U.S. GOVERNMENT PRINTING OFFICE

71–410 CC WASHINGTON : 2001

S. HRG. 106–972

FINANCIAL MANAGEMENT ACCOUNTABILITY AT

USDA

HEARING

BEFORE THE

SUBCOMMITTEE ON RESEARCH,

NUTRITION AND GENERAL

LEGISLATION,

OF THE

COMMITTEE ON AGRICULTURE,

NUTRITION, AND FORESTRY

UNITED STATES SENATE

ONE HUNDRED SIXTH CONGRESS

SECOND SESSION

ON

FINANCIAL MANAGEMENT ACCOUNTABILITY AT USDA

SEPTEMBER 27, 2000

Printed for the use of the

Committee on Agriculture, Nutrition, and Forestry

(

For sale by the U.S. Government Printing Office

Superintendent of Documents, Congressional Sales Office, Washington, DC 20402
COMMITTEE ON AGRICULTURE, NUTRITION, AND FORESTRY

RICHARD G. LUGAR, Indiana, Chairman

JESSE HELMS, North Carolina

THAD COCHRAN, Mississippi

MITCH MCCONNELL, Kentucky

PAT ROBERTS, Kansas

PETER G. FITZGERALD, Illinois

CHARLES E. GRASSLEY, Iowa

LARRY E. CRAIG, Idaho

RICK SANTORUM, Pennsylvania

GORDON SMITH, Oregon

TOM HARKIN, Iowa

PATRICK J. LEAHY, Vermont

KENT CONRAD, North Dakota

THOMAS A. DASCHLE, South Dakota

MAX BAUCUS, Montana

J. ROBERT KERREY, Nebraska

TIM JOHNSON, South Dakota

BLANCHE L. LINCOLN, Arkansas

ZELL MILLIER, Georgia

KEITH LUSE, Staff Director

DAVID L. JOHNSON, Chief Counsel

ROBERT E. STURM, Chief Clerk

MARK HALVERSON, Staff Director for the Minority

(II)
(III)

C O N T E N T S

Page

HEARING:

Wednesday, September 27, 2000, Financial Management Accountability at

USDA .................................................................................................................... 1

APPENDIX:

Wednesday, September 27, 2000 ............................................................................ 37

Wednesday, September 27, 2000

STATEMENTS PRESENTED BY SENATORS

Fitzgerald, Hon. Peter G., a U.S. Senator from Illinois, Chairman, Subcommittee on Research, Nutrition and General Legislation, of the Committee on Agriculture, Nutrition and Forestry ........................................................ 1

WITNESSES

PANEL I

Calbom, Linda, Director, Financial Management and Assurance, U.S. General

Accounting Office, Washington, DC .................................................................... 12

Thompson, Sally, Chief Financial Officer, U.S. Department of Agriculture,

Washington, DC ................................................................................................... 6

Viadero, Roger C., Inspector General, U.S. Department of Agriculture, Washington, DC ............................................................................................................. 3

PANEL II

Schatz, Thomas, President, Citizens Against Government Waste, Washington,

DC .......................................................................................................................... 30

McTigue, Hon. Maurice P., Distinguished Visiting Scholar, Mercatus Center,

George Mason University, Arlington, VA ........................................................... 25

APPENDIX

PREPARED STATEMENTS:

Fitzgerald, Hon. Peter ...................................................................................... 38

Calbom, Linda M. ............................................................................................. 68

McTigue, Maurice P. ........................................................................................ 88

Schatz, Thomas A. ............................................................................................ 83

Thompson, Sally ............................................................................................... 42

Viadero, Roger C. .............................................................................................. 51

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FINANCIAL MANAGEMENT ACCOUNTABILITY

AT USDA

WEDNESDAY, SEPTEMBER 27, 2000

U.S. SENATE, SUBCOMMITTEE ON RESEARCH, NUTRITION AND GENERAL

LEGISLATION, OF THE COMMITTEE ON AGRICULTURE, NUTRITION, AND FORESTRY, Washington, DC.

The Subcommittee met, pursuant to notice, at 9:30 a.m., in room

SR–328A, Russell Senate Office Building, Hon. Peter G. Fitzgerald,

(Chairman of the Subcommittee), presiding.

Present or submitting a statement: Senator Fitzgerald.

OPENING STATEMENT OF HON. PETER G. FITZGERALD, A U.S.

SENATOR FROM ILLINOIS, CHAIRMAN, SUBCOMMITTEE ON

RESEARCH, NUTRITION AND GENERAL LEGISLATION, OF

THE COMMITTEE ON AGRICULTURE, NUTRITION, AND FORESTRY

The CHAIRMAN. Good morning. I am going to open this hearing

of the Subcommittee on Research, Nutrition and Forestry on the

issue of Financial Management Accountability at the U.S. Department of Agriculture.

The General Accounting Office recently released a study asserting that our Federal agencies squandered $20.7 billion last year

due to poor financial management. Studies by the USDA Office of

Inspector General and the General Accounting Office have found

that our U.S. Department of Agriculture is no exception.

Since 1991, USDA has received a series of unfavorable financial

audit reports ‘‘due to deficiencies in financial reporting that are attributable primarily to weaknesses in the Agency’s financial management systems (GAO).’’

According to the Inspector General, the USDA’s books are such

a mess that at the beginning of this fiscal year its fund balance differed with the Treasury Department by $5 billion. Every American

family must balance their checkbooks and try to make ends meet,

yet this agency manages to lose track of $5 billion.

Although subsequent efforts have reduced this difference, it still

stands at more than $230 million. The books and records of USDA

have been so poorly maintained for almost 10-years that the Agency has not been able to account for its $118 billion in assets, does

not know how much money it needs to collect or how much it currently collects, and it doesn’t know the costs of its operations.

While our farmers struggle during these lean times of record low

commodity prices, bureaucrats in Washington can’t seem to keep
2

track of billions of dollars of taxpayers’ money. This disgraceful

lack of accountability is especially troubling because the USDA was

warned to address some of these problems as long as a decade ago.

The lax fiscal management of the Agency has led to some disturbing findings. According to the most recent IG report, funds intended for soil conservation programs have been shifted and used

for items ‘‘such as wall murals, transportation, and bringing civil

lawsuits against owners of derelict properties.’’I can’t possibly conceive how painting abstract wall murals helps address America’s

soil erosion problems.

The implications of the problems at the USDA reach beyond the

agriculture sector of the economy. Many of the troubles have occurred in the USDA’s nutrition programs. In a series of audits, the

IG found that funds intended for feeding children at day care facilities under the Child and Adult Care Food Program were sent to addresses that turned out to be empty lots. The responsibilities of

this agency are far too important for us to tolerate financial mismanagement of this magnitude.

Other recordkeeping entries indicate the Department cannot substantiate whether its personal property records are accurate. According to the Inspector General, the USDA has a vehicle valued

at $97 million. That is one heck of a vehicle. I guess they must

have ordered all the options.

The problem is that the USDA acts as if it is not accountable.

The chronic financial errors and overpayments revealed in the OIG

and GAO reports demonstrate how taxpayers lose when financial

agencies are not held accountable.

Any corporation that squandered money this way or couldn’t account for its assets and liabilities in a proper manner would have

to answer to its shareholders. The American people deserve a government that is accountable to them. After all, it is taxpayers’ money these agencies are spending.

I am very troubled by the findings contained in the reports and

audits by GAO and the IG. Today’s hearing addresses these problems, and I look forward to guidance from the panelists on ways

to rectify these problems so that we don’t have to do hearings like

this in the future.

And with that I would like to ask myself for unanimous consent

to submit a longer introductory statement, and I will spare you the

full load here at this hearing.

[The prepared statement of Chairman Fitzgerald can be found in

the appendix on page 38.]

I want to welcome our panelists and thank them all for coming.

We have Sally Thompson, who is the Chief Financial Officer of

the U.S. Department of Agriculture; Roger Viadero, the Inspector

General from the USDA; Linda Calbom, who is the Director of Financial Management and Assurance at the U.S. General Accounting Office; and also Mr. Ebbitt. Your first name was?

Mr. EBBITT. James.

The CHAIRMAN. James Ebbitt. You are Mr. Viadero’s assistant in

the Inspector General’s office at USDA.

Thank you all for coming here. I am going to ask Mr. Viadero,

the Inspector General, to present his views first, and then, Ms.

Thompson, we will proceed to you. I am sure you will want to do
3

a little bit of a rebuttal. And Ms. Calbom, you will also have the

opportunity. I will go to you after Ms. Thompson.

And, Sally, we are also going to want to ask you why you wanted

to take this position, coming in as you did just 2-years ago, after

so many years of lax fiscal management at the USDA. But Roger

Viadero, if you could please begin your testimony, and if you could

all be kind enough to summarize your thoughts. You have all introduced statements for the record. We will adopt those as part of the

record of this hearing, but it would be better if you could just kind

of speak free flow, off the top of your head, and summarize your

findings and conclusions. Thank you.

Mr. Viadero.

STATEMENT OF ROGER C. VIADERO, INSPECTOR GENERAL,

U.S. DEPARTMENT OF AGRICULTURE, ACCOMPANIED BY

JAMES EBBITT, ASSISTANT INSPECTOR GENERAL FOR

AUDIT

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

Committee. I am pleased to be here to provide testimony about the

Department of Agriculture’s financial management. With me today

is James Ebbitt, the Assistant Inspector General for Audit.

Financial information in the USDA is, on the whole, not reliable.

We have issued disclaimers of opinions for the last 6-years. In

other words, the books and records of the Department have been

so poorly maintained, we have been unable to compile and analyze

sufficient evidence to enable us to reach any other opinion.

What we are saying is that we don’t know how fairly the finan- cial numbers of the Department, such as the $118 billion in assets,

are presented. More critically, this also means that the managers

of the programs and operations also do not know, and in the absence of this essential information, their capability to perform their

jobs is significantly impaired.

I will now briefly discuss the primary problems preventing USDA

from getting an improved opinion on its financial statements.

The Department’s financial management systems process almost

$10 billion in collections and over $64 billion in program costs. One

of the Department’s most critical systems is the National Finance

Center’s Central Accounting System [CAS]. The problems with

CAS have been well chronicled. It is poorly documented, provides

only summary and not detailed data, and does not meet government wide accounting requirements.

Only one clear course of action is apparent to enable the Department to emerge from the murky pool of bad data: eliminate CAS.

The Department is therefore developing a new system called the

Foundation Financial Information System [FFIS]. Implementation

of the new system has been slow, however, and stymied due to various programming and design problems.

Credit reform. Another longstanding, highly complex and very

material encumbrance to the Department’s efforts to secure a clean

opinion has been the implementation of credit reform legislation.

USDA has several highly unique loan programs, subject to credit

reform, that total in excess of $70 billion.

The original loan accounting system was not equipped to provide

the extensive detail necessary to fulfill credit reform requirements.
4

In the absence of reliable historical data, USDA agencies have extensively used the judgment of program managers to estimate future loan performance. No studies or analyses are on hand, however, to support these critical assumptions. The breadth and complexity of this issue is extraordinary, though the Department, GAO,

and OIG are working tandem to attempt to resolve it.

Real property. Another major problem confronting the Department is the Forest Service’s accounting for real property. The For- est Service has about $2.6 billion in real property assets. About 60-

percent of this dollar value is attributable to what is referred to as

pooled assets, primarily roads. The remainder represents individual assets such as buildings. The Forest Service is unable to support the valuation of these pooled assets, which is estimated to be

$1.5 billion.

