United States General Accounting Office

GAO Testimony

Before the Subcommittee on Government Management,

Information and Technology, Committee on Government

Reform and Oversight, House of Representatives

For Release on Delivery

Expected at

9:30 a.m.

Wednesday,

April 1, 1998

U. S. GOVERNMENT

FINANCIAL STATEMENTS

Results of GAO’s Fiscal

Year 1997 Audit

Statement of Gene L. Dodaro

Assistant Comptroller General

Accounting and Information Management Division

GAO/T-AIMD-98-128

Mr. Chairman and Members of the Subcommittee:

We are pleased to discuss the results of our audit of the United States

government’s consolidated financial statements. The Chief Financial

Officers (CFO) Act, as expanded by the Government Management Reform

Act, requires the Secretary of the Treasury, in cooperation with the

Director of the Office of Management and Budget (OMB), to annually

prepare these statements, beginning with those for fiscal year 1997, and

GAO is required to audit them. Yesterday, the first consolidated financial

statements for the U.S. government, along with our report, were submitted

to the Congress and the President by the statutory deadline.

The preparation of this historic document is the latest product of a series

of reforms with the goal of producing much needed improvements in the

federal government’s financial management. These efforts have included

the development and issuance of a new set of generally accepted

accounting standards for the federal government.1

In 1990, the CFO Act established a pilot program under which a few

agencies began preparing and auditing financial statements. Following the

successful pilot program, each of the government’s 24 largest departments

and agencies was statutorily required to annually produce audited

financial statements using the new accounting standards, beginning with

fiscal year 1996.

These reforms now subject the federal government to the same fiscal

discipline imposed for years on the private sector and state and local

governments. This discipline is needed to correct long-standing serious

weaknesses in financial management systems, controls, and reporting

practices. Considerable effort is underway across government to make

needed improvements and progress is being made, but it will take

concerted, sustained attention to rectify years of inattention.

The most serious challenges are framed by the results of our audit of the

consolidated financial statements of the U.S. government for fiscal year

1997. In summary, significant financial systems weaknesses, problems

with fundamental recordkeeping, incomplete documentation, and weak

internal controls, including computer controls, prevented the government

from accurately reporting a large portion of its assets, liabilities, and costs.

These deficiencies affect the reliability of the consolidated financial

1

Federal accounting standards are developed and recommended by the Federal Accounting Standards

Advisory Board, which was established in October 1990 by the Secretary of the Treasury, the Director

of the Office of Management and Budget, and the Comptroller General.

Page 1 GAO/T-AIMD-98-128
statements and much of the underlying financial information. They also

affect the government’s ability to accurately measure the full cost and

financial performance of programs and effectively and efficiently manage

its operations. Major problems included the federal government’s inability

to

• properly account for and report billions of dollars of property, equipment,

materials, and supplies;

• properly estimate the cost of most federal credit programs and the related

loans receivable and loan guarantee liabilities;

• estimate and report material amounts of environmental and disposal

liabilities and related costs;

• determine the proper amount of various reported liabilities, including

postretirement health benefits for military and federal civilian employees,

veterans compensation benefits, accounts payable, and other liabilities;

• accurately report major portions of the net costs of government

operations;

• determine the full extent of improper payments that occur in major

programs and that are estimated to involve billions of dollars annually;

• properly account for billions of dollars of basic transactions, especially

those between governmental entities;

• ensure that the information in the consolidated financial statements is

consistent with agencies’ financial statements;

• ensure that all disbursements are properly recorded; and

• effectively reconcile the change in net position reported in the financial

statements with budget results.

Such deficiencies prevented us from being able to form an opinion on the

reliability of the consolidated financial statements. They are the result of

widespread material internal control and financial systems weaknesses

that significantly impair the federal government’s ability to adequately

safeguard assets, ensure proper recording of transactions, and ensure

compliance with laws and regulations. Additionally, (1) serious computer

control weaknesses expose the government’s financial information to

inappropriate disclosure, destruction, modification, or fraud and

(2) material control weaknesses affect the government’s tax collection

activities.

