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December 6, 1999

GAO/T-AIMD-00-50

FINANCIAL

MANAGEMENT

Financial Management

Weaknesses at the

Department of Education

Statement of Gloria Jarmon

Director, Health, Education, and Human Services

Accounting and Financial Management Issues

Accounting and Information Management Division

Testimony

Before the Subcommittee on Oversight and Investigations,

Committee on Education and the Workforce,

House of Representatives

United States General Accounting Office

GAO

Page 1 GAO/T-AIMD-00-50

Mr. Chairman and Members of the Subcommittee:

I am pleased to be here today to discuss our review of the independent

auditors’ reports1 on the Department of Education’s financial statements

covering fiscal year 1998. The Department’s financial statements are

important to the federal government because Education is the primary

agency responsible for overseeing the more than $73 billion annual federal

investment in support of educational programs for U.S. citizens and

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

approximately 93 million student loans and 15 million grants as well as

collecting more than $150 billion owed by students. In fiscal year 1998,

more than 8.5 million students received over $48 billion in federal student

financial aid through programs administered by Education.

As you know, audit results of agency financial statements are key

indicators of the quality of the underlying agency financial data and the

related systems used to compile that information. In March of this year, we

reported on the results of our financial statement review of the fiscal year

1998 consolidated financial statements of the U.S. government.2 Because

of serious deficiencies in the government’s systems, recordkeeping,

documentation, financial reporting, and controls, we found that amounts

reported in the governmentwide financial statements do not provide a

reliable source of information for decision-making by the government or

the public.

Similar outcomes were identified at Education. The results of the effort to

audit the fiscal year 1998 financial statements for Education reveal that

serious internal control and financial management system issues continue

to plague the agency. Pervasive weaknesses in the design and operation of

Education’s financial management systems, accounting procedures,

documentation, recordkeeping, and internal controls, including computer

security controls, prevented Education from reliably reporting on the

results of its operations. Education’s independent auditors were unable to

express an opinion (called a disclaimer of opinion) on Education’s fiscal

year 1998 consolidated financial statements. The reasons cited for the

disclaimer for fiscal year 1998, also described as material internal control

 1Department of Education, Fiscal Year 1998 Consolidated Financial Statements, Ernst & Young LLP,

November 1999.

2Financial Audit: 1998 Financial Report of the United States Government (GAO/AIMD-99-130,

March 31, 1999).
Page 2 GAO/T-AIMD-00-50 

weaknesses in the report,3 were (1) weaknesses in the financial reporting

process and (2) inadequate reconciliations of financial accounting records.

In addition, the independent auditors cited inadequate controls over

information systems as a third material internal control weakness.4 These

deficiencies prevented the independent auditors from being able to form

an opinion on the reliability of the financial statements and represent

material weaknesses in internal control. Similar deficiencies concerning

financial reporting, reconciliations, and systems controls were reported by

Education’s Inspector General (IG) for fiscal year 1997.5 In addition,

vulnerabilities in the Department’s student financial assistance programs

have led us since 1990 to designate this a high-risk6 area for waste, fraud,

abuse, and mismanagement. As we reported in our high-risk series update

in January 1999, audits by GAO and the Department’s IG have found

instances in which students fraudulently obtained grants and loans.

Federal decisionmakers need reliable and timely financial information to

ensure adequate accountability, manage for results, and make timely and

well-informed decisions. However, historically, such information has not

been available across the government. Agencies’ independent auditor

reports, IG reports, as well as our own work, have identified persistent

limitations in the availability of quality financial data for decision-making.

Major reforms, such as the Chief Financial Officers (CFO) Act of 1990, and

later the Government Management Reform Act of 1994 and the Federal

Financial Management Improvement Act of 1996 (FFMIA), set

expectations for federal agencies to develop and deploy more modern

financial management systems to routinely produce sound cost

information.

 3A material internal control weakness is a reportable condition that precludes the entity’s internal

controls from providing reasonable assurance that material misstatements in the financial statements

or material noncompliance with applicable laws or regulations will be prevented or detected on a

timely basis.

4In addition to these material internal control weaknesses, the independent auditors also reported four

reportable conditions. Reportable conditions are matters coming to the auditors’ attention that, in their

judgment, should be communicated because they represent significant deficiencies in the design or

operation of internal controls that could adversely affect the organization’s ability to meet the

objectives of reliable financial reporting and compliance with applicable laws and regulations.