A significant problem also persists in the valuation of the individual real property assets. Our audit tests statistically projected

that these assets have been overstated by about $135 million and

understated by almost $80 million, or, if you would, a net difference of about $215 million.

Government Performance and Results Act. The next area I would

like to discuss deals with the Government Performance and Results

Act [GPRA]. As you know, GPRA seeks to improve the effectiveness, efficiency, and accountability of Federal programs by requiring Federal agencies to set performance goals and to report annual

performance compared to these goals.

Our audit of the Forest Service’s fiscal year 1999 Annual Performance Report found, however, it was based on flawed data and

assumptions, to the extent that it did not report reliable information about actual performance or the Agency’s progress in meeting

its goals and objectives. At each of the four national forests we visited, we found instances where reported performance data contained material—material—errors and omissions.

A few examples: Under the goal ‘‘Ensure Sustainable Ecosystems’’ we found that one ranger district had reported two miles

of stream enhancement. When we asked to view the stream, the

Forest Service staff acknowledged that two miles of road had been

repaired but reported as a stream. No stream.

At one forest we found that the same portion of a road was annually reported as decommissioned. The forest would erect a barrier

to preclude its use. Passers-by would remove the barrier, and the

Agency personnel would re-erect it.

We conducted a review last year of the Department’s final action

process, the legislative requirement that agreed-upon audit recommendations be implemented within 1-year. Our review disclosed

that USDA agencies had not exhibited the commitment necessary

to promptly and effectively institute corrective actions that arise

from audits. The Secretary’s Management Report to Congress was

replete with examples of recalcitrance in terms of the Agency’s unwillingness to revise their processes as they had agreed to after the

issued audits were resolved.

The failure to implement audit recommendations in a timely

manner permitted the continuation of ineffective and inefficient

government operations. At the time of our review, the Secretary’s

Management Report for the six-month period ending September 30,
5

1998 included 187 audits without final action within 1-year of management decision, with in excess of $989 million in funds to be put

to better use, as identified by my reports. Since the conditions identified in these audits had perpetuated in excess of 1-year to over

10-years, the monetary impact of these findings has compounded

significantly.

A major reason that final action had not been achieved was that

agencies had not published regulations, instructions, et cetera, to

formally modify their operations in response to the audit within the

one-year time frame legislatively mandated. Although this process

is involved, requires various in-house and intradepartmental clearances, and can be the subject of political considerations, all sense

of immediacy in the face of critical disclosures has been lost. Rather, corrective actions became ensnared in a bureaucratic web from

which it has taken years to be extricated.

I will provide you with just one example of many we noted. We

issued a report on the Forest Service’s Timber Sale Cruising Controls in 1993. Cruising represented a critical agency function to estimate the volume of wood available for sale and was to replace,

pursuant to a recommendation from the House Appropriations

Committee, the prevailing method of scaling, which had been found

to be highly vulnerable to timber theft.

Our review of the cruising process, as it was being implemented,

disclosed significant control weaknesses which had to be remedied

immediately, as cruising was to be adopted as the preferred volume

estimation method. According to the Secretary’s March 30, 2000 report, 5-years after the report was released, only 3 of the 15 recommendations had been acted upon. The reason given for the delay

is ‘‘Issuance of the Forest Service Cruising Handbook is delayed

due to the administrative process involved in its publication.’’ Subsequent to the issuance of this report, we instigated aggressive actions to get these reports closed. We worked closely with the

Department and the agencies through correspondence and numerous face-to-face meetings, and are pleased to report 59 audits were

closed in the most recent reporting period. The number that still

remains open is unacceptably high, however, at 166.

Overall, improvements have been made and that is primarily due

to the efforts put forth by my comrade here, Ms. Sally Thompson,

the Chief Financial Officer, who arrived at this Department about

two and a half years ago. She has really done a remarkable job of

working with the Inspector General and the Inspector General’s office. It took a great deal of time, it took a great of energy, it took

a great deal of attention-getting to get over the initial inertia, to

get this ball rolling. I think collectively both offices, combined, have

gotten over that inertia, and we are seeing marked improvements

in the Department so far as financial management goes. I still

don’t know what is going on in some of the programs regarding financial management, but on Sally’s part—excuse me, on Ms.

Thompson’s part—in getting through the National Finance Center

and instituting this new FFIS, we see marked improvements.

That concludes my statement, Mr. Chairman. I will be happy to

answer any questions you may have.

[The prepared statement of Mr. Viadero can be found in the appendix on page 51.]
6

The CHAIRMAN. We will wait until the end, until everybody has

testified, and then we will start questions.

Ms. Thompson, if you could, preface your remarks by telling us

your background before you came to the USDA and your experience

before you assumed this position.

STATEMENT OF SALLY THOMPSON, CHIEF FINANCIAL

OFFICER, U.S. DEPARTMENT OF AGRICULTURE

Ms. THOMPSON. I have been a math teacher, but more importantly, I was CPA for over 8-years, and then I went into banking.

I have been a bank president, and I have been elected State Treasurer for Kansas for 8-years before I took the CFO position here at

the Department of Agriculture.

The CHAIRMAN. You have substantial experience.

Ms. THOMPSON. I do. I do, and as you can see, I have half my

career or more in the private sector, and your comments were absolutely right in terms of stockholder accountability. On the other

hand, I feel that our stockholders are taxpayers, as well the people

up here on the Hill, as well as OMB, as well as Treasury. I have

many, many bosses. But I do bring background to it.

You asked me why I would want to do this. Because I enjoy taking on challenges, and I pride myself in trying to help clean up the

mess, and this isn’t the first time I have come in and been, you

know, faced with many, many challenges.

I have to say, though, that the support that I have received from

Secretary Glickman and Deputy Secretary Rominger has been absolutely incredible. Anything that they could do to help me, they

have done so. You may know the history of the Department of Agriculture. It has been very, very decentralized. I, too, would like to

express my appreciation for both Roger Viadero and for Linda

Calbom and her staff at GAO. They have given me, also, a tremendous amount of support.

I sometimes describe Government, Federal Government, like the

Titanic, in that it doesn’t make sharp turns, but I am here to say

that I am pleased that, unlike the Titanic, we are not sinking. We

are making progress. There is much left to do. But what I would

like to do is just to cover a few of the progress that we have made

in the last couple of years, to say we have overcome this inertia

and we do have the ball rolling.

I would like to talk a little bit about the financial statements to

begin with, and what it will take to get to a clean opinion. Now,

the clean opinion is not in itself, while it is valuable, it is what it

represents.

And I try to explain financial management to our Department

which, as you know, is largely consumed with delivering programs

to our clients out there, throughout the whole world, in fact, and

they are concerned about hunger, and they are concerned about

production and drought and floods and rural development and that

sort of thing, and soil conservation, as you mentioned. And I explain financial management as like a picture frame that tells the

world what USDA is all about, and when we get a clean opinion

on our financial statements, that says to the world that we have

timely, reliable, and creditable information, no matter whether it
7

is in the financial statements or it is in a hearing or wherever

numbers are being discussed out there for USDA.

I would like to first talk a little bit about credit reform, that we

have worked—we put together an executive task force made up of

key people in our department, from particularly Rural Development and the Farm Service Agency and the Commodity Credit Corporation, which have in total over $104 billion of loans, which represents about 40-percent of the Government’s non-tax loans. We

had old, antiquated systems. When credit reform came in, in 1996,

while we could tell you every individual loan history, they were not

capable of rolling up and giving you summary information and giving you historical.

So we have a great number of different types of loan programs,

and so with GAO’s help and with the IG’s, we put together a very

detailed plan which we are following to try to resolve all these

issues. GAO has helped us look at the market to see if there were

loan packages out there that we could just implement.

One of the most important ones is single family housing, and

that one we are going to need to develop from scratch. We were

able this year to hire an accounting firm to come in and look at

our data, to make sure that our data had integrity, because a new

system is only as good as the data that you put in it. The accounting firm has come back and said yes, we do have good historical

data, certainly back to 1992. We may need to do some estimating

and approximate information prior to that.

So we are moving along on that. We did free up some funds just

this last month to be able to start to design that model. We have

been able in the same time, though, to—we have about 6-percent

delinquent loans, though. There is the other side of this. While the

Government as a whole is 23-percent. So we have a very good track

record, but that is still not—— The CHAIRMAN. How do you define ‘‘delinquent,’’ if I can interrupt? Is it 30, 60, 90-days?

Ms. THOMPSON. Yes, and there are all different categories of that.

The CHAIRMAN. When does it become delinquent?

Ms. THOMPSON. About 60-days. When they have missed, you

know, that 30-day payment, and then the next payment is due.

The CHAIRMAN. Is that a consistent, uniform, 60-days late is a

delinquency throughout the Government?

Ms. THOMPSON. Yes. Yes, these are.

The CHAIRMAN. So your 6-percent delinquency rate compares favorably. It is like 23-percent average delinquency for the other government loan programs.

Ms. THOMPSON. Right. There is a very specific schedule called a

Schedule 9 that is reported to OMB and to Treasury on how you

calculate all of that, and so it is very comparative on that.

We have brought that down, you know, in terms of total dollars.

It was about $7.1 billion and it is down to $5.1 billion now, in just

the last couple of years.

The CHAIRMAN. How much of it was just written off?

Ms. THOMPSON. That does not count what was written off, on

that. Now, to talk about what we have turned over to Treasury——

The CHAIRMAN. Well, did you bring down your delinquencies by

just writing off?
8

Ms. THOMPSON. No. That is what I am saying. These are real dollars that we have brought down.

The CHAIRMAN. OK.

Ms. THOMPSON. Also, there is a program out there for turning

over to Treasury for collection after 180-days, and we have made

significant progress there. In 1997 we turned over about $71 billion. This last year we turned over $136 billion, and year-to-date,

well, through June we have turned over about $118 billion, so we

probably will at least equal if not exceed what we did last year.

So that, you know, if you look that up for the last 3-years, that

is almost, that is over a 90-percent increase. There is still more to

do. You know, I am not going to say for a minute that we don’t

have a lot more work to do, but I am just trying to give you a picture that we really are working on it, and I am mostly just giving

you what has happened in the last couple of years.

The CHAIRMAN. When do you proceed for collection? I am sorry.

I am interjecting with some questions now that I don’t want to forget and have to come back to later.

Ms. THOMPSON. That is fine.

The CHAIRMAN. Sixty-days is a delinquency. At what point do

you refer a loan for collection?

Ms. THOMPSON. At 180-days.

The CHAIRMAN. A hundred and eighty-days?

Ms. THOMPSON. Now, sometimes that—I put that with caveats,

because when you are dealing with housing loans, you have got—

you know, the borrower has certain legal rights and terms you

have to go through, steps that go all the way to foreclosure.

The CHAIRMAN. But you don’t begin the process of foreclosing

until 180-days, so somebody could be 6-months behind before you

start?

Ms. THOMPSON. Well, we certainly have begun the process of trying to collect and doing whatever legally we can make the steps to.

But, as I said, you can’t start to foreclose. There are standards out

there, you know, in the mortgage loan industry, and we are guided

by those kinds of statutes as well. It isn’t that we don’t get on the

phone just as soon—within 15-days, you know.

The CHAIRMAN. Within 15-days you will be on the phone——

Ms. THOMPSON. That is right.

The CHAIRMAN.—asking for their payment.

Ms. THOMPSON. That is right, trying to find out what is wrong.

