. Complete and thorough Year

2000 testing is essential to providing reasonable assurance that

new or modified systems will be able to process dates correctly and

not jeopardize agencies’ ability to perform core business operations.

Moreover, adequate business continuity and contingency plans

must be successfully completed throughout Government.’’ 16

D. RECOMMENDATIONS

Based on the foregoing findings, the committee recommends the

following:

1. Continuation of regular congressional and Presidential oversight

Strong oversight is one of Congress’s most effective tools in the

effort to ensure that executive departments and agencies implement necessary reforms. To build upon this, Congress needs to

mandate formal oversight hearings to review the status of agency

financial management and actions to resolve related problems.

Each department or agency should provide a detailed, annual

status report on its financial management operations. When appropriate, each department or agency should be regularly reviewed by

its relevant oversight, authorization, and appropriations subcommittees regarding its financial management processes. These

hearings should be held annually, semiannually, or quarterly, depending on the severity of the financial problems within the agency

or department.

Agencies with serious financial management problems are required by the Federal Financial Management Improvement Act of

1996 to prepare a ‘‘remediation plan.’’ This plan should be a detailed guide for agency management and staff that includes procedures for resolving any reported problems the agency is having in

adhering to Federal Government accounting and systems standards

and the implementation of the Government standard general ledger. The GAO is currently making its initial evaluations of the agency remediation plans. Those evaluations will be included in a report to be released on or before October 1, 1999.

Congressional oversight hearings need to include a discussion of

the agency’s plan, and the progress being made toward resolving

outstanding problems with various financial systems and practices.

Oversight hearings should also include the department or agency’s

Inspector General who is responsible for reporting on the agency’s

compliance with the Federal Financial Management Improvement

Act of 1996.

As previously recommended, the agency remediation plans must

provide a detailed description of planned actions with clear and

reasonable milestones, including the names of staff members responsible for resolving particular issues. The plan should be ap-
8

proved by the agency head and relevant agency officials, such as

the Chief Financial Officer, the Chief Information Officer, and the

Inspector General. A draft of the approved plan should be sent to

the Comptroller General who would coordinate the agency’s actions

and related milestones in the remediation effort. A draft of the plan

should also be available to relevant congressional committees, and

the Director of the Office of Management and Budget. These parties must meet regularly, monitoring the agency’s progress toward

meeting the objectives of the plan. This would assist Congress in

effectively monitoring agency actions and taking corrective actions

as necessary.

2. Provide incentives for implementing effective financial management

It is clear that congressional oversight alone cannot effect the

necessary change in financial management practices at all departments and agencies. The committee again notes that incentives are

needed to prompt agencies to resolve their outstanding financial

management problems. If an agency is unable or unwilling to effect

these crucial changes, Congress has the authority to provide the

needed incentives for change. They include: (1) redirecting a percentage of the agency’s appropriated program or administrative

funding toward correcting financial management problems; (2) restricting a percentage of the agency’s appropriated funds until the

problems are corrected; or (3) reducing various amounts of appropriated funds until the agency has completed its remediation efforts.

These actions are intended to provide an incentive for the agency

to resolve its financial management problems expeditiously.

3. Strengthen the ability of Inspectors General to carry out their financial management oversight responsibilities

Inspectors General are responsible for conducting audits of agency and department programs and operations. Their audit function

in the executive branch is crucial. Agency audits provide information to executive branch managers and Congress that are necessary

to uncover and resolve problems that impede effective financial

management. To ensure that Inspectors General can provide quality audit services, it is imperative that Congress take steps to ensure that Inspectors General are highly qualified and have the necessary resources to oversee agency financial management.

The Office of the Inspector General must ensure that all candidates for Inspector General positions are qualified to perform financial statement audits or specific segments of audits requiring

specific expertise. These qualifications should be determined

through a review by an external party and may be incorporated

into the peer review process.

As the committee suggested last year, when appointments for the

Inspector General office are being considered, a board, which includes representatives of the President’s Council on Integrity and

Efficiency [PCIE], should review the qualifications of the Inspector

General candidate before the nomination is forwarded to the Senate for confirmation.
9

4. Strengthen the President’s role as Chief Executive Officer of the

executive branch by establishing an Office of Management

Management of the executive branch of the Federal Government

should be a Presidential priority. Among the President’s many

roles is the responsibility to serve as Chief Executive Officer of the

Federal Government. Many broad objectives—including effectively

managing Federal Government finances—are intended to make the

Federal Government work better, but they depend on the commitment of the President and his staff in the Executive Office of the

President. By approaching the Federal Government almost exclusively from a budgetary or policy perspective, Presidents limit their

capacity to reform management within the Federal Government.

If the financial management function is to be strengthened, the

President needs management experts. That is also true of various

other management functions. In the past, the Subcommittee on

Government Management, Information, and Technology has recommended legislation that would form an Office of Management,

separate and distinct from the Office of the Budget. It continues to

recommend such an office. This office could help the President and

his Cabinet focus on the critical management challenges facing the

Federal Government.

Cabinet officers are not always nominated for their managerial

skills. They need assistance. Congress has provided some of that

assistance by mandating the roles of Chief Financial Officer and

Chief Information Officer. However, in a number of departments

and agencies, these dual roles have been assigned to one person.

That is not what Congress sought. The financial and information

management functions are so complex that each one requires the

full-time attention of a senior management official.

SUMMARY OF OVERALL FINDINGS AND RECOMMENDATIONS

Findings

1. Material deficiencies continue to exist in Federal financial information.

2. Material control weaknesses in financial systems continue.

3. Some agencies have again failed to comply with the laws and

regulations governing Federal financial accountability.

4. The year 2000 computer problem poses a threat to Federal financial systems.

Recommendations

1. There is a continuing need for regular congressional and Presidential oversight.

2. Financial incentives need to be provided that will prompt

agencies and departments to resolve their financial management

problems.

3. The ability of Inspectors General to carry out their financial

management oversight responsibilities must be strengthened.

4. The President’s role as Chief Executive Officer of the executive

branch should be strengthened by establishing an Office of Management.
10

17Thomas Jefferson in a letter to the Secretary of the Treasury, Albert Gallatin, Apr. 1, 1802,

The Writings of Thomas Jefferson, Edited by Andrew A. Lipscomb, (Washington, DC, 1905.) Vol.

10, pps. 306–309.

II. REPORT ON THE COMMITTEE’S OVERSIGHT REVIEW

A. BACKGROUND

I think it an object of great importance . . . to simplify our

system of finance, and bring it within the comprehension

of every member of Congress . . . the whole system [has

been] involved in an impenetrable fog. There is a point

. . . on which I should wish to keep my eye . . . a simplification of the form of accounts . . . so as to bring everything to a single centre[;] we might hope to see the finances of the Union as clear and intelligible as a merchant’s books, so that every member of Congress, and

every man of any mind in the Union, should be able to

comprehend them to investigate abuses, and consequently

to control them.17 —Thomas Jefferson, April 1, 1802

1. The need for effective Federal financial management

Nearly 200 years ago, President Thomas Jefferson recognized the

need for effective financial management in the Federal Government. President Jefferson’s insight on this subject is still relevant

today.

Federal financial management continues in a state of disarray.

Billions of taxpayers’ dollars are being lost each year to fraud,

waste, abuse, and mismanagement in hundreds of Federal programs. Financial systems and practices are obsolete and ineffective,

and do not provide complete, consistent, reliable, and timely information to congressional decisionmakers and agency management.

The source of these losses could be identified and significantly reduced by improved management practices.

2. Federal financial management legislation

In response to this problem, Congress passed a series of laws designed to ensure that agency management problems would be fixed.

The Chief Financial Officers Act, as expanded by the Government

Management Reform Act of 1994 and amended by the Federal Financial Management Improvement Act of 1996, represents the

most comprehensive financial management reform legislation in

the last 40 years. Other significant legislation affecting Federal financial management includes: the Budget and Accounting Procedures Act of 1950 [BAPA]; the Inspector General Act of 1978, as

amended by the Inspector General Act Amendments of 1988 [IG

Act]; the Federal Managers’ Financial Integrity Act of 1982

[FMFIA]; the Debt Collection Act of 1982, as amended, and the

Debt Collection Improvement Act of 1996. The key financial management provisions of each of these laws are described in detail in

Appendix B of this report.

Audited financial statements

The Chief Financial Officers Act established a pilot program that

required 10 agencies to prepare financial statements and have
11

18The Commission on the Organization of the Executive Branch of Government, chaired by

former President Herbert Hoover and commonly known as the ‘‘Hoover Commission,’’ was

formed in 1947. The Commission’s first report, issued in 1949, contained recommendations regarding accounting and budget matters, many of which were enacted in the Budget and Accounting Procedures Act of 1950. 19The Budget and Accounting Procedures Act of 1950 (ch. 946, 64 Stat. 832, pt. II, sec.

112(a)).

those statements audited. This pilot program demonstrated the

benefits of requiring Federal agencies to prepare audited financial

statements. Based on the pilot program’s success in uncovering financial managment problems in these agencies, Congress expanded

the CFO Act with the passage of the Government Management Reform Act of 1994.