Our audit of the federal government’s consolidated financial statements

and the Inspectors General (IG) audits of agencies’ financial statements

have resulted in an identification and analysis of deficiencies in the

government’s recordkeeping and control systems and recommendations to

Page 2 GAO/T-AIMD-98-128
correct them. Fixing these problems represents a significant challenge

because of the size and complexity of the federal government and the

discipline needed to comply with new accounting and reporting

requirements. Several individual agencies that have been audited for a

number of years faced serious deficiencies in their initial audits and made

good progress in resolving them.

With a concerted effort, the federal government, as a whole, can continue

to make progress toward ensuring full accountability and generating

reliable information on a regular basis. Annual financial statement audits

are essential to ensuring the effectiveness of the improvements now

underway, and ultimately, to producing the reliable and complete

information needed by decisionmakers and the public to evaluate the

government’s financial performance. They are also central to helping the

government implement broader management reforms called for by the

Government Performance and Results Act.

The following sections outline (1) our disclaimer of opinion on the

government’s fiscal year 1997 consolidated financial statements,

(2) internal controls weaknesses, and (3) serious difficulties complying

with financial systems requirements. They also present information on

(1) the Year 2000 computing problem, (2) issues affecting the

government’s long-term financial condition, and (3) actions underway to

improve financial reporting across the government.

Disclaimer of Opinion Overall, because we were unable to determine the reliability of significant

portions of the government’s fiscal year 1997 consolidated financial

statements, we were unable to express an opinion on them. However, we

were able to determine that amounts reported for environmental and

disposal liabilities and liabilities for veterans compensation benefits are

understated by material amounts.

Because of the government’s serious systems, recordkeeping,

documentation, and control deficiencies, amounts reported in the

consolidated financial statements and related notes do not provide a

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

the public. These deficiencies also diminish the reliability of any

information contained in any other financial management

information—including budget information and information used to

manage the government day-to-day—which is taken from the same data

sources as the consolidated financial statements.

Page 3 GAO/T-AIMD-98-128
The following sections describe material deficiencies we identified and

discuss their effect on the financial statements and the management of

government operations.

Property, Plant and

Equipment and Inventories

and Related Property

The federal government—one of the world’s largest holders of physical

assets—does not have accurate information about the amount of assets

held to support its domestic and global operations. Hundreds of billions of

dollars of the more than $1.2 trillion of these reported assets are not

adequately supported by financial and/or logistical records. These include

(1) operating materials and supplies comprised largely of ammunition,

defense repairable items (such as navigational computers, landing gear,

and transmissions), and other military supplies and (2) buildings, military

equipment, and various government-owned assets in the hands of private

sector contractors.

Because the government does not have complete and reliable information

to support its asset holdings, it could not satisfactorily verify the existence

of all reported assets, substantiate the amounts at which they were valued,

or determine whether all of its assets were included in its financial

statements. For example, certain recorded military property had, in fact,

been sold or disposed of in prior years—or could not be located—and an

estimated $9 billion of known military operating materials and supplies

were not reported. These problems impair the government’s ability to

(1) know the location and condition of all its assets, including those used

for military deployment, (2) safeguard them from physical deterioration,

theft, or loss, (3) prevent unnecessary storage and maintenance costs or

purchase of assets already on hand, and (4) determine the full costs of

government programs that use the assets.

Loans Receivable and Loan

Guarantee Liabilities

Most federal credit agencies responsible for federal lending programs

were unable to properly report the cost of these programs. Federal credit

programs include direct loans and loan guarantees for farms, rural

utilities, low and moderate income housing, veterans’ mortgages, and

student loans. As of the end of fiscal year 1997, the government reported

$156 billion of loans receivable and $37 billion of liabilities for estimated

losses on defaulted guaranteed loans. However, the net loan amounts

expected to be collected and guarantee amounts expected to be paid could

not be reasonably estimated because of a lack of historical data or other

evidence. In addition, some agencies did not have adequate information to

Page 4 GAO/T-AIMD-98-128
support the validity of their outstanding direct loans or to track the

specific loans that they have an obligation to guarantee.