The CHAIRMAN. OK. At what point do you file a lawsuit to collect

the loan?

Ms. THOMPSON. It will vary from loan program to loan program

and loan type. I hate to be—I am not trying to—I can get you the

various—you know, we have got utility loans and telecommunication loans and co-op loans and farm loans of different kinds, and

housing loans, so each one of those has different kinds of statutes

connected to it. And I would be glad to get you a summary of all

that.

But I am simply saying we are very aggressive. We have, over

the last few years, consolidated all of the loans into a loan servicing

center in St. Louis, which has made a considerable improvement in

the process. We have hired people out of the private sector, like a
9

person who headed a Citibank is in there, that is bringing into

there the private sector.

Now, you have got to also, and I remind you that we are there

because the private sector wouldn’t make loans to these people, but

Congress has decided that we want to reach out a helping hand.

So our clientele to begin with is much different than, coming out

of the banking industry, I can tell you that——

The CHAIRMAN. I come out of the banking industry, too.

Ms. THOMPSON. OK, so you understand what I am talking about,

you know. But we have made significant progress, and I suspect

that Ms. Calbom will touch on that, too, not that we don’t have a

ways to go, as everybody will say.

If I can kind of move on, I would like to talk a little bit about

the new accounting system that Mr. Viadero mentioned. When I

came in, it was a project that was in a great deal of trouble. With

OMB’s help and the Secretary’s help, and OPM, we were able to

bring in an experienced project team that has turned this around,

and as of this weekend we will have over 80-percent of the department up on the new accounting system, which will go a long ways

toward solving the accountability issues that you were mentioning

and our Inspector General’s office was mentioning. It has been a

major project for all of us, and we will finish up that within the

next year, and we will shut down this old CAS system that the IG

mentioned.

He also mentioned reconciliation of Treasury balances, and this

is a major, major issue throughout the whole Federal Government,

but I am pleased to say that we have provided the Inspector General with all the documentation to have our checkbook balanced,

but probably for this fiscal year that is closing as of Friday or Saturday, the 30th—but more importantly, we have a process in place

that will keep it reconciled on an ongoing basis.

We have worked with Treasury very closely. Treasury still has

a lot more to go, and they are in the process of revising and redeveloping their system. You know, it is a two-way street, when you

get your bank statement and you have got your checkbook. Well,

our bank statement is obviously coming from Treasury. They all

the time will go in and debit our account. The documentation

doesn’t arrive for 60- to 100-days later, you know, to try to balance

our checkbook. They are working on that, too, very significantly.

We have built several automated tools, because the volume at

USDA is just incredible. It is more than having 100 checkbooks

that you have to balance at the end of the month, you know, and

there are millions of transactions. And I have to tell you, with the

forest fires that we have had, the transaction volume both on the

new accounting system, because the Forest Service came up last

October on the new accounting system, just getting all of that run

through the accounting system has just been incredible, and the

same will be true with trying to keep our checkbook balanced.

But I feel comfortable that we have a team in place that is dedicated towards that, that are very knowledgeable. We have had

Price Water house Coopers in. We have had over 100 people for a

year working on this project, and we are there, and we are going

to keep it there going forward.
10

Mr. Viadero mentioned the plant, property, and equipment in the

Forest Service. I am pleased to say that we agreed this year on a

methodology for valuing roads. Roads had never been valued, and

so we are going back 100-years to try to accumulate what the costs

were to first prepare the ground to put the road in and then to surface it and then to look at the condition it is currently in.

We agreed on a methodology. The engineers have spent a tremendous amount of time this year. I have been in two regional forest offices this last couple of weeks which Mr. Viadero’s staff was

in, looking at the methodology, looking at the engineering reports,

recalculating all of our calculations. Some of those, as you imagine,

are document calculations that are this thick. In one, after completely recalculating, they found a $6 difference in hundreds of millions of dollars worth of calculations.

I think we are there. They still have other regional offices to visit

and other road documentation to look at in these other regions, but

I know that two regions have passed the audit test on that. Now,

we have got another 10 to go, and we will see that it is there, but

I feel comfortable that we are at least on the right track. Again,

it was working in a partnership to come up with a methodology for

something that had never been done before.

We are doing the same for all of the real property, you know, the

bulldozers and all of the other equipment we use out there in the

forests, as well as all the personal properties, buildings that were

built in 1920, you know, that had never been valued before. It is

a big job, but once it is done, and more importantly, we will have

processes in place to try to keep it forward, to keep it current and

accurate.

Yes, we have more audit issues to go. I wouldn’t be sitting here,

I wouldn’t have a job if we didn’t. But we are working on it, and

I think that the Inspector General let you know how much progress

we have made. Some of them require systems development and

some of them require regulations, and we are pushing those regulations as a top priority of the Secretary right now.

About half of the regulations are sitting at OMB, and they have

also promised us they will get those out, and we are pushing very

hard to have those regulations issued, about 24, 30 of them, within

the next 2-months. A lot of it, you know, the public hearings you

have to have, the constituent groups you have to work with, you

know, because there is a lot of different views out there on how we

deal with things.

I guess I would just like to close and say, to bring your attention

to an issue that we have been struggling with and what I have

definitely struggled with for two and a half years, and that is having adequate staff and adequate dollars to invest in systems. And

I am not talking about me personally, I am talking about the whole

department.

If you look as an average, program dollars have increased about

50, over 50-percent in the last 3-years, and every one of those dollars were needed, whether it was for emergency funds for our farmers or whether it was for rural America, to deliver to people that

were really in need. On the other hand, the staff dollars to deliver

those, because those staff dollars are not included in program dol-
11

lars, has been cut 30-percent as an average. So if you can view 50-

percent up and 30-percent down.

Now, we have done a lot of that in the private sector, as you

know, but what we have given our people in the private sector is

the tools to do more with less, and we have not done that in the

Federal Government. Very fortunate for us, right now, with a lot

of luck, there is a provision added to our budget that would allow

us to use unobligated balances to do this long-neglected, deferred

maintenance of our systems. We have got 1970s and 1980s COBOL

programming in these systems.

We put together a committee this last year, made up of the senior management of the department, to put together a corporate

strategy to also feed into our accounting system, because what

feeds into our accounting system is just as important, whether it

is in the area of property, in the area of travel, in the area of

human resources, or in budget formulation. And if the Senate

agrees to add that language to our budget bill, and the last I heard,

there was a good possibility, we would have the funds that we need

to put into the systems to bring us probably not into the 21st century, but I would be happy just bringing us into the 20th century

right now.

The CHAIRMAN. How much are you seeking?

Ms. THOMPSON. About $100 million.

The CHAIRMAN. OK.

Ms. THOMPSON. That would, of course, be spent over a 5-year period of time, because it would take us—you can’t just flip the

switch, you know, and get new systems in all of the eight areas;

telecommunications, be able to—you know, we need the right

equipment out there to be able to deliver to the field. Also, as you

know, security is a big issue right now, and so that also includes

the security we would need to be delivering that information.

The CHAIRMAN. You recognize you are asking for $100 million at

a time when your Inspector General is saying we have a difference

of $230 million in your checking book with the Treasury’s statement.

Ms. THOMPSON. Well, I am telling you that——

The CHAIRMAN. And he is also saying that he lacks confidence in

your books, to the extent that he can’t give an opinion one way or

the other in whether they fairly reflect your assets, liabilities, revenues, and the like, so——

Ms. THOMPSON. Yes, Mr. Chairman, I would agree with that, but

I think that Mr. Viadero would also agree with you that a large

part of that inability is due to these antiquated feeder systems that

we have, that don’t reconcile, that don’t track information. And a

lot of that is not cash that has been misplaced, it is a matter of

not being able to account for it in the right accounts, and that is

where you are out of balance.

[The prepared statement of Ms. Thompson can be found in the

appendix on page 42.]

The CHAIRMAN. We will get to that in a little bit on the questioning, Ms. Thompson. I want to thank you for your testimony.

We will let Ms. Calbom speak for a few moments, and then we

will go to the questions. And, if you could, just bring up anything
12

that you would want to add to what Mr. Viadero or Ms. Thompson

has said, so as to not go over old ground.

STATEMENT OF LINDA CALBOM, DIRECTOR, FINANCIAL MANAGEMENT AND ASSURANCE, U.S. GENERAL ACCOUNTING OFFICE

Ms. CALBOM. Thank you, Mr. Chairman. I just wanted to add a

couple of comments in a few of the areas that have already been

covered.

Probably to me the most important area is estimating the costs

of the loan programs. It is an area where I think a lot less progress

has been made compared to the other problem areas. That is not

for a lack of trying on Ms. Thompson’s part. I think it does get

down to a resource area and, frankly, a commitment of senior management to take on this issue.

The whole idea of estimating the costs of these credit programs

is somewhat complex. I know your banking background, so I know

you probably understand that basically what they have to do is estimate the present value of the cash coming in and cash going out,

over the life of the loans. And when you have so many different

loan programs, it does become quite complex, and you have to

measure it by each year and that kind of thing, so it is very complex.

The CHAIRMAN. Are they on accrual accounting for their loans,

or cash accounting?

Ms. CALBOM. Well, actually, it is what you might call super accrual. They have to—and this is different than the private sector—

they have to estimate the entire cost of the loan at the time they

make the loan. You know, in the private sector you kind of wait

until things go bad.

But in this case you have got to use historical data and try to

estimate, right up front, what do I think my cash flows are going

to be? What do I think my defaults are going to be? When are they

going to be? When am I going to have delinquent interest payments? You know, that kind of thing. All of this goes into the calculation. It is very complex.

But the law was passed in 1990. The accounting standards,

which essentially mirror the law, were passed in 1994. So the agencies had a long time to try to deal with this problem, and they really just now, in the last couple of years, have been focusing attention on it.

You know, in the private sector, if a new accounting rule or a

new law was coming out, no matter how complex, I mean, any

major bank—which USDA, $70 billion in loans—any major bank

would have been right on top of it. Whatever systems were needed,

whatever policies and procedures were needed, they would have

had them in place by the time that rule was effective.

So this issue is probably the number one issue that we have concern over. It is one of the issues that actually causes us, GAO, to

disclaim an opinion on the consolidated statements of the Federal

Government. So it is something we think is very critical. USDA, it

is complex, but other agencies, now maybe they are not as big, but

they have been able to implement the systems that are needed to
13

be able to make these calculations. So we think this is a big issue

that needs a lot of attention going forward.

The next issue that both Ms. Thompson and Mr. Viadero have

touched on a bit is the fund balance with Treasury accounts. I do

agree there has been good progress made. It is essential that this

gets cleaned up. You know, this account, it is like their checking

account. I mean, all their receipts and disbursements go through

it.

The CHAIRMAN. When was the first time the $5 billion difference

was cited? How many years ago was that?

Ms. CALBOM. Well, I know that was last year’s number, and I

know it has been at least, what, some of these differences go back

about 10-years, don’t they?

The VIADERO. Yes, some go back about 10-years.

Ms. CALBOM. Yes. So, again, another issue that has only just recently received focused attention.

This issue, you know, basically says if you can’t balance your

checkbook, you don’t know if you are allocating your expenses to

the right accounts and the right areas. And it all comes into performance measurement because, you know, the financial statements are just one piece of the end game.

The end game is being able to tell the taxpayer what do they get

for their money. And if you can’t say what accounts, your expenses

relate to, and what programs, you cannot tell the taxpayer, how

much did it cost me to get this service, this output. And so it is

a very critical account to make sure we have in balance because

otherwise, everything is suspect.