The Government Management Reform Act [GMRA] is intended to

provide a more effective, efficient, and responsive Government. To

that end, it specifically requires that each executive department

and agency prepare and have audited a financial statement covering all accounts and associated activities of each office, bureau, and

activity within the agency. The Director of the Office of Management and Budget is responsible for setting the form and content of

the financial statements against which the auditor must measure

an agency’s financial statements. The guidance provided by the

OMB incorporates the standards recommended by the Federal Accounting Standards Advisory Board. These audited statements are

to be sent to the Director of the OMB no later than March 1 of the

year following the fiscal year for which the statements are prepared.

In addition, GMRA required that a set of consolidated governmentwide financial statements be prepared for fiscal year 1997 and

each year thereafter by the Secretary of the Treasury in coordination with the Director of the OMB. The financial statements are to

be audited by the Comptroller General of the United States and

forwarded to Congress by March 31 of the following year.

Federal accounting and auditing standards

The Budget and Accounting Procedures Act of 1950 was enacted

as a result of recommendations by the Hoover Commission.18 The

commission suggested sweeping reforms that were intended to

modernize and simplify governmental accounting and auditing

methods and procedures. Congress agreed and directed the Comptroller General to ‘‘prescribe the principles, standards, and related

requirements for accounting to be observed by each Executive agency.’’ 19 In response, the Comptroller General issued accounting principles to be followed by executive agencies in the General Accounting Officer’s Policy and Procedures Manual for Guidance of Federal

Agencies.

Those standards were modeled, to a large degree, after private

sector practices. They were the primary source of accounting guidance for Federal agencies from the 1950s until they were superseded by the Statements of Federal Financial Accounting Standards.

The passage of the CFO Act in 1990 and its requirement for audited financial statements focused attention on the accounting

standards to which these Federal agencies were to be held. Consequently, the Office of Management and Budget objected to the
12

20Federal Accounting Standards Advisory Board, Statement of Federal Financial Accounting

Concepts No. 1, Objectives of Federal Financial Reporting, ch. 1, pars. 23–30; Sept. 2, 1993.

Comptroller General setting such policy since the Comptroller General’s Office and its General Accounting Office are part of the legislative branch.

To resolve this constitutional dispute and improve adherence to

a set of comprehensive accounting standards, the Comptroller General, along with the Director of the Office of Management and

Budget and the Secretary of the Treasury, agreed to establish an

independent board that would recommend accounting principles.

This board, known as the Federal Accounting Standards Advisory

Board [FASAB], was established in October 1990 as a deliberative

body to consider and recommend accounting standards and principles for the Federal Government. To avoid constitutional intrusion by the legislative branch, as represented by the Comptroller

General, two of the board’s members represent the executive

branch and one represents the legislative branch.

The recommendations of the FASAB must be approved by the

Comptroller General, the Director of Management and Budget, and

the Secretary of the Treasury who are referred to as the board’s

principals. The approved standards, as adopted by the board’s principals, are then issued by the Comptroller General and the Director

of OMB as Statements of Federal Accounting Standards. These

Statements of Federal Accounting Standards are the body of standards that constitutes generally accepted accounting principles for

the Federal Government.

The FASAB is responsible for recommending accounting standards, referred to as Statements of Federal Financial Accounting

Standards [SFFAS], after considering the financial and budgetary

information needs of Congress and executive agencies, as well as

other users of Federal financial information.20 While financial

statements of private entities are principally intended to provide

investors (shareholders, bankers, etc.) with information on the profitability of the entity, accounting and financial reporting in the

Federal Government focuses on the Government’s duty to be publicly accountable.

Federal financial reporting is intended to be used to assess the

Government’s accountability, efficiency and effectiveness, and to

provide information on the economic and social consequences of the

allocations and various uses of Federal resources. Accounting

standards for the Federal Government should result not only in understandable, relevant, and reliable financial information, but

should also foster effective accounting systems and internal controls that will help provide reasonable assurance that governmental activities are conducted economically, efficiently, and effectively, and in compliance with applicable laws and regulations.

The FASAB completed the development of the original set of

eight accounting standards for the Federal Government in 1996.

Since that date, four additional standards have been adopted. As

of the date of this report, there are three recommended standards,

referred to as Statements of Recommended Accounting Standards

[SRAS], waiting for final approval. The existing standards have

been augmented by two Statements of Federal Financial Account-
13

ing Concepts [SFFAC]. Also, the FASAB currently has four exposure drafts and one invitation for views on suggested standards

outstanding, and has issued five interpretations of standards. The

following table lists the documents issued by the FASAB. It is expected that the FASAB will continue to recommend statements on

specialized topics and revise existing statements as necessary.

Accounting Concepts and Standards Documents Issued by the Federal Accounting

Standards Advisory Board [FASAB]

Title of Document Date of Issuance Effective Date

SFFAC 1: Objectives of Federal Financial ReportingSeptember 2, 1993 Not Applicable

SFFAC 2: Entity and Display June 6, 1995 Not Applicable

SFFAS 1: Accounting for Selected Assets and LiabilitiesMarch 30, 1993 October 1, 1993

SFFAS 2: Accounting for Direct Loans

and Loan Guarantees

August 23, 1993 October 1, 1993

SFFAS 3: Accounting for Inventory and

Related Property

October 27, 1993 October 1, 1993

SFFAS 4: Managerial Cost Accounting

Concepts and Standards

July 31, 1995 October 1, 1997

SFFAS 5: Accounting for Liabilities of

the Federal Government

December 20, 1995 October 1, 1996

SFFAS 6: Accounting for Property, Plant

and Equipment

November 30, 1995 October 1, 1997

SFFAS 7: Accounting for Revenue and

Other Financial Sources

May 10, 1996 October 1, 1997

SFFAS 8: Supplementary Stewardship

Reporting

June 11, 1996 October 1, 1997

SFFAS 9: Deferral of Implementation

Date for SFFAS 4

November 3, 1997 October 1, 1997

SRAS 10: Accounting for Internal Use

Software

Not Applicable Not Applicable
14

Accounting Concepts and Standards Documents Issued by the Federal Accounting

Standards Advisory Board [FASAB]—Continued

Title of Document Date of Issuance Effective Date

SFFAS 11: Amendments to Accounting

for PP&E—Definitions

December 15, 1998 October 1, 1998

SFFAS 12: Recognition of Contingent

Liabilities from Litigation

February 5, 1999 October 1, 1997

SFFAS 13: Deferral of Paragraph

65.2—Material Revenue-Related

Transactions Disclosures—Amending SFFAS 7

February 5, 1999 October 1, 1998

SRAS 14: Amendments to Deferred

Maintenance Reporting

Not Applicable Not Applicable

SRAS 15: Management Discussion and

Analysis

Not Applicable Not Applicable

Exposure Draft: Governmentwide Supplementary Stewardship ReportingJune 1997 Not Applicable

Exposure Draft: Accounting for Social

Insurance

February 1998 Not Applicable

Exposure Draft: Amendments to Accounting for Property, Plant, and

Equipment

February 1998 Not Applicable

Exposure Draft: Amendments to Accounting for Direct Loans and Loans

Guarantees

March 1999 Not Applicable

Invitation for Views: Accounting for the

Cost of Capital by Federal Entities

July 1996 Not Applicable

Interpretation 1: Reporting on Indian

Trust Funds

March 12, 1997 Effective upon implementation of

SFFAS 7
15

Accounting Concepts and Standards Documents Issued by the Federal Accounting

Standards Advisory Board [FASAB]—Continued

Title of Document Date of Issuance Effective Date

Interpretation 2: Accounting for Treasury Judgment Fund TransactionsMarch 12, 1997 Effective upon implementation of

SFFAS 4 and 5

Interpretation 3: Measurement Date for

Pension and Retirement Health Care

Liabilities

August 29, 1997 Reporting periods

ending on or

after September

30, 1997

Interpretation 4: Accounting for Pension Payments In Excess of Pension

Expense

December 19, 1997 Reporting periods

ending on or

after September

30, 1997

Interpretation 5: Recognition by Recipient Entities of Receivable Non-exchange RevenueDecember 3, 1998 Effective upon implementation of

SFFAS 7

3. The Importance of Effective Internal Controls

Federal financial management legislation—the Federal Managers’ Financial Integrity and Federal Financial Management Improvement Acts, in particular—placed great emphasis on the importance of effective internal controls. Their importance cannot be

overstated, especially in the large, complex operating environment

of the executive branch of the Federal Government. Effective internal controls are the first line of defense against fraud, waste,

abuse, and mismanagement, and help to ensure that an entity’s

mission is achieved in the most effective and efficient manner. The

subject of internal controls generally surfaces—as has been the

case in subcommittee hearings—after improprieties or inefficiencies

are found. However, as has been previously noted, good managers

continually seek new ways to improve operations through effective

internal controls.