5U.S. Department of Education, Office of Inspector General Audit of Fiscal Year 1997 Consolidated

Financial Statements, June 15, 1998.

6High-Risk Series: An Update (GAO/HR-99-1, January 1999).

Background
Page 3 GAO/T-AIMD-00-50 

Toward that end, 24 CFO Act agencies have been required to annually

prepare financial statements and have them audited beginning with those

for fiscal year 1996. These audits have shown that many agencies face

major challenges in generating reliable year-end financial information. Of

the 24 CFO Act agencies, 12 agencies received unqualified audit opinions

on their fiscal year 1998 financial statements, indicating that their financial

statements were reliable in all material respects; 4 agencies received

qualified opinions, indicating that at least one significant item on the

financial statements was unreliable; 6 agencies, including Education,

received disclaimers of opinion, meaning that the auditors were unable to

determine on an overall basis if the financial statements were reliable; and

2 agencies received mixed opinions.7 Education, the last CFO Act agency

to issue its fiscal year 1998 financial statements, released them on

November 18, 1999, over 8 months later than the March 1, 1999, due date

for audited statements.

For some agencies, like Education, the preparation of financial statements

requires considerable reliance on ad hoc programming and analysis of

data produced by inadequate financial management systems that are not

integrated or reconciled. These systems problems often require significant

adjustments to the financial statements. While obtaining unqualified or

“clean” opinions on federal financial statements is an important objective,

it is not an end in and of itself. The key is to take steps to continuously

improve underlying financial and management information systems and

internal controls as a means to ensure accountability, increase the

economy, improve the efficiency, and enhance the effectiveness of

government. The ultimate goal is for these systems to generate timely,

accurate, and useful information on an ongoing basis, not just as of the

end of the fiscal year.

More fundamentally, FFMIA requires that agency financial management

systems substantially comply with (1) financial management systems

requirements,8 (2) federal accounting standards, and (3) the U.S.

Government Standard General Ledger9 at the transaction level. Of the 24

 7One of these agencies received an unqualified opinion on its balance sheet and a disclaimer on the

rest of its statements. The other agency did not prepare consolidated statements and received

unqualified opinions on three of its components and disclaimers on the remaining two of its

components.

8The financial management systems requirements have been developed by the Joint Financial

Management Improvement Program, which is a joint and cooperative undertaking of the Department

of the Treasury, Office of Management and Budget (OMB), GAO, and the Office of Personnel

Management.

9The Standard General Ledger provides a standard chart of accounts and standardized transactions

that agencies are to use in all their financial systems.
Page 4 GAO/T-AIMD-00-50 

CFO Act agencies, financial management systems for 21 agencies,

including Education, were found by auditors to be in substantial

noncompliance with FFMIA’s requirements during fiscal year 1998.

Education’s fiscal year 1998 audit effort was conducted by Ernst & Young

LLP, independent auditors contracted for by the Education Inspector

General. We reviewed the independent auditors’ reports during the last

half of November 1999 and their workpapers on information systems.

However, we did not review key workpapers supporting other material

internal control weaknesses because they have not yet been made

available to us. We shared a draft of this statement with Education

officials, who provided technical comments. We have incorporated their

comments where appropriate. Our work was conducted in accordance

with generally accepted government auditing standards.

The independent auditors found that the Department does not have

adequate internal controls over its financial reporting process to provide

reasonable assurance that its principal financial statements are reliable. As

a result, Education (1) was unable to prepare reliable statements and

(2) could not support material amounts reported on its financial

statements, including obligations, grant expenditures, and net position.

These limitations in the financial reporting process of the Department’s

new accounting system10 contributed to the disclaimer of opinion on its

fiscal year 1998 financial statements. The system’s reported weaknesses

included its inability to perform an automated year-end closing process

and directly produce consolidated financial statements as would normally

be expected from such systems. Because of these weaknesses, Education

had to resort to a costly, labor-intensive and time-consuming process

involving extensive and complex analyses and ad hoc procedures to

prepare financial statements for fiscal year 1998. These system limitations

contributed to the delay in Education submitting financial statements to

the auditors and OMB.

The amounts produced by these efforts involved over 700 adjustments to

develop the balances for the financial statements. The auditors reported

that one of these adjustments, erroneously posted for $550 million, would

have resulted in a net difference in expenditures of $1.1 billion if not

corrected. In another instance, a $400 million adjustment made by the

Department was deemed to be unnecessary and needed to be reversed.