Until federal credit agencies correct these serious data deficiencies,

information supplied by them about the cost of their credit programs,

including information to support annual budget requests for these

programs, should be used with caution in making future budgetary

decisions, managing program costs, and measuring the performance of

credit activities.

Environmental Liabilities Liabilities for disposal of hazardous waste and remediation of

environmental contamination, reported at $212 billion, were materially

understated primarily because an estimate has not been developed for

major weapons systems, such as aircraft, missiles, ships and submarines,

and for ammunition. Properly stating these liabilities could assist in

determining priorities for cleanup activities and allow for appropriate

consideration of future budgetary resources needed to carry out these

activities.

Liabilities The systems and data were not available to accurately estimate significant

portions of the more than $2.2 trillion reported as federal employee and

veterans benefits liabilities. For example, to estimate the $218 billion

reported as military postretirement health benefit liabilities, the

government used unaudited budget information because the necessary

cost data were not available. Also, the federal government cannot provide

adequate assurance about the reliability of historical claim information at

the insurance carrier-level used to estimate the $159 billion reported for

civilian postretirement health benefit liabilities.

Additionally, the estimated liability for veterans compensation benefits is

materially understated because it does not include estimates for

anticipated changes in disability ratings and for incurred claims not yet

reported. In addition, some agencies do not maintain adequate records and

controls or have systems to ensure the accuracy and completeness of data

used to calculate estimates of a reported $98 billion of accounts payable

and a reported $169 billion of other liabilities such as those for litigation.

These problems significantly affect the determination of the full cost of the

government’s current operations, as well as the extent of actual liabilities.

Further, commitments and contingencies were not properly reported

Page 5 GAO/T-AIMD-98-128
because many amounts represent the maximum risk exposure rather than

the amount of loss that is reasonably possible and certain commitments

are not reported.

Costs of Government

Operations

The government was unable to support significant portions of the more

than $1.6 trillion reported as the total net costs of government operations.

The previously discussed material deficiencies in reporting assets and

liabilities and the lack of effective reconciliations, as discussed below, also

affect reported net costs. Further, we were unable to determine whether

the amounts reported in the individual net cost categories reported in the

Statement of Net Cost and in the subfunction detail following the

statement were properly classified. Without accurate cost information, the

federal government is limited in its ability to control and reduce costs,

assess performance, evaluate programs, and set fees to recover costs

where required.

The government is also unable to determine the full extent of improper

payments—that is, payments made for other than valid, authorized

purposes. In this regard, estimates of improper payments in major federal

programs, such as Medicare, total in the billions of dollars annually. The

full extent of such payments, however, is unknown because many

agencies have not estimated the magnitude of improper payments in their

programs. The reasons for improper payments range from mistakes to

fraud and abuse. Such payments are likely to continue until agencies

implement better systems and controls.

Unreconciled Transactions To make the consolidated financial statements balance, Treasury recorded

a net $12 billion item on the Statement of Changes in Net Position, which it

labeled unreconciled transactions. This out-of-balance amount is the net of

more than $100 billion of unreconciled transactions—both positive and

negative amounts—which Treasury attributes to the government’s inability

to properly identify and eliminate transactions between federal

government entities and to agency adjustments that affected net position.

Agencies’ accounts can be out of balance with each other, for example,

when one or the other of the affected agencies does not properly record a

transaction with another agency or the agencies record the transactions in

different time periods. These out-of-balance conditions can be detected

and corrected by instituting procedures for reconciling transactions

between agencies. Generally, such reconciliations are not performed.

Page 6 GAO/T-AIMD-98-128
These unreconciled transactions result in material misstatements of

assets, liabilities, revenues, and/or costs.