Internal controls can be simply defined as the methods by which

an organization governs its activities to accomplish its mission effectively and efficiently. More specifically, internal controls are concerned with stewardship and accountability for the resources consumed in the process of accomplishing an entity’s mission with effective results. The GAO has defined internal controls in its Standards for Internal Controls in the Federal Government as follows:

The plan of organization and methods and procedures

adopted by management to ensure that resource use is

consistent with laws, regulations, and policies; that resources are safeguarded against waste, loss, and misuse;
16

21 Codification of Statements on Auditing Standards (Including Statements on Standards for

Attestation Engagements), Nos. 1 to 82, American Institute of Certified Public Accountants, as

of Jan. 1, 1997.

and that reliable data are obtained, maintained, and fairly

disclosed in reports.

Internal controls should not be looked upon as separate, specialized systems within an agency. Rather, they should be recognized

as an integral part of each system that management uses to regulate and guide its operations. Internal controls are synonymous

with management controls in that the broad objectives of internal

controls cover all aspects of agency operations. Although ultimate

responsibility for good internal controls rests with management, all

employees have a role in the effective operation of internal controls

set by management.

The committee again stresses that it is important to recognize

that internal controls can be designed to provide reasonable, not

absolute, assurance that an organization’s activities are being accomplished in accordance with its objectives.

In its Statement of Auditing Standards No. 55,21 the American

Institute of Certified Public Accountants identified internal control

limitations, such as the possibility of errors arising from such

causes as misunderstanding instructions, mistakes in judgment,

and personal carelessness. Also, many control procedures depend

on the segregation of duties. The effectiveness of these procedures

can be circumvented by collusion. Similarly, management authorizations may be ineffective against errors or fraud perpetrated by

management. In addition, the standard of reasonable assurance

recognizes that the cost of internal controls should not exceed the

benefit derived. Reasonable assurance equates to a satisfactory

level of confidence under given considerations of costs, benefits, and

risks.

The full cost of fraud, waste, abuse, and mismanagement cannot

always be known in advance or measured in terms of dollars. If improper activities are allowed to continue, public confidence is eroded in the Government’s ability to manage its programs effectively

and honestly. Such erosion to any degree cannot be measured in

dollars. The trust of the citizenry in its Government is a priceless

relationship.

Management executives at most Federal agencies are faced with

tight budgets and, thus, limited in human, information, and financial resources. In such an environment, especially given the diverse

and complex nature of Federal operations, weak control environments can provide fertile ground for fraud, waste, abuse, and mismanagement.

Effective financial management practices and timely, reliable financial information enable senior management to make decisions

that will result in effective and efficient operations. This belief is

reflected in the Government Performance and Results Act passed

by Congress in 1993. The act sought to ‘‘. . . improve the confidence of the American people in the capacity of the Federal Government, by systematically holding Federal agencies accountable

for achieving program results.’’ The act was also designed to aid

the legislative branch and improve congressional decisionmaking
17

by providing ‘‘more objective information on achieving statutory objectives, and on the relative effectiveness and efficiency of Federal

programs and spending.’’ Without reliable and timely financial information, neither agency decisionmakers nor Congress can determine the real costs and benefits of Federal programs. Thus, it is

imperative that Federal agencies and departments produce reliable

financial information in a timely and efficient manner.

B. RESULTS OF THE FISCAL YEAR 1998 GOVERNMENTWIDE FINANCIAL

STATEMENT AUDIT AND RELATED AGENCY AUDITS

1. Oversight hearings held by the subcommittee

On March 31, 1999, the General Accounting Office released its

audit report on the financial status of the Federal Government required under the Chief Financial Officers Act of 1990 as expanded

by the Government Management Reform Act of 1994 and amended

by the Federal Financial Management Improvement Act of 1996.

This second annual report again provided a concise description of

the myriad problems faced by the executive branch. The subcommittee held a hearing on March 31, 1999 to examine the results

of this audit.

The subcommittee hearings focused on the status of financial

management at the Internal Revenue Service, the Federal Aviation

Administration, the Department of Justice, the Health Care Financing Administration, and the Department of Defense. Collectively, these agencies account for more than 98 percent of the Federal Government’s annual revenue and a majority of the costs (excluding interest on the national debt held by the public and the Social Security program). In addition, the Department of Defense accounts for a significant portion of the assets held by the Federal

Government. Consequently, these agencies play a significant role in

the production of governmentwide statements, and significantly affect the audit results. All of these agencies have experienced problems with their financial management, and have had varying degrees of success in resolving those problems. Each agency and department is required to issue a separate audited financial statement. The subcommittee held hearings to explore specific issues at

each of these agencies.

These hearings held by the Subcommittee on Government Management, Information, and Technology:

• explored the results of the financial audits for the second

year of full implementation of the GMRA throughout the Federal Government, and in particular at the five agencies noted

above;

• considered the need for congressional action to improve financial management in the executive branch; and

• reviewed options for possible congressional actions needed to

ensure the successful implementation of Federal financial management reforms.

Internal Revenue Service [IRS]

The IRS collects more than 95 percent of the Federal Govern- ment’s $1.7 trillion in annual revenue. In fiscal year 1998, the IRS

issued its first set of financial statements covering both its custo-
18

22 ‘‘Financial Audit: IRS’ Fiscal Year 1998 Financial Statements,’’ GAO/AIMD–99–75, p. 6.

dial and administrative activities. Prior to 1998, the IRS had

issued two sets of financial statements; one set for its custodial operations—the revenues collected, refunds paid, and related taxes

receivable and payable—and another for its appropriated funds.

The IRS’s financial data were then incorporated into the agencywide statements prepared by the Department of the Treasury.

The IRS is responsible for enforcing tax laws in a fair and equitable manner, but the agency has long been criticized for the perceived abuse of its broad enforcement powers. In response to this

criticism, Congress established the Commission on the Restructuring of the IRS. Led by Representative Rob Portman of Ohio and

Senator Bob Kerrey of Nebraska, the bipartisan commission released a comprehensive report in June 1997, proposing several

changes in the IRS’s management. The Commission’s recommendations were the basis of H.R. 2676, the Internal Revenue Service Restructuring and Reform Act of 1997, which was signed into law by

the President on July 22, 1998. The underlying theme of the act

is one of creating a cultural change within the IRS. In the broadest

terms, the act shifts the emphasis within the IRS from its self-defined role as an enforcement agency to a role more closely resembling a financial service organization.

Also at congressional urging, the Clinton administration appointed a new commissioner with extensive experience in managing

large organizations. Charles O. Rossotti, founder of a firm in the

management systems and technology industry, was appointed Commissioner of the IRS in September 1997. Since his appointment,

Commissioner Rossotti has proposed a sweeping reorganization of

the IRS that exceeds the changes mandated in the legislation. Testifying before the subcommittee, Commissioner Rossotti stated that

he plans on ‘‘shifting the entire focus of the agency from one which

focuses solely on conducting our own internal operations to one

which puts far more emphasis on trying to see things from the

point of view of taxpayers and emphasizing service and fairness to

taxpayers.’’

For the second consecutive year, the IRS was able to reliably report on its financial activity covering the collection and refunds of

taxes in 1998. This achievement, however, required extensive, costly, and time-consuming ad hoc procedures to overcome pervasive

internal controls and systems weaknesses. The ability to provide

reliable year-end data is an important first step for the IRS, but

it is not an end in itself. The GAO audit report stated that the ‘‘IRS

continues to face significant financial and other management challenges and risks.’’ 22 These weaknesses must be addressed before

the IRS can make any significant improvement in the area of financial management.

The IRS was unable to report on its administrative activities in

fiscal year 1998. The GAO report found that ‘‘pervasive weaknesses

in the design and operation of IRS’s financial management systems, accounting procedures, documentation, recordkeeping, and

internal controls prevented IRS from reliably reporting on the results’’ of these activities.
19

The subcommittee’s oversight hearing on March 1, 1999 highlighted the need for better computer systems to improve the IRS’s

debt management. At the time of the hearing, the IRS estimated

that it collects only 11 percent of the $222 billion in debts the agency claims are owed by delinquent taxpayers. The hearing also illustrated the need for better controls over refunds. According to the

GAO, the IRS doesn’t have the preventive controls it needs to reduce the amount of inappropriate payments being disbursed for tax

refunds.

Department of Defense [DOD]

The General Accounting Office, the Defense Inspector General,

and the department’s audit agencies have long reported problems

in the DOD’s financial management systems and practices. Each

year, numerous reports are issued with virtually the same problems as the prior years. The DOD’s reported financial management

problems include: inadequate control over assets such as real property, capital leases, construction in progress, and inventories; the

understatement of costs associated with environmental clean-ups;

liabilities, including military retiree benefits, that are not covered

by current budgetary resources; and instances of noncompliance

with laws and regulations. Because of these problems, the Inspector General was unable to render an opinion on the DOD’s financial statements for fiscal year 1998. The GAO disclaimed an opinion on the Consolidated Governmentwide Financial Statements of

the Federal Government, largely due to the Defense Department’s

inability to provide complete and verifiable information on its finances.

The issues that need to be resolved cross operational lines within

the DOD and the military services. Thus, action is needed from the

top levels of DOD management to ensure that these long-standing

problems are resolved.