The Department’s inability to prepare reliable, year-end financial

 10ED operated under a new accounting system—Education’s Central Automated Processing System

(EDCAPS)—in fiscal year 1998.

Education’s Reporting

Controls Are Inadequate

and Its Financial

Management Systems

Do Not Comply With

FFMIA
Page 5 GAO/T-AIMD-00-50 

statements after extraordinary efforts is evidence that Education cannot

provide reliable information about its operations on a day-to-day basis.

Thus, decisionmakers, such as agency management and the Congress,

cannot be assured that the information they are using is reliable.

Department officials stated that they have recognized the seriousness of

these problems and are working with a contractor to resolve them.

For fiscal year 1998, the independent auditors found that Education was

not in compliance with FFMIA because it lacked adequate financial

management systems, reports, and oversight to prepare timely and

accurate financial statements. The independent auditors also reported that

the Department did not comply with all of the requirements included in

the Chief Financial Officers Act of 1990, as expanded by the Government

Management Reform Act of 1994. Specifically, the Department did not

submit fiscal year 1998 audited financial statements to OMB by March 1,

1999, the statutory deadline.

The independent auditors reported that Education did not properly or

promptly reconcile its financial accounting records during fiscal year 1998.

An adequate reconciliation provides assurance that processed transactions

are properly and promptly recorded in accounting records and financial

statements, which in turn facilitates management’s ability to routinely

analyze its financial condition and results of operations and to use that

data in the course of daily operations. However, the Department did not

adequately perform reconciliations and could not provide sufficient

documentation to support its financial transactions.

For example, as indicated in fiscal year 1997 and again in fiscal year 1998,

Education has not been able to identify and resolve differences between

its accounting records and cash transactions reported by the Treasury for

several years. Such reconciliations are required by Treasury policy and are

analogous to companies or individuals reconciling their checkbooks to

monthly bank statements. In fiscal year 1998, Education reported about

$45 billion in Fund Balance with Treasury accounts, but the independent

auditors could not determine whether the amount was correct.

For the grantback account,11 which is part of Education’s Fund Balance

with Treasury, Education’s new accounting system showed a balance of

almost $400 million, some portion of which Education owed the Treasury,

 11The grantback account holds funds paid to recipients under a grant or cooperative agreement that

were recovered from a recipient following a determination of a violation of law or of the grant or

cooperative agreement. A portion of these funds is to be returned to the recipient when the violation

has been corrected. Any amounts not returned to the grantee should revert to the Treasury.

Education’s Financial

Accounting Records

Were Not Reconciled

Properly or Promptly
Page 6 GAO/T-AIMD-00-50 

as of September 30, 1998. Of this balance, over $386 million represented

several adjustments that had been accumulating since fiscal year 1993 that

Education could not identify with any specific program or reconcile. When

Education attempted to resolve the differences and determine what

amount it should return to the Treasury, its estimates ranged from about

$15.4 million to over $221 million. According to Department officials,

Education is in the process of resolving these differences.

The independent auditors also determined that the transactions Education

reported to the Treasury routinely differed from those reported in

Education’s general ledger throughout fiscal year 1998. The auditors found

that Education made large adjustments, which it did not research or

support, merely to force the records into agreement. In addition,

Education did not reconcile its general ledger balance with its subsidiary

debt collection system. Instead, Education made unsupported adjustments

to the general ledger to align these records with amounts reported in its

debt collection system. Furthermore, Education did not reconcile between

the loans reported by its guaranty agencies12 as assigned13 to Education

and those recorded in its debt collection system. As a result, Education

could not be assured that amounts reported for assigned loans receivable

were accurate. Such practices are severely at odds with established

financial management practices and reporting standards.

Many of these differences result from a lack of supporting documentation

for proprietary accounts (such as cash) and budgetary balances, the

failure to regularly perform formal reconciliations, and the serious

problems with Education’s accounting system. The lack of timely,

thorough reconciliations makes it difficult if not impossible for Education

to determine if operating funds have been properly spent or if reported

amounts for operating expenses, assets, and liabilities are reliable. Without

performing such reconciliations, Education has no assurance that its

financial accounting records are accurate. The lack of appropriate

reconciliations also affects Education’s ability to ensure that it complies

with the laws governing the use of its budget authority. Errors in these

accounts may also affect the accuracy of various Education financial

reports, including budget execution reports and information reported to

the Congress.