The last thing I just wanted to touch on, again, was the Forest

Service. We have issued a number of reports over the years—I

think December 1996 was the first one we did on Forest Service— because of just the pervasive nature of the problems they have had

there. And in fact in January of 1999 we put Forest Service financial management on our high risk list.

Now, again, there have been improvements made, the biggest

one probably being that the new system, this FFIS system, has

been put in place, and that will help with a lot of the other basic,

accounting problems, with accounts receivable, accounts payable,

and that kind of thing. But, and I think this was mentioned, the

real problem is the feeder systems. So you can have a great accounting system, but if the feeder systems that put the data in

aren’t any good, you know, you are still going to get bad accounting

data coming out.

So that is a real major issue. Again, it is dollars we are talking

about, but again, it is over the long term having the commitment

to fix these things.

The other thing with the Forest Service is they still don’t quite

have a handle on all their assets out in the field. I know they are

trying to do this, and they have come a long way, but frankly we

think the autonomous nature of the Forest Service really hinders

this.

And one thing that we have suggested is that each of the regions

have a chief financial officer installed, which I know is being considered, but we think that is something very important. If you had

a chief financial officer that had direct reporting responsibility to
14

headquarters, we think that would go a long ways towards overcoming this whole autonomous nature of the Forest Service.

That pretty much summarizes the points that I wanted to make.

These issues are very deep seated, and particularly going forward,

even into the next administration, it is going to be just essential

that focused attention be maintained on these issues to ensure that

they get corrected.

So that is all I had. Thank you, Mr. Chairman.

[The prepared statement of Ms. Calbom can be found in the appendix on page 68.]

The CHAIRMAN. Well, thank you very much.

I wondered, Mr. Viadero, if you have your pictures. We have a

picture available of the vacant lot.

Mr. VIADERO. This is our substitute for Vanna White. This is the

best the Office of Inspector General could come up with.

The CHAIRMAN. Mr. Viadero, if you could explain what you came

up with here, it is my understanding that checks were being sent

to that address.

Mr. VIADERO. No, no checks were being sent to that address.

That was listed, though, as a home, a day care home, and typically

a center home has up to 5 children at it for feeding.

We rode by there—and this started as one of our presidential ini- tiatives. The program was funding for $1.7 billion, and when we

started the program, Mr. Chairman, we questioned $1.7 billion or

100-percent of the program.

We went out to several States, did several reviews, but we developed, more importantly, a fraud audit program on this. So this was

not a compliance audit. We picked out the worst offenders based

upon the fraud audit profile that we developed. This one came out

in Ohio, and we rode by there, and that vacant lot was listed as

a home. Absolutely incredible. Absolutely incredible.

Now, the problem with this particular operation or CACFP, if

you will, is not so much the providers of the service, the mom sitting at home with, you know, anywhere from 2 to 12 children at

home, or the——

The CHAIRMAN. What was the name of this program?

Mr. VIADERO. The Child and Adult Care Food Program [CACFP].

The CHAIRMAN. Child and Adult Care?

Mr. VIADERO. Right. Food Program. CACFP.

The CHAIRMAN. OK, and the program was supposed to own centers?

Mr. VIADERO. No, no, the program didn’t. We funded, the Department, through the Food and Nutrition Service——

The CHAIRMAN. Right.

Mr. VIADERO.—reimbursed the States. Here is where the problem

starts.

The CHAIRMAN. OK.

Mr. VIADERO. The Department of Agriculture funds these programs through the State. The State is the conduit. Here is, the

next statement lays the problem out. There are sponsors. There are

sponsors that are reimbursed through the State. The sponsors then

go out and sign up centers and homes, and they reimburse the

homes and centers for the meals served. Okay?

The CHAIRMAN. OK.
15

Mr. VIADERO. They receive $42 a month administrative fee for

every home that they have. Okay? For a center, they get up to 30-

percent administrative reimbursement in some states, 30-percent.

Now, most of these homes and centers provide at least one, most

two meals and a snack, so roughly about $6 a day is allotted from

USDA to these centers and homes per child.

In this case, 5 children at $6 is $30 a day. Times that by 30 days.

That is what the people—and by the way, these people were convicted, okay?—that is what these people were receiving in just reimbursement for that vacant lot, plus $42 for administrative costs.

That is horrible.

The CHAIRMAN. Services that they weren’t providing anywhere

else, it wasn’t just a mistake as to the location of where their center was. They didn’t have a center.

Mr. VIADERO. No, it was simply just fraud.

The CHAIRMAN. Just pure fraud. You gave the money to the

State of Ohio, and the State of Ohio was reimbursing it to these

so-called providers?

Mr. VIADERO. Right.

The CHAIRMAN. Who were committing the fraud. How much were

those specific providers paid? Do you know?

Mr. VIADERO. I can get that for you, Mr. Chairman. We might

have it right here. In this particular operation, this operation received more than $1.1 billion. I am sorry. I am talking in B’s in

agriculture. It is $1.1 million.

The CHAIRMAN. OK. Was that provider providing services anywhere?

Mr. VIADERO. No.

The CHAIRMAN. It didn’t exist at all?

Mr. VIADERO. Well, it existed, but we had some, this is what we

have been proven to be fraud, $1.1 million. They were convicted on

that figure.

The CHAIRMAN. Now, does the Department now have policies in

place to prevent a repeat of this kind of fraud? How long was this

fraud going on before you found it?

Mr. VIADERO. Well, this one was going on, this operation was in

business about 10-years. However, we just completed one up in

Detroit——

The CHAIRMAN. So were they taking checks for 10-years for services they weren’t providing?

Mr. VIADERO. Yes, Sir. See——

The CHAIRMAN. Ten-years, and nobody checked it.

Mr. VIADERO. Let me give you a good quote here, and I am going

to—I quote General Eisenhower before he became President, that

the unaudited, the uninspected, deteriorates, and that is what happened here. It is a program responsibility. Is the program working?

Are there controls in place, and are they working? That is substantively a compliance review. Nobody from Food and Nutrition

Service went out and checked it, very simply.

We just finished one in Detroit. $27 million was defrauded from

the people of the United States. We convicted them on $27 million

worth of Child and Adult Care Food Program fraud. Now, as a result of that and the notoriety they got, the husband of the wife
16

were arrested and he has been indicted for the murder of his

former wife.

The CHAIRMAN. And that was recently in Detroit?

Mr. VIADERO. Yes, Sir.

The CHAIRMAN. Was that a program going through the State of

Michigan?

Mr. VIADERO. Yes, Sir. There is only one State that does not operate this way, and that is the State or Commonwealth of Virginia.

USDA operates the program directly. The sponsors are the incipient level or incipient point of entry into the greed, into the fraud.

We have organizations that operate centers, such as the YMCA,

the Salvation Army, and they have come forward to us and said,

‘‘We haven’t received our reimbursement.’’ So the sponsor has, in

many cases, either totally absconded with the reimbursement for

food, because the centers get reimbursed for food, or they have

lagged for two or 3-months. Now, that is the time value of money,

so they are using this, the reimbursement, as a float, if you will.

The CHAIRMAN. Now, was USDA doing no checking on that program at all, that Child and Adult Care Program?

Mr. VIADERO. Well, it is interesting that the USDA gave out a total of $88 million over 5-years to the States to audit the program.

In other words, USDA—— The CHAIRMAN. They gave money. So was this a State of Ohio

problem or a USDA problem? Whose fault is this?

Mr. VIADERO. Both.

The CHAIRMAN. Both.

Mr. VIADERO. Both parties are jointly and severally liable in this

case. Let me give you an example. The Department of Agriculture gave out about $88 million over

5-years to the States to audit this. Okay? Because the Food and

Nutrition Service said they couldn’t do audits. They reimbursed the

States.

We do have some honest States out there. Some States returned

about $24 million over the 5-year period and said they audited the

program through other various and sundry programs. The States

returned to the Department of Agriculture $24 million.

We found in several States where there was little activity, but

States used the money.

The CHAIRMAN. Hold on. Do we have policies in place now to prevent this kind of fraud in the future?

Mr. VIADERO. We had policies in place before. The problem is, nobody went out and looked at it. It is simple. Controls in place, yes

or no. Audit working, yes or no. In this case we had controls but

they weren’t working, by any measure.

The CHAIRMAN. Well, is the problem with this program that you

have the State and the Federal Government in charge, and one

may think the other is auditing it or checking on it, but in fact nobody is, and it is a lack of accountability?

Mr. VIADERO. Well, I think it is a little—— The CHAIRMAN. I mean, Ohio is probably pointing the finger at

the USDA, and USDA is pointing the finger at Ohio.

Mr. VIADERO. I think it is a little difficult—and this is just one

picture, I mean, I am not picking on the State of Ohio by any

means——
17

The CHAIRMAN. We will ask Senator Voinovich about this. He

was probably Governor when that happened.

Mr. VIADERO. Use her name.

[Laughter.]

The issue, though, Mr. Chairman, is that the State, regardless of

where it is, the State received the money from USDA and they

signed an agreement to audit this program.

The CHAIRMAN. Can you go against the State, to get that money

back from the State?

Mr. VIADERO. We have asked the Food and Nutrition Service to

do that.

The CHAIRMAN. Are they doing that?

Mr. VIADERO. They are attempting it.

The CHAIRMAN. Shouldn’t the State have to pay that back?

Mr. VIADERO. That is what we thought.

The CHAIRMAN. Now, tell me about the murals that you found,

if we could put that up.

Mr. VIADERO. He will win an incentive award for this.

The CHAIRMAN. Now, where is that mural?

Mr. VIADERO. Southern California.

The CHAIRMAN. And it was painted by the Government, or with

government resources?

Mr. VIADERO. With government resources. This was funded

through the Urban Resources Partnership, through the Forest

Service, through National—I am sorry, the NRCS, Natural Resources Conservation Service.

The CHAIRMAN. OK, and it was out of program funds that were

supposed to be used to prevent soil erosion, was that right?

Mr. VIADERO. Yes, Sir.

The CHAIRMAN. And there was no authorization in any statute

for them to take money out of that soil erosion program and use

it to paint murals?

Mr. VIADERO. That is correct, Sir, and we even had two opinions

from the Office of General Counsel to support that.

The CHAIRMAN. Who was the responsible official in the U.S. Department of Agriculture who ordered that, that money be used to

paint murals on walls?

Mr. VIADERO. The Under Secretary of Natural Resources.

The CHAIRMAN. And what is his name, or her name?

Mr. VIADERO. James Lyons.

The CHAIRMAN. And is he still there?

Mr. VIADERO. Yes, Sir.

The CHAIRMAN. Has he been reprimanded in any way?

Mr. VIADERO. I believe so. I think the House took care of that

last week.

The CHAIRMAN. They took care of that last week?

Mr. VIADERO. We had a hearing on this topic last week.

The CHAIRMAN. And this man’s name is James?

Mr. VIADERO. Yes, Sir. Lyons. L-Y-O-N-S.

The CHAIRMAN. Under Secretary of——

Mr. VIADERO. Natural Resources and Environment.

The CHAIRMAN.—of Natural Resources. He ordered that this

money be taken out. When was that, that he did that?
18

Mr. VIADERO. Our review of these expenditures covered the period of 1994 through 1997.

The CHAIRMAN. So he was doing it for 3-years.