On May 4, 1999, the subcommittee examined the results of the

fiscal year 1998 audits of the DOD, and the status of the Department’s plans to address its long-standing and severe problems. The

GAO and DOD’s Acting Inspector General highlighted the most serious financial management weaknesses at the Department. The

subcommittee heard that the DOD remains unable to:

• account for and properly report on billions of dollars worth

of inventory and property, plants, equipment, and national defense assets, primarily weapons systems and support equipment;

• estimate and report material amounts of environmental and

disposal liabilities, and their related costs;

• determine the liability associated with post-retirement

health benefits for military employees;

• report the net costs of its operations;

• produce accurate budget data; and

• determine the full extent of improper payments.

These weaknesses in the DOD’s financial management operations continue to result in wasted resources. Furthermore, they

undermine the DOD’s ability to manage an estimated $250 billion

budget and $1 trillion in assets, all of which limit the reliability of

financial information provided to Congress.
20

23 High Risk Series: GAO/HR–99–1, January 1999.

During 1998, the Department of Defense adressed these weaknesses more seriously than in previous years. The GAO testified

before the subcommittee on March 4, stating that ‘‘while in the

past we have questioned the department’s commitment to fixing

these long-standing problems, DOD has started to devote additional resources to correct its financial management weaknesses.

The atmosphere of ‘business as usual’ at DOD has changed to one

of marked effort at real reform.’’ The GAO went on to say, ‘‘this

commitment is imperative, as it will take considerable effort, time,

and sustained top management attention to turn reform efforts into

day-to-day management reality.’’

Health Care Financing Administration [HCFA]

HCFA accounts for more than 18 percent of all Federal budget

outlays, and pays for one-third of the health-care costs throughout

the United States. The growth of HCFA’s Medicare and Medicaid

payments has exceeded the growth in the Consumer Price Index for

medical goods and services. Yet the agency is unable to provide

timely or reliable financial information. The GAO has cited HCFA’s

Medicare program as a high-risk area for fraud, waste, and

abuse.23

HCFA’s fiscal year 1998 financial statements received a qualified

opinion. The Inspector General of HHS was unable to find sufficient documentation to complete the Medicare accounts receivable.

HCFA released its audited financial statements for fiscal year 1998

at the subcommittee’s March 26, 1999 hearing.

Based on the last 2 years of audit results, the hearing focused

on actions HCFA is taking to resolve its financial management

problems, including excessive Medicare payments. There has been

marked improvement in the agency’s annual overpayments, but the

amounts are still unacceptable. The estimated amount of overpayments for Medicare dropped from $23.2 billion in 1996 to $20.6 billion in 1997 and $12.6 billion in 1998. The 1998 amount represents

approximately 7.1 percent of the total Medicare fee-for-service benefit payments made that year.

The subcommittee found that, while progress has been made,

much more is needed to ensure that the Medicare and Medicaid

programs—critical to the security of 73 million elderly and impoverished Americans—are fiscally sound.

Specific issues disclosed in the auditor’s report on the 1998 financial statements included the following:

• Medicare contractors did not maintain the support needed to

determine the accuracy of reported collections of accounts receivable. Auditors were unable to determine if records maintained by the contractors included all the amounts owed to

HCFA.

• Medicare contractors did not adequately control cash, including collection of outstanding accounts receivable. During 1998,

Medicare contractors reported more than $7.5 billion in collections. Auditors reported serious breakdowns in controls in this

area, including the fact that, in many cases, Medicare contractors failed to prepare bank reconciliations in a timely manner.
21

24 High Risk Series: GAO/HR–99–1, January 1999.

When reconciliations were prepared, they were not adequately

documented. In addition, at one location visited by auditors the

same individual was responsible for receiving and endorsing

incoming checks, preparing and recording deposits, and performing bank reconciliations. This situation greatly increases

the risk that the money collected by this contractor could be

misappropriated. The segregation of these duties is a common

internal control adhered to by even the smallest private entities.

Department of Justice

The Department of Justice, under the direction of the Attorney

General, is charged with protecting society against criminals and

subversion, and upholding the civil rights of all Americans. In addition, the department is responsible for ensuring healthy competition among businesses, safeguarding the consumer, enforcing environmental, drug, immigration, and naturalization laws, and representing the American people in all legal matters involving departments and agencies within the executive branch of Government.

In 1998, the Department of Justice was again unable to provide

reliable financial information to decisionmakers. For the third consecutive year, auditors were unable to render an opinion on Justice’s financial statements. In addition, auditors reported significant weaknesses in internal controls and cases in which the lawenforcement department failed to comply with financial laws and

regulations.

At the subcommittee’s hearing on March 18, 1999, we learned

that the weaknesses reported in the Department’s consolidated financial statements were also prevalent in most of the Department’s component entities. The audit report stated that weaknesses

exist in the controls over computer security at the U.S. Marshals

Service, the Federal Bureau of Investigation, the Drug Enforcement Administration, and the Immigration and Naturalization

Service.

Federal Aviation Administration

The Federal Aviation Administration [FAA] operates the Nation’s

air traffic control system and regulates aviation safety, security,

and the U.S. commercial space industry. In its position on the front

line of aviation safety, the FAA works with the air transportation

industry, other agencies at the Federal, State, and local level, and

with its international counterparts.

Due to long-standing and unresolved problems, the GAO designated financial management at the FAA as a high-risk area in

its January 1999 report. The GAO report stated that ‘‘financial

management weaknesses continue to render FAA vulnerable to

waste, fraud, and abuse; undermine its ability to manage its operations; and limit the reliability of financial information provided to

the Congress.’’ 24

The subcommittee examined these weaknesses at a hearing on

March 18, 1999. Because of the results of the Department’s 1998
22

financial statement audit, the subcommittee also discussed the

findings with the Inspector General of the Department of Transportation. The Inspector General was unable to render an opinion on

the 1998 financial statements. In addition, the Inspector General

reported significant weaknesses in the FAA’s internal controls.

These weaknesses included more than $9 billion in property, plant

and equipment that could not be verified. The FAA also could not

reliably report on the costs of its operations. The combination of

poor accounting and control over assets and costs are especially

troubling, considering that the agency has an air traffic control

modernization plan that is projected to cost more than $42 billion

by the year 2004.

In 1981, the FAA had initiated an earlier air traffic control modernization program. This effort involved acquiring new air traffic

control facilities and a vast network of radar, automated data processing navigation, and communications equipment. The program,

which was poorly managed, was shutdown, costing taxpayers $4

billion for a system that didn’t work. The FAA’s current modernization program has been put on the GAO high-risk list, due in large

part to the agency’s financial management problems, such as poor

cost-accounting practices and lack of accountability over acquisitions.

2. Federal department and agency financial management grades

On March 31, 1999, the subcommittee released its second annual

report card measuring the effectiveness of financial management in

the 24 Cabinet departments and independent agencies with audited financial statements. The grades were based on the results of

the audits prepared by the agencies’ Inspectors General, independent public accountants, and the General Accounting Office. The report card is a gauge for Congress to see where attention is needed

to prod agencies toward getting their financial affairs in order.

The National Aeronautics and Space Administration and the National Science Foundation demonstrated they could effectively manage their finances. Both agencies received ‘‘A’s.’’

The General Services Administration, the Department of Labor,

and the Social Security Administration all earned commendable

‘‘B’s.’’

These agencies were the exception rather than the rule; 7 of the

24 agencies—29 percent—had not filed reports by the subcommittee’s March 31 hearing, 1 month after their March 1 reporting

deadline established by the Government Management Reform Act

of 1994, and 6 months after the close of the Government’s fiscal

year. As of the publication of this report, six agencies—the Department of Commerce, the Department of Education, the Environmental Protection Agency, the Department of the Interior, the

Small Business Administration and the Department of State—had

not submitted financial statements.

Six other agencies could not pass muster and earned a failing

grade of ‘‘F.’’ They are: the Agency for International Development,

the Department of Agriculture, the Department of Defense, the Department of Justice, the Department of Transportation, and the Office of Personnel Management.
23

These audits were required by the Government Management Reform Act of 1994, which intended to provide a more effective, efficient, and responsive Federal Government. To that end, the act

specifically requires that consolidated governmentwide financial

statements be prepared and audited, and that each executive

branch agency prepare and have audited a financial statement covering all accounts and associated activities of each office, bureau,

and activity within the agency. The grades are as follows:

Federal Financial Management Status Report—Federal Departments and Agencies

Department/Agency

Reliable

Financial Information

(yes/

qualified/no)

Effective

Internal

Control

(yes/no)

Compliance

with

Laws

and

Regulations

(yes/no)

Grade

FY 96

Grade

FY 97

Grade

FY 98

National Aeronautics

and Space Administration

YES YES YES A A A

National Science FoundationYES YES YES D B+ A

General Services AdministrationYES YES NO D+ B- BDepartment of Labor YES YES NO D B- BSocial Security Administration

YES YES NO A B- BDepartment of Energy Qualified NO YES A A C

Federal Emergency

Management Agency

YES NO NO F D- D+

Department of Housing

and Urban Development

YES NO NO D- D- D+

Nuclear Regulatory

Commission

YES NO NO A B- D+
24

Federal Financial Management Status Report—Federal Departments and Agencies—

Continued

Department/Agency

Reliable

Financial Information

(yes/

qualified/no)