Preparation of

Consolidated Financial

Statements

The federal government cannot ensure that the information in the

consolidated financial statements is consistent with agency financial

statements. Treasury relies on agencies to submit data needed to prepare

the federal government’s consolidated financial statements. Such data

consists of approximately 2,000 individual reporting components, each

having many account balances. However, several agencies were unable to

provide assurance that amounts submitted to Treasury agreed with their

agency financial statements. In addition, many agencies needed to make

significant subsequent adjustments to their submissions in an effort to

properly classify amounts in the consolidated financial statements.

We found further misstatements, which Treasury corrected, totalling

several hundred billion dollars in agency-submitted information primarily

because (1) agencies submitted incorrectly coded financial data that

contributed to the unreconciled transactions described above, (2) agencies

recorded similar transactions in different general ledger accounts, and

(3) certain amounts were materially misallocated to net cost categories.

These problems are compounded by the substantial volume of information

submitted, limitations in the federal government’s current general ledger

account structure, and the significant amount of other information that

Treasury must gather to prepare the consolidated financial statements. As

a result, additional misstatements in the government’s consolidated

financial statements could exist.

Cash Disbursement

Activity

Several major agencies are not effectively reconciling disbursements.

These reconciliations are a key control—similar in concept to individuals

reconciling personal checkbooks with a bank’s records each month.

However, there were (1) billions of dollars of unresolved gross differences

between agencies’ and Treasury records of cash disbursements as of the

end of fiscal year 1997 and (2) large amounts of unresolved differences

arbitrarily written off by some agencies without adequately determining

whether their records may, in fact, have been correct. As a result, the

government is unable to ensure that all disbursements are properly

recorded.

Page 7 GAO/T-AIMD-98-128
Reconciling the Change in

Net Position With Budget

Results

The government did not have a process to obtain information to effectively

reconcile the reported change in net position of $3 billion and the reported

budget deficit of $22 billion. The reconciling items comprising the

difference are typically the result of timing differences in the recognition

and measurement of revenue and costs. Under budgetary accounting, the

budget deficit reflects outlays and receipts that generally are measured on

a cash basis. For financial statement reporting purposes, costs are

reported when incurred rather than when paid. Federal decisionmakers

use budgetary accounting to control the use of funds and for fiscal

planning. Once the federal government produces reliable consolidated

financial statements, an effective reconciliation would provide additional

assurance of the reliability of budget results.

Material Control

Weaknesses

We found pervasive material weaknesses2 in internal controls across

government that contribute to these deficiencies. These weaknesses, such

as the lack of effective reconciliations and poorly designed systems, result

in ineffective controls over (1) safeguarding the federal government’s

assets from unauthorized acquisition, use, or disposition, (2) ensuring that

transactions are executed in accordance with laws governing the use of

budget authority and with other relevant laws and regulations, and

(3) ensuring the reliability of financial statements.

We also found that widespread and serious computer control weaknesses

affect virtually all federal agencies and significantly contribute to many

material deficiencies discussed above. Material control weaknesses also

affect the government’s tax collection activities.

Computer Control

Weaknesses

Widespread computer control weaknesses are placing enormous amounts

of federal assets at risk of fraud and misuse, financial information at risk

of unauthorized modification or destruction, sensitive information at risk

of inappropriate disclosure, and critical operations at risk of disruption.

Significant information security weaknesses in systems that handle the

government’s unclassified information have been reported in each of the

major federal agencies. The most serious reported problem is inadequately

restricted access to sensitive data. In today’s highly computerized and

interconnected environment, such weaknesses are vulnerable to

2

A material weakness is a condition in which the design or operation of one or more of the internal

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

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

by employees in the normal course of performing their duties.

Page 8 GAO/T-AIMD-98-128
exploitation by outside intruders as well as authorized users with

malicious intent.