Mr. VIADERO. From 1994 through 1997. I am sorry, 4-years.

The CHAIRMAN. He was not disciplined internally in the USDA?

Mr. VIADERO. Not to my knowledge, Sir.

The CHAIRMAN. Should not somebody like that, in your opinion,

lose their job?

Mr. VIADERO. That is not up to me, Sir. That would be up to the

Secretary.

The CHAIRMAN. Did you present your findings to Secretary Glickman?

Mr. VIADERO. The Secretary got a copy of the audit.

The CHAIRMAN. And when did he get a copy of that audit?

Mr. VIADERO. It was issued in December of 1999, Sir.

The CHAIRMAN. And nothing has happened to Mr. Lyons. He is

still there, still drawing his salary?

Mr. VIADERO. Yes, Sir.

The CHAIRMAN. I think that is something we should follow up

with the Secretary, to find out why someone like that wouldn’t be

disciplined, or how they could continue to maintain their post.

How many funds were taken out of the soil erosion program?

Mr. VIADERO. Total funding for the program including soil erosion funds exceded $20 million, Sir. That was over the 4-year period, so on average, $5 million a year.

The CHAIRMAN. Was Mr. Lyons—did you confront him with this

finding?

Mr. VIADERO. Yes, Sir.

The CHAIRMAN. Did he say he was ordered by anybody to do this?

Mr. VIADERO. No, Sir. He said he had authority to use these appropriations, and that the General Counsel supported his position.

It was our interpretation—I am not an attorney, sir——

The CHAIRMAN. So the General Counsel of the USDA supported

him?

Mr. VIADERO. Supported us.

The CHAIRMAN. Supported you?

Mr. VIADERO. Yes. And he went back to General Counsel and

asked for another opinion, and the second opinion likewise supported us. We were looking for—I think General Counsel uses the

term ‘‘nexus’’—we were looking for just some connection between

what was done in the cities to a conservation message.

In some cases it met the standard. In that event, we gave them

credit for it, but there were 209 projects such as this. If anybody

can see a conservation message in the paint on the side of somebody’s privately owned garage, I would appreciate it if they speak

up, because we are still looking for it. We have another one.

The CHAIRMAN. And the General Counsel agreed with you there

had to be a nexus with soil erosion, and what he was doing

was——

Mr. VIADERO. Absolutely. That is what the grant was for.

The next one—again, this is all Southern California we have

here——
19

The CHAIRMAN. Did he, did Mr. Lyons give this money to private

individuals and pay them to paint these murals? Was that the

idea?

Mr. VIADERO. Absolutely.

The CHAIRMAN. I mean, who were these individuals who got this

money? It is $3.4 million?

Mr. VIADERO. Yes, about $3.4 million of the funds spent for the

projects we reviewed did not meet the purposes of the statutes from

which they were funded. Some of them were——

The CHAIRMAN. Was just paid to people to paint murals?

Mr. VIADERO. Yes. Some of them were inner city groups, to paint

them, to get a message out, an environmental message. I can’t find

the environmental message painted on the side of this commercial

building.

The CHAIRMAN. Do you know what groups received that money?

Mr. VIADERO. It is in the work papers, Sir.

The CHAIRMAN. Did you refer this to any law enforcement authority?

Mr. VIADERO. We are the law enforcement branch, Sir. Understand, the Office of Inspector General is composed of about 50-percent audits and about 50-percent investigators. I am the former

Special Agent in Charge of Auditing and the Chief Auditor for the

FBI.

The CHAIRMAN. But you can’t bring a prosecution.

Mr. VIADERO. We refer all of our criminal cases to the Department of Justice. We work with the local United States

Attorney——

The CHAIRMAN. Did you refer this to any U.S. Attorneys?

Mr. VIADERO. Oh, yes, Sir.

The CHAIRMAN. You did.

Mr. VIADERO. They are ongoing.

The CHAIRMAN. Is there any prosecution?

Mr. VIADERO. They are ongoing, Sir.

The CHAIRMAN. There are investigations, there is a criminal investigation ongoing on this?

Mr. VIADERO. There are several investigations, Sir.

The CHAIRMAN. This is an outrage.

Tell me about the $97 million vehicle.

Mr. VIADERO. I will ask Mr. Ebbitt to.

The CHAIRMAN. OK. We don’t have a picture of that vehicle? I

would like to see what a $97 million vehicle looks like.

Mr. VIADERO. But it might have the bad tires on it. I can’t——

The CHAIRMAN. Maybe the Batmobile, or—Mr. Ebbitt?

Mr. EBBITT. Mr. Chairman, clearly a mistake. I mean, somehow

or other the books and records at the APHIS had recorded this particular vehicle having a value of $97 million, obviously an outright

mistake, no——

The CHAIRMAN. It was a Forest Service vehicle?

Mr. EBBITT. No. APHIS.

The CHAIRMAN. Did they put that number in to plug a gap in

their financial statements, that they were having a $97 million difference?
20

Mr. EBBITT. Mr. Chairman, I don’t believe that is the case. I

mean, the books and records are in such a state that there was no

point in trying to plug anything, because, I mean——

The CHAIRMAN. Nothing balances.

Mr. EBBITT.—you couldn’t get to the right answer. This was

clearly a mistake. One of the major problems, as Ms. Thompson referred to, is property within the Forest Service. We have this major

effort underway right now to try and understand these values. And

these kinds of mistakes, are being corrected this year, and hopefully before this year is out, as we start next year, we are going

to get closer to the right answer.

The CHAIRMAN. Another example you had was an $11 million microscope?

Mr. EBBITT. Yes, Sir. Again, these are just mistakes. How they

got there—they were so numerous, clearly just mistakes.

The CHAIRMAN. So their books and records are replete with instances of those kind of mistakes. You are just picking out a few

examples to kind of dramatize the situation, a $97 million car, an

$11 million microscope, but the bottom line here is that their books

and records are in such disarray that they are almost of no help

in examining the financial condition or position of the USDA.

Mr. EBBITT. That is correct.

The CHAIRMAN. As it relates to the Forest Service, but the rest

of the USDA, you have greater confidence?

Mr. EBBITT. Obviously, Mr. Chairman, the Forest Service is a

huge part of the Department of Agriculture, so the problems within

the Forest Service carry through to the consolidated statements of

USDA. When you put all the numbers together for the Department,

the problems of the Forest Service definitely impact the consolidated statements.

The CHAIRMAN. Let me ask this. It has been many years since

Congress required all the agencies to have audits, and it was expected that they would all be achieving unqualified opinions from

accountants who would be able to state that they have confidence

that the financial statements presented accurately reflect the financial position of each of the agencies. That requirement of those

audits went into effect in the early 1990s. Was it 1994 or 1990?

There have been two acts. There was one in 1990, and then 1994.

Which one required the audits?

Mr. VIADERO. We were one of the original departments. We go

back to 1990.

The CHAIRMAN. To 1990, okay. It has been 10-years. USDA’s

books and records haven’t been cleaned up in the last decade. The

USDA probably has been beaten up by Congress many times over

this issue, but it doesn’t seem to matter. They keep coming back.

I mean, they are trying to improve but we are still not getting

clean opinions.

Let me ask Mr. Viadero this question: It seems like there is no

down side for an Agency of the Federal Government, or a Department, if they get a bad audit. They can still receive their full appropriations the next year. In fact, they may even use their poor

audit to argue that they need more money to get the right systems

to clean up their books and records.
21

Shouldn’t there be some penalty for an agency that doesn’t get

clean audits? What about a 5-percent across-the-board administrative cut for any agency that can’t clean up its books and records,

to give them a real incentive to improve their practices?

Now, a publicly held company that couldn’t get a clean audit

really couldn’t continue to have its stock traded publicly. Nobody

would buy a stock in a company that couldn’t get a clean audit.

There are down sides for any private company that can’t get its act

together. It seems to me there is no real down side for a government agency that can’t clean up its books, other than it is going

to have to endure a couple days of embarrassing hearings on Capitol Hill, but then that is the end of it.

Do you agree with me on that? Shouldn’t there be some kind of

penalty or an incentive for these departments to get their acts together?

Mr. VIADERO. With regard to the incentives or disincentives, I

leave that up to this wonderful body up here on the Hill, because

that is going to be the legislative fix. However, just by way of background, if I can, I am starting my seventh year here, and I walked

in with the Food and Nutrition Service receiving an disclaims of

opinion on their financial statements. They couldn’t find $18 billion

out of $38 billion.

Now, nobody took the money. You know, no Government employee is going to take $18 billion. $18, maybe, $180, but not $18

billion, and that was just in bookkeeping errors, if you will. Too

many people, when they made corrections——

The CHAIRMAN. But it is possible there could be millions of dollars that somebody is actually stealing——

Mr. VIADERO. Absolutely.

The CHAIRMAN.—and we wouldn’t be able to detect it.

Mr. VIADERO. I mean, we don’t know. I mean, that is the bottom

line. We don’t know.

But let me get back to the story, if I can. I put in an action team,

if you will, consulting. I operated a management advisory service

out of the Office of Inspector General, with auditors that did not

have any reason to go back to the Food and Nutrition Service

again, to go in and work with the Food and Nutrition Service. We

brought that organization up to a clean opinion, from an adverse

opinion, and I understand that this year we are probably going to

have a clean opinion again, at this utterance, on Food and Nutrition Service, so they got it together.

I took 22 people for the last 4-years and entered into an agreement with the Forest Service to do the same thing. It is sort of we

have to retrain them after lunch again, what they learned in the

morning. We find the same errors being repeated. To this end, in

the year 2001, the upcoming fiscal year, we are not going to have

a consulting service, because I am taking their money from them

on a reimbursable agreement and it is being wasted.

Somebody has to get the Forest Service’s attention. You know,

the managers in the program, these program people must have

100-percent efficiency rate because it is all going to the program,

because nobody is spending any time or effort on the financial management of these dollars.
22

And to that end, my own budget, I have lost 24-percent of my

people in the last 5-years because the Office of Inspector General

is looked at as a staff agency, and we have been—— The CHAIRMAN. Who controls your budget?

Mr. VIADERO. The House.

The CHAIRMAN. OK, but—— Mr. VIADERO. We have been looked at, we have been flatlined.

We haven’t gotten any decreases.

The CHAIRMAN. Has the Secretary been giving you an adequate

budget?

Mr. VIADERO. Yes, and we even, we got support out of OMB, from

the President. We got support from the Secretary going out.

The CHAIRMAN. But the House cut your budget?

Mr. VIADERO. This year we got flatlined.

The CHAIRMAN. And you feel you could use more resources, too?

Mr. VIADERO. Mr. Chairman, I tell you, my organization is basically labor-intensive, travel and per diem costs for the audits and

the investigations. And we are bringing in, we bring in three times

our annual budget.

The CHAIRMAN. How many cases have you referred over the

years for prosecution?

Mr. VIADERO. Thousands.

The CHAIRMAN. Thousands?

Mr. VIADERO. Thousands.

The CHAIRMAN. Has that involved internal theft?

Mr. VIADERO. Well, I am very happy to say, because that is the

job I had at the FBI, my last job was the internal side of it, this

is an exceptionally clean Department insofar as internal theft goes.

Now, we have internal problems, workplace violence issues.

The CHAIRMAN. Have you seen any collusion on the part of

USDA employees who may be working with that child care food

provider in Ohio on a scam to send out USDA checks to that provider that doesn’t really exist? Have you found—— Mr. VIADERO. Now, we haven’t found that, but we have found collusion with State employees and some of the sponsors.