Effective

Internal

Control

(yes/no)

Compliance

with

Laws

and

Regulations

(yes/no)

Grade

FY 96

Grade

FY 97

Grade

FY 98

Health and Human

Services

Qualified NO NO F D- DDepartment of the

Treasury

Qualified NO NO F D- DDepartment of Veterans Affairs

Qualified NO NO F D- DAgency for International Development

NO NO NO F F F

Department of AgricultureNO NO NO F F F

Department of Defense NO NO NO F F F

Department of TransportationNO NO NO F F F

Department of Justice NO NO NO F F F

Office of Personnel

Management

NO NO NO F F F

Department of CommerceNo ReportNo ReportNo ReportF F F*

Department of EducationNo ReportNo ReportNo ReportD+ D+ F *

Environmental Protection AgencyNo ReportNo ReportNo ReportC D+ F *
25

Federal Financial Management Status Report—Federal Departments and Agencies—

Continued

Department/Agency

Reliable

Financial Information

(yes/

qualified/no)

Effective

Internal

Control

(yes/no)

Compliance

with

Laws

and

Regulations

(yes/no)

Grade

FY 96

Grade

FY 97

Grade

FY 98

Department of the InteriorNo ReportNo ReportNo ReportD+ B- F *

Small Business AdministrationNo ReportNo ReportNo ReportB- D+ F *

Department of State No reportNo reportNo reportD- D- F *

* Indicates that the Agency did not submit its FY98 financial statements report as

of the date of this report.

III. CONCLUSIONS

Poor financial management has been a long-recognized problem

within the Federal Government. Congress has developed a strong

legislative framework that if properly implemented, would significantly improve the Government’s financial management. This, in

turn, would lead to more efficient and effective Government operations, and more informed decisionmaking. Despite these efforts,

however, many executive branch departments and agencies have

been overly slow in implementing the financial management legislation.

Some progress was made during the Government’s 1998 fiscal

year. Nevertheless, most Federal agencies still cannot account for

billions of dollars in Federal spending in an accurate and timely

manner.

Subcommittee hearings over the last 2 months and the 1998

audit reports raise serious questions about the soundness of the

Government’s fundamental financial information.

To make informed decisions, Congress, the President, and his

Cabinet must have reliable data on a timely basis. Without such

information, both the quality of Government services and the fiscal

health of this Nation are at risk.

The Federal Government must get its financial house in order.

The Chief Financial Officers Act of 1990, as expanded by the Government Management Reform Act of 1994 and amended by the

Federal Financial Management Improvement Act of 1996, provides

the foundation for the successful implementation of the Government Performance and Results Act of 1993. However, further legislation is now necessary to penalize recalcitrant agencies and de-
26

partments that fail to comply with Federal financial management

laws. Furthermore, the President needs the appropriate staff to

focus on management problems within the executive branch of the

Government. An Office of Management whose Director reports to

the President would enable the President, his Cabinet officers, and

agency administrators to focus on improved financial management,

as well as improved general management and information management.

Without such a governmentwide management structure, other

departments and agencies will not learn from past management

failures, such as the computer debacles of the early 1990s. The

Federal Aviation Administration’s $4 billion was matched by a

similar failure when the Internal Revenue Service sought to improve its information systems. Together, these programs cost taxpayers $8 billion before they were stopped.

Congress and the President must ensure that Federal agencies

and departments place adequate attention to financial management. The framework is in place for these Federal departments and

agencies to step up to their fundamental responsibility: to be financially accountable to the American taxpayer.
(27)

25OMB Bulletin 93–06, Audit Requirements for Federal Financial Statements, establishes requirements and guidance for auditors to follow in auditing Federal financial statements.

APPENDIX A—BASIS FOR AGENCY FINANCIAL MANAGEMENT

GRADES

The grades for each of the 24 departments and agencies are

based on the results of the financial statement audits. These audits

were performed by the agency’s Inspector General, an independent

public accounting firm, and the General Accounting Office. All

auditors were required to follow generally accepted Government

auditing standards [GAGAS]. These standards incorporate the

American Institute of Certified Public Accountant’s Statements on

Auditing Standards, the same standards required for audits of private sector entities. However, GAGAS adds certain requirements

beyond the Statements on Auditing Standards. Most notably,

GAGAS has additional reporting requirements beyond an opinion

on the financial statements.

Three reports are required at the completion of each audit of

Government entities under GAGAS and as incorporated in OMB

Bulletin 93–06, Audit Requirements for Federal Financial Statements.25 These reports are an opinion of the financial statements,

a report on internal controls structure, and a report on compliance

with laws and regulations.

The opinion provides the auditor’s assessment of the reliability

of the information contained in the financial statements. There are

four types of opinions that the auditor can render—Unqualified,

Qualified, Adverse, or Disclaimer. An unqualified opinion signifies

that the information in the financial statements was reliable in all

material respects. A qualified opinion signifies that, except for

specified information in the financial statements, the information

is reliable. An adverse opinion means the statements are not reliable. Last, a disclaimer of opinion signifies that the auditor was

unable to determine if material information in the statements was

reliable.

The report on internal controls provides an assessment by the

auditors of the effectiveness of internal controls. The report is required to identify any instances of material weaknesses or reportable conditions in internal controls that surfaced during the course

of the audit. The American Institute of Certified Public Accountants defines a material weakness in internal controls as ‘‘. . . a

condition in which the design or operation of one or more of the internal control components does not reduce to a relatively low level

the risk that errors or irregularities in amounts that would be material in relation to the financial statements being audited may
28

26 Codification of Statements on Auditing Standards (Including Statements on Standards for

Attestation Engagements), Nos. 1 to 82, American Institute of Certified Public Accountants, as

of Jan. 1, 1997; AU sec. 325.15. 27OMB issued a memorandum dated Sept. 9, 1997, for agencies and auditors to use in assessing compliance with FFMIA. This interim guidance was to be followed in audits of Federal financial statements for fiscal year 1997.

occur and not be detected within a timely period by employees in

the normal course of performing assigned functions.’’ 26

The report on compliance with the laws and regulations provides

the auditor’s assessment of instances in which the agency did not

follow or conform materially to requirements of the laws and regulations deemed material to the financial operations of that agency.

The Office of Management and Budget also provides guidance to

the auditors in OMB Bulletin 93–06 regarding which general laws

and regulations need to be considered during the audit.

Starting in fiscal year 1997, an agency’s adherence to the Federal

Financial Management Improvement Act of 1996 [FFMIA] requirements must be assessed in the report on compliance with laws and

regulations, in accordance with OMB guidance.27 FFMIA specifically requires that agencies conform to promulgated Federal Government accounting and systems standards, and use the Government standard general ledger. Many agencies did not materially

conform to the requirements of FFMIA.

The subcommittee reviewed each financial report on an absolute

scale and assessed grades on a 4 point scale with ‘‘A’’ = 4, ‘‘B’’ =

3, ‘‘C’’ = 2, ‘‘D’’ = 1, and ‘‘F’’ = 0. In the financial information category, when an unqualified opinion was rendered by the auditor,

an ‘‘A’’ (4 points) was given; a qualified opinion received a ‘‘C’’ (2

points) and a disclaimer received an ‘‘F’’ (0 points). There were no

adverse opinions rendered in fiscal years 1996, 1997 or 1998, however, an adverse opinion would have also received an ‘‘F.’’

If no material weaknesses in internal controls were reported, the

agency received an ‘‘A’’ (4 points). Conversely, if material weaknesses were reported, the agency received an ‘‘F’’ (0 points) in this

category.

Similarly, if the auditor reported that the agency had no known

instances of non-compliance with laws and regulations an ‘‘A’’ (4

points) was awarded. If material non-compliances were reported,

an ‘‘F’’ (0 points) was given.

These grades were then averaged (with equal weight) to determine the overall grade for the agency.

If no report was completed or provided prior to March 31, 1999,

the agency was initially assessed as ‘‘incomplete.’’ When reports became available, the agency’s grade was determined. The grades included in this report are based on audit reports issued as of the

publication of this report. By law, agencies are required to submit

audited financial statements for the fiscal year to the Director of

OMB by March 1 of the succeeding year. This date is 5 months

after the close of the Federal Government’s fiscal year on September 30.
(29)

APPENDIX B—MAJOR FEDERAL FINANCIAL MANAGEMENT

LEGISLATION

Public Law Key Financial Management Provisions 1

Budget and Accounting Procedures Act

of 1950

(Chapter 946, 64

Stat. 832)

• The Budget and Accounting Procedures Act of 1950 provided that the maintenance of accounting systems and

producing of financial reports with respect to the operations of executive agencies be the responsibility of the

executive branch and that the auditing for the Government be conducted by the Comptroller General to determine the extent to which accounting and related financial reporting fulfill the purposes specified, financial

transactions have been consummated in accordance

with laws, regulations, or other requirements, and adequate internal financial control over operations is exercised.