The consequences of computer control weaknesses could be devastating

and costly—for instance, placing billions of dollars of payments and

collections at risk of fraud and impairing military operations. In addition

to these potential consequences at Treasury and Defense, identified

weaknesses at agencies such as the Department of Health and Human

Service’s Health Care Financing Administration and the Social Security

Administration place sensitive medical and other personal records at risk

of disclosure.

Because computer control weaknesses are pervasive across government,

in February 1997, we added information security to our list of federal

high-risk areas.3

 The problem persists, in large part, because agency

managers have not fully instituted a framework for assessing risk and

ensuring that necessary policies and controls are in place and remain

effective on an ongoing basis. Over the past 2 years, we and the IGs have

issued more than 70 reports that identify computer control weaknesses in

the federal government and made recommendations to address them.

Tax Collection Activities The federal government has material weaknesses in controls related to its

tax collection activities, which affect its ability to efficiently and

effectively account for and collect the government’s revenue.4

 This

situation requires extensive reliance on ad hoc programming and analysis

and material audit adjustments to prepare basic financial information. For

example, the government currently does not obtain information necessary

to identify tax collections by every type of tax at the time of collection. As

a result, the government cannot separately report revenue for three of the

four largest revenue sources—Social Security, Hospital Insurance, and

individual income taxes. Because of this, the government had to report

these three tax types in the same line item on the Consolidated Statement

of Changes in Net Position. Additionally, excise tax revenues are

distributed to the relevant trust funds based on assessments rather than,

as required by the Internal Revenue Code, on collections.

3

High-Risk Series: An Overview (GAO/HR-97-1, February 1997) and High-Risk Series: Information

Management and Technology (GAO/HR-97-9, February 1997).

4

Financial Audit: Examination of IRS’ Fiscal Year 1997 Custodial Financial Statements

(GAO/AIMD-98-77, February 26, 1998).

Page 9 GAO/T-AIMD-98-128
Serious weaknesses also affect the federal government’s ability to

effectively manage its taxes receivable and other unpaid assessments.5

 The

lack of appropriate subsidiary systems to track the status of taxpayer

accounts affects the government’s ability to make informed decisions

about collection efforts. This weakness, for example, has resulted in the

government pursuing and collecting, from individual taxpayers, taxes that

had already been paid. Additionally, the federal government is vulnerable

to loss of tax revenue due to weaknesses in controls over disbursements

for tax refunds. The government does not perform fundamental

verification procedures to ensure the validity of amounts claimed by

taxpayers as overpayments prior to making disbursements for refunds.

Consequently, it does not have effective controls to prevent the

inappropriate payment of refunds, increasing its exposure to lost revenue.

Financial Systems

Requirements

Generally Not Met

The Federal Financial Management Improvement Act of 1996 requires

auditors performing financial audits under the expanded CFO Act to

report whether agencies’ financial management systems comply

substantially with federal accounting standards, financial systems

requirements, and the government’s standard general ledger at the

transaction level. We reported in October 19976

 that prior audit results and

agency self-reporting all point to significant challenges that agencies must

meet to fully implement these requirements. The significant financial

management deficiencies discussed throughout this report underscore the

challenge.

The majority of federal agencies’ financial management systems are not

designed to meet current accounting standards and systems requirements

and cannot provide reliable financial information for managing

government operations and holding managers accountable. Auditors’

reports for fiscal year 1997 agency financial audits are disclosing the

continuing poor shape in which agencies find their financial systems. As of

the date of our audit report, only four agency auditors have reported that

their agency’s financial systems comply with the act’s requirements.

5

Other unpaid assessments consist of amounts for which (1) neither the taxpayer nor a court has

affirmed that the amounts are owed and (2) the government does not expect further collections due to

factors such as the taxpayer’s death, bankruptcy, or insolvency.

6

Financial Management: Implementation of the Federal Financial Management Improvement Act of

1996 (GAO/AIMD-98-1, October 1, 1997).