The CHAIRMAN. With State employees?

Mr. VIADERO. Yes. Remember, USDA is just the—— The CHAIRMAN. Did you find that in Ohio?

Mr. VIADERO. No, Sir, not that I recall.

The CHAIRMAN. How about my State of Illinois?

Mr. VIADERO. No, we didn’t find that much in Illinois. Minor,

minor deficiencies.

The CHAIRMAN. OK. So collusion with State officials. Well, maybe

these programs would be better if they were run with the USDA,

instead of turning the money over to the States to run them.

Mr. VIADERO. Well, again, the State of Virginia, we don’t have

any problems.

The CHAIRMAN. They run it, right, and don’t——

Mr. VIADERO. Yes, the Department runs it. It is interesting. We

did five or six audits throughout the State, and what we found, I

think the most horrendous one was, we found somebody was using

some of the funds to buy cigarettes and beer, but the amount was

absolutely de minimis. I mean, you could not get a Federal prosecution on this in the district. It was that we found $50 here, $70
23

there, strictly bookkeeping errors. But we did find children at the

sites. That is key. We get excited when we visit this and we find

people there. OK?

We found such things that we had to report to the local fire marshal’s office when we went in, or the building inspector, whoever

had the jurisdiction. We found 21 children in a 10 by 15 room, in

a basement, with no window. I mean, these are U.S. children here.

This is the future of the country. That is less than 10 square feet

a person, and if anybody is familiar with children, they generally

take more than 10 square feet during the day.

We found in some cases no smoke alarms or no fire alarms, no

extinguishers. In one case we found the whole house being heated

by the stove, the gas stove and the oven. Not good to have children

around. We reported this to the local jurisdiction. We have had

some very, very serious prosecutions in this program, I have gone

out to meet several top State officials, to bring it to their attention.

This is something you have to get fixed right away. You can’t wait

necessarily for our process of jurisprudence to go to work. We refer

them, but we want this condition corrected immediately.

The CHAIRMAN. Well, thank you. I am going to give Ms. Thompson some time for some closing remarks. I guess I want to ask

you—we are going to have to move to the next panel—I understand

you have brought in a Big Five CPA firm to help you reconcile that

cash balance with the Treasury. You now have the difference down

to $236 million?

Ms. THOMPSON. No, Sir. We have it down much below that. In

fact, it is close to being totally reconciled. Obviously, we broke it

into three pieces—— The CHAIRMAN. What is it at now?

Ms. THOMPSON. It is probably less than, what, $5 million, maybe,

at the most.

The CHAIRMAN. So you are working that down, you are getting

it there. How much have you had to pay the Big Five CPA firm

to get—— Ms. THOMPSON. Too much.

The CHAIRMAN. How much is it?

Ms. THOMPSON. About $2 million.

The CHAIRMAN. And what firm is it?

Ms. THOMPSON. Price Waterhouse Coopers.

The CHAIRMAN. And how long have they been working on it?

Ms. THOMPSON. A year.

The CHAIRMAN. A year?

Ms. THOMPSON. They had 40 people in there that literally rolled

up their sleeves. This wasn’t a consulting job. They helped us put

together, obviously, the project plan, and they have been training

another 40 or 50 people, of our people, to work on it. But they got

in, rolled up their sleeves, and looked at thousands and thousands

of transactions that went all the way back into the early 1990s.

The CHAIRMAN. Where was most of that $5 billion error?

Ms. THOMPSON. Again, it was accounting errors. You know—— The CHAIRMAN. Tons of small transactions?

Ms. THOMPSON. Yes.

The CHAIRMAN. It wasn’t one big——

Ms. THOMPSON. No. I wish it were. It would have been easier.
24

The CHAIRMAN. When do you think you will have the USDA’s

books and records in such a position that you will be able to get

an unqualified opinion?

Ms. THOMPSON. We are hoping to get there before DOD does. We

are working very hard, and I am not sure that we can get there,

but we had a plan in place this year to get it to a qualified opinion,

which shows you that we are making progress, and I would hope

to get to an unqualified opinion by the next year.

The CHAIRMAN. By next year?

Ms. THOMPSON. Right.

The CHAIRMAN. By 2001?

Ms. THOMPSON. Yes.

The CHAIRMAN. Well, we wish you good luck. It is a tall order,

and I clearly believe you have the background to do this job. You

have a background in banking, as a CPA, and as a State Treasurer.

You certainly appear to have great qualifications. I know you came

into a Department that was in horrible disarray, is still in disarray, but hopefully getting better.

And I would encourage you to promote Mr. Viadero’s efforts within the USDA, and I hope that if we have a hearing like this next

year, that we will hear a better report out of the GAO and your

Inspector General. And I want to urge you to keep up the good

work. Of course, the administration may change in the

meantime—— Ms. THOMPSON. That is true.

The CHAIRMAN.—and somebody else will be sitting here. But I

want to thank you very much.

Did you have any more pictures up there that we haven’t seen,

Mr. Viadero?

Mr. VIADERO. We only have one more art picture, if you would

care to see it.

The CHAIRMAN. Well, we might as well take a look.

Mr. VIADERO. The mural, this is the mural.

The CHAIRMAN. OK.

Mr. VIADERO. And, again, we just ask if anybody can see any soil

conservation message here.

The CHAIRMAN. All taken out of the soil conservation fund by Mr.

Lyons, the Under Secretary of Natural Resources?

Mr. VIADERO. Yes, Sir.

The CHAIRMAN. OK, and did you find out who were the individual community groups that were paid the money, the $3.4 million,

to paint these murals? Do you think these murals are worth $3.4

million?

Mr. VIADERO. Sir, my wife has the fine arts degree. I am the accountant.

[Laughter.]

The CHAIRMAN. How many of these, how many murals did the

$3.4 million buy?

Mr. VIADERO. I don’t have the exact number, but we can get that

for you. It is in the work papers.

The CHAIRMAN. In your judgment, was this just a mechanism for

paying cash to some community groups in Los Angeles?

Mr. VIADERO. That is part of the ongoing investigation, and unfortunately, we can’t talk about it.
25

The CHAIRMAN. There is a grand jury. Possibly this money was

just spread around the community. Do you suspect any kickbacks

were received in the Department of Agriculture?

Mr. VIADERO. No, Sir.

The CHAIRMAN. You don’t?

Mr. VIADERO. No.

The CHAIRMAN. Well, at least that is good. Well, Mr. Viadero,

Ms. Thompson, Ms. Calbom, Mr. Ebbitt, thank you all very much.

We will proceed to the second panel. Well, thank you very much.

We have on the second panel Mr. Thomas Schatz—is that the correct pronunciation?—president of the Citizens Against Government

Waste, and the Honorable Maurice P. McTigue, the distinguished

visiting scholar at the Mercatus Center at George Mason University. Mr. McTigue has done a study on the audits that have been

done of all Federal agencies, have has published some reports that

got widespread attention.

I would like to start with you, Mr. McTigue, first, and then proceed to Mr. Schatz, and I may just interject along the way with

questions. Mr. McTigue, thank you for being here.

STATEMENT OF HON. MAURICE P. MCTIGUE, DISTINGUISHED

VISITING SCHOLAR, MERCATUS CENTER, GEORGE MASON

UNIVERSITY

Mr. MCTIGUE. Thank you, Mr. Chairman. Just a couple of comments on my background. I am a visitor to the United States. I

have been here for 3-years. I spent the 3-years prior to that as New

Zealand’s Ambassador to Canada, and the 10-years prior to that as

an elected Member of the Parliament of New Zealand. I was a

member of the Cabinet of the Parliament of New Zealand. I held

seven different portfolios.

And that was during a period of change to the machinery of government that is very similar to the change that you are going

through in the United States, in other words, a major movement

away from accountability just for cash inflows and outflows as far

as government was concerned, and a new accountability requirement that was designed to show what were the public benefits that

flowed from the expenditure of taxpayer dollars and from government-funded programs.

And it is really on the basis of that experience that the work that

I do at Mercatus is very much monitoring what is happening with

the implementation of your Government Performance and Results

Act, and observing the impact that those new incentives have on

Government agencies and how that may change their behavior and

their performance over time.

Mr. Chairman, this isn’t an experience that is unique to my

country and your country. There is about 50 to 60 countries around

the world that are going through remarkable changes to their accountability regimes, and they are all headed in exactly the same

direction, that government organizations have to be much more accountable for the public benefits that they produce and able to

identify exactly what those public benefits are.

Having listened to the testimony that has appeared before you

this morning, Sir, and recognizing the gravity of the risks concerned with regard to agriculture, I want to take that another
26

stage further, because in my view the greatest risk is not just mismanagement of money, but is mismanagement of the activity which

is designed to produce very significant public benefits, and because

of these issues may not be able to indeed do that.

I want to really pick two areas of activity, and they are two areas

that I did cover in my written testimony to you, and the first of

those is with regard to the Forest Service. And if you look at the

responsibility of the Forest Service, first and foremost it is a custodial role. And if you have a custodial role, then the first issue that

you have to address is, are we able to manage this resource in perpetuity for the benefit of the American people, and really the first

rule should be, first, do no damage.

If you look at the performance reports of the Forest Service, it

is very hard to find out where they give a high priority to the

health and protection of the resources under their care. Good management would say that the first thing that you do when you have

a custodial role is to say what are the mission-critical issues that

could put this particular resource in jeopardy? And in the case of

the Forest Service and the forests themselves, it would be things

like fire, it would be wind blow, it could be disease, it could be animals, a variety of different things.

The first priority for your management, then, would be to diminish those risks. If you look at a lot of the research that has been

done around the national forests in recent years, the Forest Service

has been continually warned that there was a catastrophic potential fire risk to the forests because of the rapid build-up in fuel inside the forests.

Now, the Forest Service can’t prevent fires from happening, but

its managerial practices certainly can diminish the severity or the

intensity of the fires by making certain that the fuel levels within

the forests don’t get beyond a certain level. It is very difficult to

find that anybody has been concentrating on that issue.

And I think that those are things that Congress itself needs to

concern itself about. Are they, first and foremost, able to concentrate and effectively carry out their custodial role for all of the

resources that they have under their control? And given the experience of the current year, I think that, that is questionable.

The second thing that you would have to ask would be, does anybody know exactly what the critical risks are to these resources,

and what strategies do they have in place to make certain that

these risks are at least diminished or in many instances eliminated? And I think that, that would currently be difficult to find.

So this is not an issue that can be excused by saying that we

don’t have the resources to be able to do this, because with mission-critical issues, those are the areas in which you put the very

first of your resources. Some of the peripheral issues you may not

be able to fund because of resources, but mission-critical issues

should have first call on resources, and you can’t say at a later

date, ‘‘Sorry, we weren’t able to do that because we didn’t have

enough resources.’’

I now want to take a slightly different tack and look at one of

the other areas of responsibility that USDA has, and that is to reduce hunger and ensure food for the hungry. And quite clearly,
27

when Congress decided that these programs should exist, it was

addressing two issues.

The first issue was hunger, and the requirement to reduce hunger really says that USDA should be looking at causal factors.

What are the causes of hunger, and what can we do to diminish

or eliminate those causes of hunger? The second one was the consequences of hunger. There are hungry people, so let’s see that we

feed hungry people. But it seems to me that the more important

of the two is the first, the requirement to diminish hunger.