 12These agencies act as intermediaries between the government and the lender. They are responsible

for reviewing student applications and approving loans, reviewing and paying claims to lenders when

defaults occur, and collecting on defaulted loans.

13Under the Federal Family Education Loan Program, when the guaranty agencies have exhausted

their collection efforts or a loan meets specific Education criteria (34 CFR § 682.409), all rights and

title of the loan are permanently assigned to Education.
Page 7 GAO/T-AIMD-00-50 

In connection with their review of Education’s fiscal year 1998 financial

statements, the independent auditors also conducted a review of

information systems controls over Education’s accounting and financial

reporting systems. The Department places significant reliance on its

financial management systems to perform basic functions, such as making

payments to grantees and maintaining budget controls. Consequently,

weaknesses in information systems controls could render Education

unable to perform these vital functions or place Education’s sensitive

grant and loan data at risk of loss or misuse.

The independent auditors reported information systems controls as a

material internal control weakness in Education’s fiscal year 1998 financial

statement report. Specifically, the independent auditors reported

deficiencies in (1) authorizing and revalidating user access to Education’s

systems and effectively managing user identification and passwords,

(2) providing adequate physical security for its computer facility,

(3) monitoring and reviewing access to sensitive computer resources,

(4) documenting the approach and methodology for the design and

maintenance of information technology architecture, and (5) developing

and testing disaster recovery plans to ensure the continuity of critical

system operations in the event of disaster.

Continued weaknesses in these information system control areas place

critical Education operations, such as financial management and sensitive

loan and grant systems, at increased risk of unauthorized access and

disruption. In addition, sensitive financial transaction data are vulnerable

to inadvertent or deliberate misuse, fraudulent use, improper disclosure,

or destruction, possibly occurring without detection. For example, given

the high volume of transactions that flow through Education’s Grant

Administration and Payment System (GAPS)–over $20 billion a year—

these weaknesses in the information systems controls increase the risk of

misuse or loss of grant data. Effective information systems controls

contribute greatly to the reduction of such risks.

The need to strengthen information system security in both the

government and the private sector has been recognized over the past

several years by a number of entities. Since 1994, we have issued dozens of

reports on individual agency computer security weaknesses and made

scores of related recommendations. In September 1996, we reported that

poor information security was a widespread federal problem.14

 14Information Security: Opportunities for Improved OMB Oversight of Agency Practices (GAO/

AIMD-96-110, September 24, 1996).

Information Systems

Controls Are Inadequate
Page 8 GAO/T-AIMD-00-50 

Subsequently, in February 1997, in a series of reports to the Congress, we

designated information security as a new governmentwide high-risk area.15

More recently, we reported16 that the nation’s computer-based critical

infrastructures are at increasing risk of severe disruption from varying

sources. We also reported on cooperative efforts underway across federal

agencies and among public and private sector entities and other nations to

address this substantial risk.

Education continues to be plagued by serious internal control and system

deficiencies that hinder its ability to achieve lasting financial management

improvements. While Education has planned and begun implementing

many actions to resolve its financial management problems, it is too early

to tell whether they will be successful. We recognize that Education’s

newly acquired financial management system does not meet current

systems and financial reporting needs, that its financial management

problems did not occur overnight, and that the task ahead of Education to

fully correct these deficiencies will take a great deal of commitment and

effort. We do, however, believe that serious internal control issues can be

addressed in the near term through continued dedicated effort on the part

of Education’s management. It is critical that Education rise to the

challenges posed by these financial management issues, because its

success in achieving all aspects of its strategic objectives depends in part

upon reliable financial management information and effective internal

controls. It is also important to recognize that several of the financial

management issues that have been raised in reports emanating from

reviews of Education’s financial statements directly or indirectly affect

Education’s ability to meet its obligations to its loan and grant recipients

and responsibilities under law.

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

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

 15High-Risk Series: Information Management and Technology (GAO/HR-97-9, February 1997).

16Critical Infrastructure Protection: Comprehensive Strategy Can Draw on Year 2000 Experiences

(GAO/AIMD-00-1, October 1, 1999).

Significant Efforts Will

Be Needed To Resolve

Education’s Financial

Management Issues
Page 9 GAO/T-AIMD-00-50 

For information about this statement, please contact Gloria Jarmon at

(202) 512-4476 or at jarmong.aimd@gao.gov. Individuals making key

contributions to this statement included Chinero Thomas, Cheryl Driscoll,

Anh Dang, and Meg Mills.

(916316)

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