Page 10 GAO/T-AIMD-98-128
Year 2000 Computing

Crisis

The Year 2000 computing crisis is the most sweeping and urgent

information technology challenge facing pubic and private section

organizations.7

 In recent testimony8 before the Subcommittee, we

discussed the need for strong leadership and effective public/private

cooperation to avoid major disruptions due to the Year 2000 computing

crisis. The federal government is extremely vulnerable due to its

widespread dependence on computer systems to deliver vital public

services and to carry out financial operations, such as processing financial

transactions, reporting financial information, controlling property, and

collecting revenue. While some progress has occurred in addressing the

Year 2000 problem, a great deal of additional effort is required to prevent

serious disruptions in government operations and in financial transactions

and reporting.

This challenge is made more difficult by the age and poor documentation

of the government’s existing systems and its lackluster track record in

modernizing systems to deliver expected improvements and meet

promised deadlines. Consequently, we surfaced the Year 2000 computing

crisis as a high-risk area across government in February 1997.

In the past year, we have issued over 20 reports outlining actions

underway in a wide range of federal activities to address this challenge

and providing numerous recommendations for additional improvements

needed. The President recently created a Council on Year 2000

Conversion, led by an Assistant to the President, to oversee federal

agencies’ Year 2000 efforts, speak for the United States in national and

international forums, and coordinate with governments at all levels, as

well as with the private sector. We will continue to monitor this situation

and make needed recommendations.

7

For the past several decades, information systems have typically used two digits to represent the year,

such as “98” for 1998, in order to conserve electronic data storage and reduce operating costs. In this

format, however, 2000 is indistinguishable from 1900 because both are represented as “00.” As a result,

if not modified, computer systems or applications that use dates or perform date- or time-sensitive

calculations may generate incorrect results beyond 1999.

8

Year 2000 Computing Crisis: Strong Leadership and Effective Public/Private Cooperation Needed to

Avoid Major Disruptions (GAO/T-AIMD-98-101, March 18, 1998).

Page 11 GAO/T-AIMD-98-128
Financial Statement

and Budget Decisions:

Adding the Long-Term

Perspective

When the government is able to produce them, reliable consolidated

financial statements will be a valuable tool for analyzing the government’s

financial condition. They will also help inform budget deliberations by

providing additional information beyond that provided in the budget on

the long-term cost implications for a wide range of government programs.

The largely cash-based budget and the financial statements offer different

perspectives which, when combined, can provide a fuller view of the costs

of agency programs and of the government’s commitments.

A view of the long-term sustainability of fiscal policies can also be helpful

to decisionmakers considering the government’s financial position and

making decisions about resource allocation. Such a picture requires

projections of spending and revenues into the future. In this context, the

sovereign power to tax and the implied commitments of social insurance

programs—such as Social Security and Medicare—must be considered in

addition to those items that are quantified in the financial statements. For

example, if the combined Social Security trust funds’ disbursements

exceed receipts, as currently estimated to occur in 2012, the government’s

financing needs will increase. Since 1992, in a series of long-term

simulations, we have analyzed various fiscal policy alternatives and their

long-term sustainability.9

Financial

Management

Improvements

Underway

Several individual agencies that have been audited for a number of years

faced serious deficiencies in their initial audits and made good progress in

resolving them. For example, we conducted audits of IRS’ financial

statements since fiscal year 1992. During our first audits, we identified

serious problems and were unable to give an opinion on IRS’ financial

statements. IRS was committed to resolving the problems, and we were

able to express an unqualified opinion on its custodial financial statements

for fiscal year 1997. These financial statements reported over $l.6 trillion

of tax revenue, $142 billion of tax refunds, and $28 billion of net federal

taxes receivable.10

In another case at Treasury, we audited and expressed an unqualified

opinion on the Schedule of Federal Debt Managed by Treasury’s Bureau of

9

The most recent of these reports are Budget Issues: Long-Term Fiscal Outlook

(GAO/T-AIMD/OCE-98-83, February 25, 1998) and Budget Issues: Analysis of Long-Term Fiscal Outlook

(GAO/AIMD/OCE-98-19, October 22, 1997).