If you look at the measures that come through in the annual report of USDA in this area, it isn’t possible to determine from that

whether the problem of hunger is getting better or worse. If you

look at the feeding programs, it seems that at a time of extraordinary affluence in the United States, more and more people are

requiring feeding. So one of the measures can be, how many people

did you feed? But another measure that seems to be absent, in my

view, is how many hungry people did you not feed, because that is

of serious consequence as well.

And if you take on a social responsibility like that, then I believe

that you do have an ongoing responsibility to pass on to those who

control your destiny in terms of financing your operations, a full

picture of whether or not you are impacting these particular social

problems that you are addressing, whether or not you have an understanding of what the causal factors are, and can you draw distinct linkages between your activities and these particular problems?

Now, I don’t think that you can say fairly that the USDA is responsible for hunger. No. But what you have given it is a responsibility in that field, and it should be able to trace the activities of

its programs and directly link them to how much they are diminishing hunger. If they were able to do that, you would then be able

to decide which of the programs were most effective and which of

the programs therefore were most deserving of resources.

If you were able to optimize those resources into the very best

of those programs, then you may be able to materially improve the

lot of hungry people in society without actually having to put any

more resources into the programs, because you would be funding

only those which were most effective. At the moment it is very difficult to be able to draw a measure of effectiveness of those feeding

programs across the activities of USDA.

Mr. Chairman, I would be the first one to admit that we can’t

expect everybody to get this perfect in year one, and we are dealing

with year one. The 1999 financial year was the first year that everybody had to comply with the full implications of GPRA.

But I think that it is timely for Congress and the Senate to start

to put some pressure on these organizations to say at least by next

year we need to be able to able to have a fair indication that you

are impacting these problems, that you are able to get on top of

mission-critical issues as far as the Forest Service is concerned,

that the risk is diminishing, not increasing, and that the resources

that you are using are indeed fulfilling some of the goals that have

been set out for you in the mandates given to you by Congress and

the administration.
28

The CHAIRMAN. If I could interject at this point, Mr. McTigue,

and bring up a question I asked of the last panel, I asked Mr.

Viadero specifically, and he didn’t want to answer in his role as Inspector General of the USDA, but maybe you as an academic and

somebody who has a lot of experience in government, as a Member

of Parliament in New Zealand and as an Ambassador from New

Zealand to Canada:

What would be a good idea for Congress to do to get these departments to take our requirements of getting their books in order

seriously? Doesn’t there have to be some down side other than just

getting berated before a Senate or a House panel and enduring one

or 2 days of bad publicity, and then they go back to their old ways

and keep their books in an unsatisfactory state? Should we look at

something like cutting their administrative budget automatically if

they aren’t presenting financial statements that are given unqualified opinions?

Mr. MCTIGUE. I think that the intent that Congress clearly had

at the time that it passed GPRA was to put itself in a position

where it could measure the efficacy, the effectiveness of different

programs, and then decide which of those programs it was going

to fund. The work that you are doing here this morning I would

consider to be part of the research work that goes into trying to

identify effectiveness inside the organization, and that should influence the decisions that are made about appropriations.

Unless there is a clear linkage between high quality performance

and the allocation of resources, then I don’t think that well-intended criticism is ever going to really change behavior. The only

thing that will change it is if you link resources to poor performance, or the loss of resources to poor performance.

The CHAIRMAN. I agree with you on that. It might be a political

problem around here, though, to do that. Is there a way of linking

their administrative resources to their performance, as opposed to

linking their overall budget resources to their audit results, because we don’t want to cut some of these programs that are intended, for example, to feed the hungry? Would you see anything,

any way we could target our linking of resources?

Mr. MCTIGUE. Yes. Let me just put the targeting to one side for

a moment and say that in my view there are a significant number

of dynamics at work, as soon as you decide to move scrutiny of activity to an assessment of what was the public benefit that followed

as a result.

By requiring full disclosure, and you are entitled to that—what

government agencies do should not be an issue of hide-and-seek between themselves and those people who stand in the shoes of the

owners, the American public—there should be full disclosure. If you

have full disclosure and full transparency, just the fact that the

poor performance is going to become known will have a salutary effect on management inside the organization in the first instance.

In the second instance, public knowledge of it will also put pressure

on the legislature to take action on those programs that they see

as being ineffective.

In my view, you cannot address all of this issue by attacking administrative allocations of monies only, because you may indeed be

the architect of the problem, or blamed for being the architect of
29

the problem, because there aren’t sufficient administrative resources to actually effectively deliver the program. So I think there

is a risk there.

In fact, we heard the Chief Financial Officer saying that the inability to be able to gather accurate information was one of the

major causal factors in their inability to be able to properly manage

their resources. There is some truth in that, but you would have

to say that if that was one of the most important mission-critical

issues for Agriculture in the last 10-years, there should have been

money being diverted from other areas to address that issue.

The CHAIRMAN. That is a very good point. What did they do in

New Zealand? Did they have a requirement of audits for each agency and department?

Mr. MCTIGUE. Yes, indeed. But more than that, what you call the

Secretary, we call the Chief Executive Officer of a government organization, the Chief Executive Officer has a formal written contract, legally enforceable, with the Government to deliver a certain

volume and quality of outputs. The failure to deliver those would

result in the termination of that person’s position, so there is full

accountability. That Secretary, or in our case the Chief Executive

Officer, will have those types of contracts with their senior management team and down on through their organization, so the accountability has been brought very much an individualization basis

as well as a global basis for the organization.

The CHAIRMAN. Well, here, where we have a government that is spending $2 trillion, roughly, per year, it wasn’t until the 1920s, as

I understand it, that we required the agencies or departments to

have budgets at all that they would present to Congress, and it

was only in the early 1990s that we required audits at all. I gather

that prior to 1990 there were no audits being done of any of these

departments. And now that we are spending $2 trillion a year, and

many of the departments are not able to get their books and

records in an intelligible state, there is still the possibility that just

vast amounts are being wasted, misappropriated, stolen in some

cases, possibly, and we wouldn’t even know about it.

How do the USDA’s books and records or financial recordkeeping

compare with the other agencies of government that your center

has looked at and done reporting on?

Mr. MCTIGUE. One of the things that we did a real study on, because in our view it is the most important incentive created by

GPRA, was what is their level of disclosure and what is the transparency of their reporting, and USDA did not come out very well

in that study. Of the 24 CFO agencies, it came out as number 22,

so very close to the bottom.

The CHAIRMAN. Who are the worst two?

Mr. MCTIGUE. USDA—I would have to have a look, Mr. Chairman. The best two, I can tell you while I am having a look,

was——

The CHAIRMAN. Defense?

Mr. MCTIGUE. No, the best wasn’t Defense. The worst were— USDA was number 22, and Department of Commerce was also 22,

and the worst of the lot was the National Science Foundation.

The CHAIRMAN. National Science Foundation was the worst of

the lot?
30

Mr. MCTIGUE. Yes, in terms of the quality of its disclosure. And

what we are really doing there is saying that if you can get open,

very good disclosure, and you get very open transparency, then the

pressures created by the Congress and the public will see that performance improves. That is not a measure of their performance.

That is a measure of their reporting. But the quality of their reporting is usually indicative of other things that are happening inside the organizations.

The organizations that came out well——

The CHAIRMAN. How many of them had unqualified opinions?

Mr. MCTIGUE. I can’t answer that, Sir, without doing some—

without going back to our——

The CHAIRMAN. That number has been going up. It was very few.

Initially, I think none had unqualified audit opinions, and now we

have a number that are achieving that.

Mr. MCTIGUE. My recollection, Sir, is actually the other way,

that we are getting more agencies now who have unqualified opinions than when you first required the creation of Inspectors General back in 1990, so there has been some improvement but you

still have a number of agencies that have qualified accounts.

The CHAIRMAN. Right.

Mr. MCTIGUE. So that you have a wide range of——

The CHAIRMAN. And some that have disclaimers of opinion altogether, like USDA.

Mr. MCTIGUE. Indeed there are, yes. There is a wide range in

terms of the quality of financial reporting and the quality of reporting generally. But I think that what we have been able to detect

across Government organizations is, there is considerable good will

to address the issue and to get better at it.

And it is interesting that some of the best performers were organizations that 10-years ago were considered to be among the worst

performers. A notable one there, of course, is FEMA, which came

from being an organization which Congress talked about getting rid

of and eliminating entirely in 1990, today being an organization

that performs considerably better. So it does show that it is possible to turn around poor performing organizations and make them

perform somewhere close to the international standards.

[The prepared statement of Mr. McTigue can be found in the appendix on page 88.]

The CHAIRMAN. Mr. Schatz, would you wish to jump in at this

point and talk about the perspective of Citizens Against Government Waste?

STATEMENT OF THOMAS A. SCHATZ, PRESIDENT, CITIZENS

AGAINST GOVERNMENT WASTE

Mr. SCHATZ. Thank you very much, Mr. Chairman. And just an

observation about this hearing, which is, of course you are the only

Senator at this hearing, but if you were here discussing spending

money, I am sure that most of the Senators would be showing up

to participate in that activity. And that is unfortunately one of the

other problems that you and your colleagues face in terms of bringing management issues to the attention of not just the agencies but

also the Senate and the House itself.
31

There was discussion briefly about incentives, and in the last

year I know that the Chairman of the Government Reform and

Oversight Committee in the House, Mr. Burton, and also the

Chairman of the Appropriations Committee, Mr. Young, did write

a letter to the agencies that were on the high risk list of GAO to

inform them that they would be considering their performance in

terms of providing support for their activities in the fiscal 2001 appropriations process.

Now, I don’t know if they have followed up on that because of

course we haven’t seen all the final bills, but there is at least a recognition that the Government Performance and Results Act is in

place; that there is some accountability that is being considered in

the appropriations process. And that of course is the first time that

a letter like that has been sent, in my recollection, and hopefully

those kinds of activities will be followed up, both by the oversight

committees as well as the Appropriations Committee.

The CHAIRMAN. You are suggesting there needs to be a tie-in between committees like ours, which are an oversight committee, and

the Appropriations Committee. And it may well be true that while

we are out doing all these oversight hearings on this committee

and other committees, the Appropriations Committee, which is giving monies to these departments, really doesn’t know what the results of all these hearings are. And so there has got to be a greater

link in reporting back to the Appropriations Committee, and they

really have to get involved in this, or the oversight committees are

going to have no effect in getting improvement in these agencies.

Mr. SCHATZ. In particular that is true in these last several weeks

of the Congress, where most of what is read about in the papers

and the reports from the appropriators is that they are just going

out to spend more money. This will be another record year of

spending. Spending will go up more than the appropriators intended.

Certainly within that spending, because it will be done, there

should be some effort to provide the support, for example, that is

sought by the CFO of USDA in terms of more resources to improve

technology, to improve the performance of the agencies themselves.

So, while we would certainly prefer that the money not be spent

in terms of all these additional projects, at least there would be

some support or some effort put in to provide some money for the

various projects that are out there, that have not been funded, that

haven’t been able to provide these changes in assistance.

When you hear about COBOL system from the 1970s and 1980s

in terms of computers, you know, we were in college, or in some

cases with some of the staff maybe in high school when these systems were put in, and nothing has been changed.

The CHAIRMAN. Couldn’t an agency like USDA, which spends billions and billions of dollars, find $100 million worth of waste and

cut it out, and redeploy that money internally to take care of their

needs in information services?