• The Comptroller General was given the responsibility of

prescribing accounting and auditing principles and

standards to be followed in the preparation of financial

reports by executive agencies and by the GAO in the

audit of the financial transactions of each executive,

legislative, and judicial agency.

Inspector General Act

of 1978, as

amended by the

Inspector General

Act Amendments

of 1988

(Public Laws 95–452

and 100–504)

• The Inspector General Act (IG Act) requires that Inspectors General perform audits in accordance with generally

accepted government auditing standards.

• The Chief Financial Officers Act of 1990, as expanded by

the Government Management Reform Act, and amended

by the Federal Financial Management Improvement Act,

has demanded shifts in the focus of the Inspectors’

General work.
30

Public Law Key Financial Management Provisions 1

Federal Managers’ Financial Integrity

Act of 1982

(Public Law 97–255)

• The Federal Managers’ Financial Integrity Act of 1982

[FMFIA] required that internal accounting and administrative controls of each executive agency be established

in accordance with standards prescribed by the Comptroller General, and shall provide reasonable assurance

that: obligations and costs are in compliance with applicable law; assets are safeguarded from waste, loss,

unauthorized use, or misappropriation; and revenues and

expenditures applicable to agency operations are properly recorded and accounted for.

• The head of each agency is required to report to the

President and Congress whether the agency’s systems of

internal accounting and administrative control fully

comply with the Comptroller General’s requirements. For

all material weaknesses, the agency head must describe

in the report the plan and schedule for correcting any

such weaknesses.

Debt Collection Act of

1982, as amended,

and Debt Collection Improvement

Act of 1996

(Public Laws 97–365

and 104–134, sec.

31001)

• The Debt Collection Act, as amended, provides greater

powers to Federal agencies in collecting debts owed to

the Federal Government including: reporting a delinquent

debtor to a consumer reporting agency; offsetting the

salary of Federal employees who are delinquent in the

payment of debts; disclosing to a Federal lending agency that an applicant has a tax delinquency and deny

such individual credit; disclosing a taxpayer’s address

to an agency to use for purposes of collecting delinquent debt; administratively offsetting all Federal payments, including tax refunds; garnishing wages; and

charging of interest and penalties on any debt.

• Agencies are required to report to the Director of the Office of Management and Budget and the Secretary of

the Treasury at least once a year information regarding

its debt collection activities. Further, the Secretary of

the Treasury must report that information to Congress

annually and provide a one-time report, not later than

April 1999, to Congress on the collection services provided by it and other entities collecting on behalf of

Federal agencies.
31

Public Law Key Financial Management Provisions 1

• Agencies are required to make Federal payments to individuals by electronic fund transfer, except for tax refunds.

• Agencies, except for the IRS, can contract with a collection service to pursue outstanding debts of the agency

or to sell debt over 90 days delinquent.

• Agencies are required to collect the taxpayer identification number of any individual or entity doing business

with the Government.

Chief Financial Officers Act of 1990

(Public Law 101–576)

• The Chief Financial Officers Act of 1990 (CFO Act) creates a new leadership structure for Federal financial

management, including the creation of a Deputy Director

of Management, a Controller who advises the Deputy Director, and an Office of Federal Financial Management

within the Office of Management and Budget. The Deputy Director is responsible for providing financial management leadership including the establishment and

oversight of Federal financial policies and practices.

• The Office of Management and Budget is required by the

CFO Act to prepare and submit to Congress a governmentwide 5-year financial management plan. The plan

describes the planned activities of OMB and agency’s

CFO over the next 5 years to improve financial management.

• The CFO Act also requires that 24 agencies have Chief

Financial Officers and Deputy Chief Financial Officers

and lays out their authorities and functions. It also stipulates the qualifications and responsibilities for each of

the positions.

Government Management Reform Act

of 1994

(Public Law 103–

356) 2

• The Government Management Reform Act of 1994

[GMRA] expands requirements for executive branch

agencies contained in section 303(a) of the CFO Act.

• GMRA requires all 24 agencies covered under the CFO

Act to have agencywide audited financial statements,

beginning with fiscal year 1996. Those statements, due

March 1, 1997, and each year thereafter, must cover all

accounts and associated activities.
32

Public Law Key Financial Management Provisions 1

• GMRA provides that, for each audited financial statement required from the agency, the auditor (the Inspector General, independent public accountant, or the GAO)

must submit a report on the audit to the head of the

agency. This report is to be prepared in accordance with

generally accepted Government auditing standards.

• GMRA requires that a consolidated financial statement

for all accounts and associated activities of the executive branch be prepared by the Secretary of the Treasury, in coordination with the Director of the Office of

Management and Budget, for fiscal year 1997 and each

year thereafter. Such statements are to be audited by

the Comptroller General. The audited financial statements must be submitted to the President and Congress

by March 31, 1998.

Federal Financial

Management Improvement Act of

1996

(Title VIII of Public

Law 104–208)

• The Federal Financial Management Improvement Act of

1996 [FFMIA] requires that agencies conform to promulgated Federal Government accounting and systems

standards, and use the U.S. Government Standard General Ledger.

• FFMIA requires auditors performing financial audits to

report whether agencies’ financial management systems

comply substantially with Federal accounting standards,

financial systems requirements, and the Government’s

Standard General Ledger at the transaction level.

• For agencies that are not in material compliance with

the standards described above, the head of the agency,

in consultation with the Director of the Office of Management and Budget, must prepare a remediation plan

that addresses the problems. This plan shall include resources, remedies, and intermediate target dates necessary to bring the agency’s financial management systems into substantial compliance. The remediation plan

shall bring the agency’s financial management systems

into substantial compliance within 3 years after the

date a determination is made by the auditors that the

agency is not in compliance.
33

Public Law Key Financial Management Provisions 1

• The Director of the Office of Management and Budget is

required to report to Congress, not later than March 31

of each year, regarding implementation of FFMIA.

• The Comptroller General is required to report to Congress, no later than October 1 of each year, concerning

compliance with the requirements of FFMIA and the adequacy of applicable accounting standards of the Federal

Government.

1 These laws, except FFMIA, are compiled in Laws Related to Federal Financial Management, House Report 104–745. FFMIA is included in Appendix C to this report. 2 The section of GMRA that deals with financial management is also referred to as the ‘‘Federal Financial Management Act of 1994.’’
(34)

APPENDIX C—PUBLIC LAW 104–208, TITLE VIII—FEDERAL

FINANCIAL MANAGEMENT IMPROVEMENT ACT

TITLE VIII—FEDERAL FINANCIAL MANAGEMENT

IMPROVEMENT

SEC. 801. SHORT TITLE.

This title may be cited as the ‘‘Federal Financial Management

Improvement Act of 1996.’’

SEC. 802. FINDINGS AND PURPOSES.

(a) FINDINGS.—The Congress finds the following:

(1) Much effort has been devoted to strengthening Federal

internal accounting controls in the past. Although progress has

been made in recent years, Federal accounting standards have

not been uniformly implemented in financial management systems for agencies.

(2) Federal financial management continues to be seriously

deficient, and Federal financial management and fiscal practices have failed to—

(A) identify costs fully;

(B) reflect the total liabilities of congressional actions;

and

(C) accurately report the financial condition of the

Federal Government.

(3) Current Federal accounting practices do not accurately

report financial results of the Federal Government or the full

costs of programs and activities. The continued use of these

practices undermines the Government’s ability to provide credible and reliable financial data and encourages already widespread Government waste, and will not assist in achieving a

balanced budget.

(4) Waste and inefficiency in the Federal Government undermine the confidence of the American people in the government and reduce the federal Government’s ability to address

vital public needs adequately.

(5) To rebuild the accountability and credibility of the Federal Government, and restore public confidence in the Federal

Government, agencies must incorporate accounting standards

and reporting objectives established for the Federal Government into their financial management systems so that all the

assets and liabilities, revenues, and expenditures or expenses,

and the full costs of programs and activities of the Federal

Government can be consistently and accurately recorded, monitored, and uniformly reported throughout the Federal Government.
35

(6) Since its establishment in October 1990, the Federal

Accounting Standards Advisory Board (hereinafter referred to

as the ‘‘FASAB’’) has made substantial progress toward developing and recommending a comprehensive set of accounting

concepts and standards for the Federal Government. When the

accounting concepts and standards developed by FASB are incorporated into Federal financial management systems, agencies will be able to provide cost and financial information that

will assist the Congress and financial managers to evaluate the

cost and performance of Federal programs and activities, and

will therefore provide important information that has been

lacking, but is needed for improved decision making by financial managers and the Congress.

(7) The development of financial management systems

with the capacity to support these standards and concepts will,

over the long term, improve Federal financial management.

(b) PURPOSE.—The purposes of this Act are to—

(1) provide for consistency of accounting by an agency from

one fiscal year to the next, and uniform accounting standards

throughout the Federal Government;

(2) require Federal financial management systems to support full disclosure of Federal financial data, including the full

costs of Federal programs and activities, to the citizens, the

Congress, the President, and agency management, so that programs and activities can be considered based on their full costs

and merits;

(3) increase the accountability and credibility of federal financial management;

(4) improve performance, productivity and efficiency of

Federal Government financial management;

(5) establish financial management systems to support

controlling the cost of Federal Government;

(6) build upon and complement the Chief Financial Officers Act of 1990 (Public Law 101–576; 104 Stat. 2838), the

Government Performance and Results Act of 1993 (Public Law

103–62; 107 Stat. 285) and the Government Management Reform Act of 1994 (Public Law 103–356; 108 Stat. 3410); and

(7) increase the capability of agencies to monitor execution

of the budget by more readily permitting reports that compare

spending of resources to results of activities.