10Financial Audit: Examination of IRS’ Fiscal Year 1997 Custodial Financial Statements

(GAO/AIMD-98-77, February 26, 1998).

Page 12 GAO/T-AIMD-98-128
the Public Debt.11 This schedule reported (1) $3.8 trillion of federal debt

held by the public comprising individuals, corporations, state or local

governments, the Federal Reserve System, and foreign governments and

central banks, (2) $1.6 trillion of federal debt held by federal entities, such

as the Social Security trust funds, and (3) $246 billion of interest on federal

debt held by the public.

At the completion of our field work, several agencies have received

unqualified opinions on fiscal year 1997 financial statements. These

agencies are the:

• Social Security Administration.

• National Aeronautics and Space Administration.

• Nuclear Regulatory Commission.

• Department of Energy.

• General Services Administration.

• Department of Labor.

• Small Business Administration.

• Environmental Protection Agency.

The executive branch recognizes the extent and severity of the financial

management deficiencies discussed in this report and that addressing

them will require concerted improvement efforts across government.

Financial management has been designated one of the President’s priority

management objectives, with the goal of having performance and cost

information in a timely, informative, and accurate way, consistent with

federal accounting standards. Also, the administration has made a

commitment to complete audits and gain unqualified opinions for all CFO

Act agencies and the government as a whole.

To help achieve this goal, strategies are being established involving

specific agencies. For example, plans at the Department of Defense

include completing a new accounting systems architecture, reviewing

inventory accounting processes, and developing a departmentwide

property accountability system. Treasury and OMB are developing plans to

improve the accuracy and timeliness of governmentwide accounting and

reporting.

OMB is also working with individual agencies to address problems

precluding unqualified audit opinions, which will require the active

11Financial Audit: Examination of the Bureau of the Public Debt’s Fiscal Year 1997 Schedule of Federal

Debt (GAO/AIMD-98-65, February 27, 1998).

Page 13 GAO/T-AIMD-98-128
involvement of individual agency IGs as well. We will continue to focus on

financial systems and internal control deficiencies at particular agencies.

For example, we have issued a series of reports12 on the factors to be

considered and the data that must be available to meet accounting

standards for Defense’s environmental and disposal liabilities. Also, we

plan to further evaluate Defense’s property and logistical systems to

recommend additional corrective actions to address weaknesses in

accounting for major asset categories on the financial statements. We are

also working with the major credit agencies to improve reporting of loans

and loan guarantees.

In addition, the coordinated efforts of Treasury and OMB will be required

to identify and provide solutions for certain governmentwide deficiencies,

such as the inability to properly identify and eliminate transactions

between federal entities. We will continue to provide suggestions for

resolving governmentwide problems and to monitor progress in

overcoming them.

We appreciate the cooperation and assistance we received from the Chief

Financial Officers and Inspectors General throughout government, as well

as Department of the Treasury and Office of Management and Budget

officials, in carrying out our responsibility to audit the government’s

consolidated financial statements. We look forward to continuing to work

with these officials to achieve the CFO Act’s financial management reform

goals.

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

to any questions that you or other members of the Committee may have at

this time.

(919202)

12Financial Management: Factors to Consider in Estimating Environmental Liabilities for Removing

Hazardous Materials in Nuclear Submarines and Ships (GAO/AIMD-97-135R, August 7, 1997), Financial

Management: DOD’s Liability for Aircraft Disposal Can Be Estimated (GAO/AIMD-98-9, November 20,

1997), Financial Management: DOD’s Liability for the Disposal of Conventional Ammunition Can Be

Estimated (GAO/AIMD-98-32, December 19, 1997), and Financial Management: DOD’s Liability for

Missile Disposal Can Be Estimated (GAO/AIMD-98-50R, January 7, 1998).

Page 14 GAO/T-AIMD-98-128
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Permit No. G100