Mr. SCHATZ. I would certainly agree with that, Mr. Chairman,

but——

The CHAIRMAN.—if we just give them another $100 million, they

don’t have the incentive to go out and find the waste, fat, fraud and
32

abuse that they otherwise would have if we didn’t give them that

extra $100 million.

Mr. SCHATZ. But what occurs in the appropriations process, as

you well know, at the end of each Congress, is all of these projects

and programs get put in by the House and the Senate that force

the Agency to spend the money elsewhere. And certainly if you

were in charge yourself, as the CEOs I believe in New Zealand

might be, of these departments and agencies, you could really reallocate those resources in the appropriate manner.

But if you follow all the line items and you follow all of the monies through the appropriations process, if somebody wants to spend

money on wood utilization research, for example, and that is $5.8

million a year almost every year that we have been around since

1985, they spent that amount on this particular project, if USDA

says, ‘‘We’re going to take that $5.8 million and go out and buy

some new computers,’’ you can be sure that the Members from the

States that are affected by that project will say, ‘‘Sorry, you can’t

do that.’’ So you and I might agree on what we consider a wasteful

project, but once Congress says, ‘‘Go out and spend it,’’ it is difficult

for the Secretary or the CFO or anyone else to go and reallocate

that money without some flexibility in terms of what they do.

We just had a report by Senator Thompson, who asked the General Accounting Office to examine improper payments. There is

some $20.7 billion in improper payments, and that is only in 12

agencies throughout the Federal Government.

The CHAIRMAN. Are these of the nature that we talked about

with that soil conservation program being used to paint murals?

Mr. SCHATZ. It is not necessarily along those lines. For example,

in the Food Stamp program there are improper payments going

out. Medicare, there is $13.5 billion in improper payments. Some

of those are paperwork errors——

The CHAIRMAN. Overpayments to providers?

Mr. SCHATZ. Not necessarily overpayments. They may be payments that are made in error. They may be, for example, a payment that is made that doesn’t take advantage of a discount. If you

have a contract with a vendor, and if you pay early you are supposed to take a 15-percent discount, but you actually pay the entire

bill, that is called an improper payment. And there is actually legislation that is, I believe, being marked up today by the Senate

Committee on Governmental Affairs, to put in a recovery audit program which has been——

The CHAIRMAN. Describe recovery auditing.

Mr. SCHATZ. Recovery auditing is a process where an organization, whether it was in or outside the Government, goes into the

Agency and examines the transactions inside the Agency to determine whether the payments were made properly. In other words,

was the right amount paid? Was it paid in a timely manner? Was

there an overpayment that should be refunded back to the Agency?

And right now they have done a pilot program in the Department

of Defense, and I don’t recall the exact number, but they have recovered tens of millions of dollars through this process. And the bill

would actually provide funding back to management improvement.

Twenty-five-percent of what is recovered can go——
33

The CHAIRMAN. Are these computer systems that you are putting

in, or are you just hiring accountants to come in and audit your

payments to vendors to make sure that you didn’t overpay them?

Mr. SCHATZ. Well, there is actually no money being spent by the

Government. In other words, the audit company itself gets paid

only if it recovers funds, so the money goes back to the Agency or

to the Treasury.

The CHAIRMAN. But there are presumably companies out there

that are probably lobbying for that bill to be passed, because it—— Mr. SCHATZ. But it is a competitive situation. In other words, in

some cases the Agency itself might do the audit. In other cases it

might be a private sector organization. Actually one of the issues

within the bill is whether you can go within the Agency itself

and——

The CHAIRMAN. Let me just bring up a situation that happened

in the State of Illinois in our last administration. In their Medicaid

payments, they brought in somebody to do recovery auditing. The

first year they paid this company $200,000 and I think they recovered $5 or $6 million. The next year the State paid this company

about $4 million and they recovered $8 million. Then the following

year it was found that the State of Illinois was paying this consultant $8 million to recover $8 million, and it led to prosecutions and

people went to jail on that. I mean—— Mr. SCHATZ. Well, there is always, whenever you are talking

about money, there is always an incentive to get more than you

should get, whether it is within the Agency, with these murals or

the other things that we have talked about. But certainly there is

money out there that could be either collected or reallocated to deal

with these management issues.

But again, if you look at what the Inspector General spoke about

in the earlier panel, in terms of what they have been receiving for

support, the Secretary supported them, asked for more money, and

the House has said, ‘‘Sorry, we’re just going to keep you at the

same level,’’ but they get a 3 to 1 return on that investment.

Now, that is within the Government itself. Whether you are talking about, although people don’t like to talk about the IRS, they

do collect more than you pay for in terms of audits, as well. So

when you put the resources into either finding the waste, fraud

and abuse or fixing the system so you can actually understand

what is going on with these various programs, you do find an awful

lot of money.

There was a report by the House Government Reform and Oversight Committee in 1996 talking about management in the 21st

century, where they said there could be as much as $350 billion in

waste, fraud and abuse throughout the Federal Government. Needless to say, the Department of Agriculture played some prominent

role in that report.

And I would actually like to submit that for the record, the Agriculture portion, as well as what we put out called ‘‘Prime Cuts’’

that identifies in this case, for this year, 52 specific recommendations to reform USDA with savings of $57 billion over 5-years. So

when you say yes, we can——

The CHAIRMAN. Would you highlight a couple of those recommendations, some of the better ones?
34

Mr. SCHATZ. Well, one is that, interestingly, the Food Stamp program—and this was actually a recommendation from the Grace

Commission 16-years ago—does not update the program annually

to reflect changes in the participant households’ size and composition. The last time they changed that was 1971, so clearly the nature of a family——

The CHAIRMAN. So as kids move out of the house——

Mr. SCHATZ. Well, what they do is, they take the average family

and they say, ‘‘This is what an average family should get for Food

Stamps,’’ but that number has changed. What that would mean is

that you would get less money for Food Stamps, so it is politically

a very difficult decision to make, but it is actually a factual one if

you approached it from simply that standpoint and said, ‘‘This is

how we should be spending money on this particular program.’’

And that, as I said, goes back quite a number of years.

We also have talked about—well, we talked about the Natural

Resource Conservation Service a little bit. The Natural Resource

Conservation Service simply tells farmers how to take care of their

own land, and we think that at this point farmers can probably figure that out for themselves. That is about $3.5 billion over 5-years.

The CHAIRMAN. Telling farmers how to take care of their own

land?

Mr. SCHATZ. Right.

The CHAIRMAN. What is it——

Mr. SCHATZ. Well, I don’t know a lot of the details on it. These

are summaries of other resources. Now these, by the way, are referenced to the original source, whether it is the Inspector General

or another source, and we can provide some more details on that

particular——

The CHAIRMAN. OK.

Mr. SCHATZ. Another one is to reduce the county offices, field offices of USDA. They have been reduced over a number of years, but

we believe they could be reduced further. Certainly people have access to information on the internet or by computer, and——

The CHAIRMAN. Well, we just passed a bill this year, it was my

bill, to require the USDA to allow farmers to file their paperwork

on line.

Mr. SCHATZ. Right.

The CHAIRMAN. But it will take USDA a couple of years to have

that capability, and they really argued with us about the implementation time line for this and tried to slow it down as much as

they could.

Mr. SCHATZ. Well, that again goes back to the incentives. It goes

back to ensuring that there is more interest on the part of your colleagues in the House, as well, to exercise the oversight.

And also, as Mr. McTigue pointed out, the more that people are

aware of the kinds of changes that need to be made, in this case

some progress has been made at USDA, the public also needs to

know about what is going on in order for them to demand more

changes. Because, again, you will get more people interested in providing money for the various projects at USDA than actually fixing

the management problems themselves.
35

There are a number of other recommendations, as well, that we

have in here, and again I would be happy to submit that for the

record.

The CHAIRMAN. In general, I take it that both of you support

Congress giving more resources for financial management, for Inspectors General, for the sorts of things that could result in cost

recovery or expense reduction. You recognize that Congress has put

restrictions on how the USDA can spend its funds, so when we give

it its overall appropriation, it must spend this much on this program, this much on that program, and it can’t just reallocate within itself, steer the financial resources within the Department, oftentimes to beef up its financial accounting, for example, and its information systems. So in general, you guys support the concept of

Congress giving them more money for their internal control operations?

Mr. SCHATZ. Well, hopefully by eliminating the waste and mismanagement, in other words, providing money back into the system in those circumstances, as opposed to just simply saying,

‘‘Here’s another $100 million.’’ Because again, with an agency of

that size, as you have pointed out, there is plenty of room to reduce

the excesses and come up with a way to provide these management

systems. Any other organization would be doing that in order to

modernize itself, to keep up with whatever competition it may

have, and that sense of urgency needs to be permeated throughout

the agencies themselves.

You have also pointed out the Chief Financial Officer will likely

be someone new, so that the systems are very important, that they

remain in place, so that anyone coming in can say, ‘‘Well, here is

an unqualified opinion. I know exactly what is going on, because

all of those feeder systems are correct and all the information is

correct,’’ and we know that GAO and the IG will agree with that,

because they are more or less kind of more permanent oversight in

terms of what is going on. So that is certainly something that has

to get done.

Mr. MCTIGUE. Mr. Chairman, if I were sitting in your seat, I certainly wouldn’t give carte blanche and an open check. I would only

do that if they were able to produce for me a study that showed

these are the strategic, critical elements that need to be addressed,

this is the cost of each of them, and this is the benefit that should

flow from those.

And in my experience of doing that, the best measure is how will

this impact our capability? And the capability that you would want

to see improved was their ability to control and manage their assets, their ability to be able to produce the information necessary

to improve their decisionmaking on where they would allocate their

resources. But all of the other things on the periphery, I wouldn’t

give a carte blanche for that at all.

The other thing is this, that as you develop the capability to be

able to measure the effectiveness of program activity, you are going

to get to a point where you are going to be able to at least maintain

or improve the public benefit, but do it with less in resources, because you are going to put your resources into the most effective

of your programs. Some of the international orders of magnitude in
36

that area are quite enormous, and some of them we are seeing replicated here in the United States.

For example, a number of the Government departments in my

country were able, when you allocated the resources only to the

most effective programs, to produce about 20- to 40-percent more

in public benefit for about 20- to 30-percent less in money, a very

large order of magnitude.

But if you actually look at FEMA as an organization, and we did

a case study on it earlier this year, between 1990 and now you can

look at the level of activity of FEMA, the number of disasters it

was managing and everything like that, and what it is doing today,

and today it is doing about 20-percent more to 25-percent more for

about 20- to 25-percent less money, a similar order of magnitude.

Now, the cost of the disasters has gone up. That is the money they

pay to other people. But the administrative cost of running the organization has come down considerably.

So what that says to me is that in a number of organizations inside the U.S. Government, there is room for gains of about that

magnitude. But at the moment I don’t think that anybody is doing

the critical thinking in terms of what are the resources we need in

place to be able to give us the capability of doing that.

[The prepared statement of Mr. Schatz can be found in the appendix on page 83.]

The CHAIRMAN. Well, thank both of you. You have been wonderful. I appreciate your time and attention, and compliment you on

your good work and your studies in this regard, and I hope we can

keep in touch. The key is that this committee stay on the USDA,

and I think that we talk to our appropriators, as well. And we have

learned a lot from you. I want to thank you both. Thanks very

much.

Mr. MCTIGUE. Thank you very much, Mr. Chairman.

The CHAIRMAN. With that, this meeting is adjourned.

[Whereupon, at 11:25 a.m., the Subcommittee was adjourned.]
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