SEC. 803 IMPLEMENTATION OF FEDERAL FINANCIAL MANAGEMENT

IMPROVEMENTS.

(a) IN GENERAL.—Each agency shall implement and maintain

financial management systems that comply substantially with Federal financial management systems requirements, applicable Federal accounting standards, and the United States Government

Standard General Ledger at the transaction level.

(b) AUDIT COMPLIANCE FINDING.—

(1) IN GENERAL.—Each audit required by section 3521(e) of

title 31, United States Code, shall report whether the agency

financial management systems comply with the requirements

of subsection (a).

(2) CONTENT OF REPORTS.—When the person performing

the audit required by section 3521(e) of title 31, United States
36

Code, reports that the agency financial management systems

do not comply with the requirements of subsection (a), the person performing the audit shall include in the report on the

audit—

(A) the entity or organization responsible for the financial management systems that have been found not to

comply with the requirements of subsection (a);

(B) all facts pertaining to the failure to comply with

the requirements of subsection (a), including—

(i) the nature and extent of the noncompliance including areas in which there is substantial but not full

compliance;

(ii) the primary reason or cause of the noncompliance;

(iii) the entity or organization responsible for the

non-compliance; and

(iv) any relevant comments from any responsible

officer or employee; and

(C) a statement with respect to the recommended remedial actions and the time frames to implement such actions.

(c) COMPLIANCE IMPLEMENTATION.— (1) DETERMINATION.—No later than the date described

under paragraph (2), the Head of an agency shall determine

whether the financial management systems of the agency comply with the requirements of subsection (a). Such determination shall be based on—

(A) a review of the report on the applicable agencywide audited financial statement;

(B) any other information the Head of the agency considers relevant and appropriate.

(2) DATE OF DETERMINATION.—The determination under

paragraph (1) shall be made no later than 120 days after the

earlier of—

(A) the date of the receipt of an agency-wide audited

financial statement; or

(B) the last day of the fiscal year following the year

covered by such statement.

(3) REMEDIATION PLAN.—

(A) If the Head of an agency determines that the agency’s financial management systems do not comply with the

requirements of subsection (a), the head of the agency, in

consultation with the Director, shall establish a remediation plan that shall include resources, remedies, and intermediate target dates necessary to bring the agency’s financial management systems into substantial compliance.

(B) If the determination of the head of the agency differs from the audit compliance findings required in subsection (b), the Director shall review such determinations

and provide a report on the findings to the appropriate

committees of the Congress.

(4) TIME PERIOD FOR COMPLIANCE.—A remediation plan

shall bring the agency’s financial management systems into

substantial compliance no later than 3 years after the date a
37

determination is made under paragraph (1), unless the agency,

with concurrence of the Director—

(A) determines that the agency’s financial management systems cannot comply with the requirements of subsection (a) within 3 years;

(B) specifies the most feasible date for bringing the

agency’s financial management systems into compliance

with the requirements of subsection (a); and

(C) designates an official of the agency who shall be

responsible for bringing the agency’s financial management systems into compliance with the requirements of

subsection (a) by the date specified under subparagraph

(B).

SEC. 804. REPORTING REQUIREMENTS.

(a) REPORTS BY THE DIRECTOR.—No later than March 31 of

each year, the Director shall submit a report to the Congress regarding implementation of this Act. The Director may include the

report in the financial management status report and the 5-year financial management plan submitted under section 3512(a)(1) of

title 31, United States Code.

(b) REPORTS BY THE INSPECTOR GENERAL.—Each Inspector

General who prepares a report under section 5(a) of the Inspector

General Act of 1978 (5 U.S.C. App.) shall report to Congress instances and reasons when an agency has not met the intermediate

target dates established in the remediation plan required under

section 3(c). Specifically the report shall include—

(1) the entity or organization responsible for the non-compliance;

(2) the facts pertaining to the failure to comply with the

requirements of subsection (a), including the nature and extent

of the non-compliance, the primary reason or cause for the failure to comply, and any extenuating circumstances; and

(3) a statement of the remedial actions needed to comply.

(c) REPORTS BY THE COMPTROLLER GENERAL.—No later than

October 1, 1997, and October 1, of each year thereafter, the Comptroller General of the United States shall report to the appropriate

committees of the Congress concerning—

(1) compliance with the requirements of section 3(a) of this

Act, including whether the financial statements of the Federal

Government have been prepared in accordance with applicable

accounting standards; and

(2) the adequacy of applicable accounting standards for the

Federal Government.

SEC. 805. CONFORMING AMENDMENTS.

(a) AUDITS BY AGENCIES.—Section 3521(f)(1) of title 31, United

States Code, is amended in the first sentence by inserting ‘‘and the

Controller of the Office of Federal Financial Management’’ before

the period.

(b) FINANCIAL MANAGEMENT STATUS REPORT.—Section

3512(a)(2) of title 31, United States Code, is amended by—

(1) in subparagraph (D) by striking ‘‘and’ after the semicolon;
38

(2) by redesignating subparagraph (E) as subparagraph

(F); and

(3) by inserting after subparagraph (D) the following:

‘‘(E) a listing of agencies whose financial management

systems do not comply substantially with the requirements

of Section 3(a) the Federal Financial Management Improvement Act of 1996, and a summary statement of the

efforts underway to remedy the noncompliance; and’’

(c) INSPECTOR GENERAL ACT OF 1978.—Section 5(a) of the Inspector General Act of 1978 is amended—

(1) in paragraph (11) by striking ‘‘and’’ after the semicolon;

(2) in paragraph (12) by striking the period and inserting

‘‘; and’’; and

(3) by adding at the end the following new paragraph:

‘‘(13) the information described under section 05(b) of the

Federal Financial Management Improvement Act of 1996.’’

SEC. 806. DEFINITIONS.

For purposes of this title:

(1) AGENCY.—The term ‘‘agency’’ means a department or

agency of the United States Government as defined in section

901(b) of title 31, United States Code.

(2) DIRECTOR.—The term ‘‘Director’’ means the Director of

the Office of Management and Budget.

(3) FEDERAL ACCOUNTING STANDARDS.—The term ‘‘Federal

accounting standards’’ means applicable accounting principles,

standards, and requirements consistent with section

902(a)(3)(A) of title 31, United States Code.

(4) FINANCIAL MANAGEMENT SYSTEMS.—The term ‘‘financial

management systems’’ includes the financial systems and the

financial portions of mixed systems necessary to support financial management, including automated and manual processes,

procedures, controls, data, hardware, software, and support

personnel dedicated to the operation and maintenance of system functions.

(5) FINANCIAL SYSTEM.—The term ‘‘financial system’’ includes an information system, comprised of one or more applications, that is used for—

(A) collecting, processing, maintaining, transmitting,

or reporting data about financial events;

(B) supporting financial planning or budgeting activities;

(C) accumulating and reporting costs information; or

(D) supporting the preparation of financial statements.

(6) MIXED SYSTEM.—The term ‘‘mixed system’’ means

an information system that supports both financial and

nonfinancial functions of the Federal Government or components thereof.

SEC. 807. EFFECTIVE DATE.

This title shall take effect for the fiscal year ending September

30, 1997.

SEC. 808. REVISION OF SHORT TITLES.

(a) Section 4001 of Public Law 104–106 (110 Stat. 642; 41

U.S.C. 251 note) is amended to read as follows:
39

‘‘SEC. 4001. SHORT TITLE.

‘‘This division and division E may be cited as the ‘ClingerCohen Act of 1996’.’’.

(b) Section 5001 of Public Law 104–106 (110 Stat. 679; 40

U.S.C. 1401 note) is amended to read as follows:

‘‘SEC. 5001. SHORT TITLE.

‘‘This division and division D may be cited as the ‘ClingerCohen Act of 1996’.’’

(c) Any reference in any law, regulation, document, record, or

other paper of the United States to the Federal Acquisition Reform

Act of 1996 or to the Information Technology Management Reform

Act of 1996 shall be considered to be a reference to the ClingerCohen Act of 1996.

This Act may be cited as the ‘‘Treasury, Postal Service, and

General Government Appropriations Act, 1997’’.
(40)

APPENDIX D—INDEX OF WITNESSES

APP, Steven, Deputy Chief Financial Officer, Department of

Treasury, March 1, 1999.

BROMWICH, Michael, Inspector General, Department of Justice,

March 18, 1999.

BROWN, June Gibbs, Inspector General, Department of Health

and Human Services, March 26, 1999.

CALBOM, Linda, Director, RCED Accounting and Financial

Management, U.S. General Accounting Office, March 18, 1999.

COLGATE, Stephen, Assistant Attorney General for Administration, Department of Justice, March 18, 1999.

CUNNINGHAME, Donna, Chief Financial Officer, Internal Revenue Service, March 1, 1999.

DESEVE, G. Edward, Deputy Director for Management, Office of

Management and Budget, March 31, 1999.

DODARO, Gene, Assistant Comptroller General for Accounting

and Information Management, U.S. General Accounting Office,

March 31, May 4, 1999.

HAMMOND, Donald V., Fiscal Assistant Secretary, Department

of Treasury, March 31, 1999.

HASH, Michael M., Deputy Administrator, Health Care Financing Administration, Department of Health and Human Services,

March 26, 1999.

HAWKINS, Joan B., Assistant Director, Governmentwide Accounting and Information Management, U.S. General Accounting

Office, March 1, 1999.

JACOBSON, Lisa, Director of Defense Audits, Accounting and

Information Management Division, U.S. General Accounting Office,

May 4, 1999.

KESSINGER, Marilyn, Director of Financial Statement Audits,

Office of Inspector General, Department of Justice, March 18, 1999.

KLEINBERG, David, Deputy Chief Financial Officer, Department of Transportation, March 18, 1999.

KUTZ, Gregory D., Associate Director, Governmentwide Accounting and Information Management Division, U.S. General Accounting Office, March 1, 1999.

LEE, Diedre A., Administrator, Office of Federal Procurement

Policy, Office of Management and Budget, March 31, 1999, April

15, 1999.

LIEBERMAN, Robert, Assistant Inspector General for Audit, Department of Defense, May 4, 1999.

LYNN, William, Under Secretary of Defense, Chief Financial Officer, Department of Defense, May 4, 1999.

MANCUSO, Donald, Acting Inspector General, Department of

Defense, May 4, 1999.
41

MECHE, John, Deputy Assistant Inspector General for Financial, Economic, and Information Technology, Department of Transportation, March 18, 1999.

ROSSOTTI, Charles, Commissioner, Internal Revenue Service,

Department of the Treasury, April 15, 1999.

SCHELLENBERG, Carl, Chief Financial Officer, Federal Aviation Administration, March 18, 1999.

SEBASTIAN, Steven J., Assistant Director, Governmentwide Accounting and Information Management, U.S. General Accounting

Office, March 1, 1999.

STEVENS, Nye, Director, Federal Management and Workforce

Issues, U.S. General Accounting Office, April 15, 1999.

TOYE, Nelson, Deputy Chief Financial Officer, Department of

Defense, May 4, 1999.

VENGRIN, Joseph, Assistant Inspector General for Audit Operations and Financial Statement Activity, Department of Health and

Human Services, March 26, 1999.

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

U.S. General Accounting Office, March 31, 1999.

WHITE, James, Director, Tax Policy and Administration Issues,

U.S. General Accounting Office, April 15, 1999.
(42)

MINORITY VIEWS OF HON. HENRY A. WAXMAN, HON. JIM

TURNER, HON. TOM LANTOS, HON. ROBERT E. WISE, JR.,

HON. MAJOR R. OWENS, HON. EDOLPHUS TOWNS, HON.

PAUL E. KANJORSKI, HON. PATSY T. MINK, HON. CAROLYN B. MALONEY, HON. ELEANOR HOLMES NORTON,

HON. CHAKA FATTAH, HON. ELIJAH E. CUMMINGS, HON.

DENNIS J. KUCINICH, HON. ROD R. BLAGOJEVICH, HON.

DANNY K. DAVIS, HON. JOHN F. TIERNEY, HON. THOMAS

H. ALLEN, HON. HAROLD E. FORD, JR., AND HON. JANICE

D. SCHAKOWSKY

The Subcommittee on Government Management, Information,

and Technology held a series of oversight hearings on financial

management and reviewed the audits of several important Federal

agencies, including the Internal Revenue Service, the Federal Aviation Administration, the Health Care Financing Administration,

and the Departments of Justice and Defense. Audits of these agencies, and others, demonstrate that not all components of the Federal Government can produce reliable and timely financial information on a continuing basis. These audits also provide useful information on whether the government is managing its financial responsibilities well.

Last year, President Clinton challenged Federal agencies to ensure that the Federal Government receives an unqualified audit

opinion on its fiscal year 1999 consolidated financial statements.

Attempts to achieve this ambitious goal have resulted in significant

attention to financial reforms and improvements at agencies like

the Department of Defense, which has some of the greatest deficiencies in its financial management systems.

Modernization of financial management systems that are outdated and inadequate for fulfilling current audit requirements will

take years. Congress passed a crucial financial management reform

law in 1990, which required financial audits of certain Federal

agencies for the first time. Since that time, Congress has enacted

a number of other financial management laws that together provide a strong legislative framework to assure financial accountability in the Federal Government. The current system provides the

opportunity to identify and resolve the most significant financial

problems existing in the Federal Government.

It may take some time before every agency can produce the timely, reliable financial information that it must produce under the

current requirements; however, Federal agencies are headed in the

correct direction. Many Federal agencies have made steady

progress improving their financial management recently.

While many of the report’s findings and recommendations are

valid, we reluctantly oppose this financial management report. Unfortunately, the majority report has turned financial management

into a partisan issue by grading agencies in a manner that unfairly
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portrays the state of agencies’ financial affairs. While the majority

believes that these grades provide a ‘‘gauge for Congress to see

where attention is needed,’’ these grades are misleading and partisan by their nature.

The majority assigned numerous D’s and F’s to Federal agencies

to convey the impression that the administration is failing to take

financial management seriously. In fact, just the opposite is true.

This administration has done more than any other to improve the

financial accountability of the Federal Government. The Clinton

administration is resolving financial management problems that

have existed for decades. The Comptroller General noted on March

31, 1999, that it is clear that the President was making financial

management a priority and setting goals for clean audit opinions

at Federal agencies and that the Office of Management and Budget

has been actively following agency progress. He concludes that

progress is being made and ‘‘steady improvements in financial accountability are occurring.’’

The partisan nature of the grades is apparent when one compares what the majority says about the administration with what

the majority says about financial management in the House of Representatives. Republicans say that the grades show ‘‘very little improvement’’ in the Federal agencies and that if these agencies were

schoolchildren ‘‘and that was their report card, they would be

grounded.’’ At the same time, they praise the House of Representatives for conducting the first audit of the House in 1995.

Yet, under the majority’s own grading system, the results from

the last House audit—which indicate the unreliability of some of

the House accounts, internal control weaknesses, and noncompliance with House rules—would have received an overall grade of a

D-. Under this year’s newest criteria, which is timeliness, the

House would have received an F.

This example illustrates the problems with the grading scheme,

because the House did not deserve a D- or an F for last year’s financial audit, given its progress in financial management. As the

Inspector General for the House of Representatives stated about

the House’s audit last year, ‘‘It’s definitely improving and is almost

there.’’ Similarly, the low grades received by the Federal agencies

unfairly skew perception of the progress being made by the administration. The majority simply refuses to credit the administration

with progress—awarding more low grades this year than last year.

Second, we question the recommendation that Federal agencies

be financially penalized if they fail to produce timely and reliable

financial information. Positive incentives for agencies to implement

reforms in their financial systems would be helpful. However, depriving agencies of their needed funds may hinder substantial financial reforms. Faced with a potential loss of appropriations,

agencies may be inclined to implement ‘‘band-aid’’ repairs to their

financial systems rather than making the appropriate long-term

system modifications. Moreover, it will be difficult to assess when

an agency’s reforms are adequate. Some agencies simply have

much further to go, and some have fewer resources to allocate. The

majority’s own faulty grades demonstrate how difficult it is to assess financial progress fairly.
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Finally, we also question whether there is a need for a statutorily-mandated Office of Management within the executive branch.

It is unclear whether creating a new management agency will improve government management or whether separating management functions from budget functions will backfire and result in

less attention being placed on management reform at Federal agencies. Presidents can create organizations within the executive

branch that focus on management reform. For example, the Clinton

administration has achieved a number of fundamental government

management reforms and brought innovative ideas to the Federal

Government through the National Partnership for Reinventing

Government. In addition, a number of high-level interagency working groups focused on improving government management have

taken hold, such as the Chief Financial Officers Council and the

Chief Information Officers Council. Alternative approaches to improving management should be encouraged and explored. An Office

of Management is just one approach.

HON. HENRY A. WAXMAN. HON. JIM TURNER. HON. TOM LANTOS. HON. ROBERT E. WISE, JR. HON. MAJOR R. OWENS. HON. EDOLPHUS TOWNS. HON. PAUL E. KANJORSKI. HON. PATSY T. MINK. HON. CAROLYN B. MALONEY. HON. ELEANOR HOLMES NORTON. HON. CHAKA FATTAH. HON. ELIJAH E. CUMMINGS. HON. DENNIS J. KUCINICH. HON. ROD R. BLAGOJEVICH. HON. DANNY K. DAVIS. HON. JOHN F. TIERNEY.

HON. THOMAS H. ALLEN.

HON. HAROLD E. FORD, JR.

HON. JANICE D. SCHAKOWSKY.

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