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H.R. 4685, THE ACCOUNTABILITY OF TAX

DOLLARS ACT OF 2002

HEARING

BEFORE THE

SUBCOMMITTEE ON GOVERNMENT EFFICIENCY,

FINANCIAL MANAGEMENT AND

INTERGOVERNMENTAL RELATIONS

OF THE

COMMITTEE ON GOVERNMENT REFORM

HOUSE OF REPRESENTATIVES

ONE HUNDRED SEVENTH CONGRESS

SECOND SESSION

ON

H.R. 4685

TO AMEND TITLE 31, UNITED STATES CODE, TO EXPAND THE TYPES

OF FEDERAL AGENCIES THAT ARE REQUIRED TO PREPARE AUDITED

FINANCIAL STATEMENTS

MAY 14, 2002

Serial No. 107–193

Printed for the use of the Committee on Government Reform

(

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

http://www.house.gov/reform

(II)

COMMITTEE ON GOVERNMENT REFORM

DAN BURTON, Indiana, Chairman

BENJAMIN A. GILMAN, New York

CONSTANCE A. MORELLA, Maryland

CHRISTOPHER SHAYS, Connecticut

ILEANA ROS-LEHTINEN, Florida

JOHN M. MCHUGH, New York

STEPHEN HORN, California

JOHN L. MICA, Florida

THOMAS M. DAVIS, Virginia

MARK E. SOUDER, Indiana

STEVEN C. LATOURETTE, Ohio

BOB BARR, Georgia

DAN MILLER, Florida

DOUG OSE, California

RON LEWIS, Kentucky

JO ANN DAVIS, Virginia

TODD RUSSELL PLATTS, Pennsylvania

DAVE WELDON, Florida

CHRIS CANNON, Utah

ADAM H. PUTNAM, Florida

C.L. ‘‘BUTCH’’ OTTER, Idaho

EDWARD L. SCHROCK, Virginia

JOHN J. DUNCAN, JR., Tennessee

——— ———

HENRY A. WAXMAN, California

TOM LANTOS, California

MAJOR R. OWENS, New York

EDOLPHUS TOWNS, New York

PAUL E. KANJORSKI, Pennsylvania

PATSY T. MINK, Hawaii

CAROLYN B. MALONEY, New York

ELEANOR HOLMES NORTON, Washington,

DC

ELIJAH E. CUMMINGS, Maryland

DENNIS J. KUCINICH, Ohio

ROD R. BLAGOJEVICH, Illinois

DANNY K. DAVIS, Illinois

JOHN F. TIERNEY, Massachusetts

JIM TURNER, Texas

THOMAS H. ALLEN, Maine

JANICE D. SCHAKOWSKY, Illinois

WM. LACY CLAY, Missouri

DIANE E. WATSON, California

STEPHEN F. LYNCH, Massachusetts

———

BERNARD SANDERS, Vermont

(Independent)

KEVIN BINGER, Staff Director

DANIEL R. MOLL, Deputy Staff Director

JAMES C. WILSON, Chief Counsel

ROBERT A. BRIGGS, Chief Clerk

PHIL SCHILIRO, Minority Staff Director

SUBCOMMITTEE ON GOVERNMENT EFFICIENCY, FINANCIAL MANAGEMENT AND

INTERGOVERNMENTAL RELATIONS

STEPHEN HORN, California, Chairman

RON LEWIS, Kentucky

DAN MILLER, Florida

DOUG OSE, California

ADAM H. PUTNAM, Florida

JANICE D. SCHAKOWSKY, Illinois

MAJOR R. OWENS, New York

PAUL E. KANJORSKI, Pennsylvania

CAROLYN B. MALONEY, New York

EX OFFICIO

DAN BURTON, Indiana HENRY A. WAXMAN, California

J. RUSSELL GEORGE, Staff Director and Chief Counsel

JUSTIN PAULHAMUS, Clerk

DAVID MCMILLEN, Minority Counsel

(III)

C O N T E N T S

Page

Hearing held on May 14, 2002 1

Text of H.R. 4685 .............................................................................................. 4

Statement of:

Engel, Gary T., Director, Financial Management and Assurance, U.S.

General Accounting Office; Mark A. Reger, Chief Financial Officer,

Federal Communications Commission; Alison L. Doone, Deputy Staff

Director for Management, Federal Election Commission; Frederick J.

Zirkel, Inspector General, Federal Trade Commission; and Paul

Brachfeld, Inspector General, National Archives and Records Administration ............................................................................................................ 55

Toomey, Hon. Patrick J., a Representative in Congress from the State

of Pennsylvania ............................................................................................. 8

Letters, statements, etc., submitted for the record by:

Brachfeld, Paul, Inspector General, National Archives and Records Administration, prepared statement of ........................................................... 98

Doone, Alison L., Deputy Staff Director for Management, Federal Election

Commission, prepared statement of ............................................................ 83

Engel, Gary T., Director, Financial Management and Assurance, U.S.

General Accounting Office, prepared statement of .................................... 57

Horn, Hon. Stephen, a Representative in Congress from the State of

California, prepared statement of ................................................................ 3

Kanjorski, Hon. Dennis J., a Representative in Congress from the State

of Pennsylvania, New York Times article ................................................... 111

Reger, Mark A., Chief Financial Officer, Federal Communications Commission, prepared statement of .................................................................... 76

Schakowsky, Hon. Janice D., a Representative in Congress from the

State of Illinois, prepared statement of ...................................................... 53

Toomey, Hon. Patrick J., a Representative in Congress from the State

of Pennsylvania, prepared statement of ...................................................... 10

Zirkel, Frederick J., Inspector General, Federal Trade Commission, prepared statement of ........................................................................................ 88

(1)

H.R. 4685, THE ACCOUNTABILITY OF TAX

DOLLARS ACT OF 2002

TUESDAY, MAY 14, 2002

HOUSE OF REPRESENTATIVES,

SUBCOMMITTEE ON GOVERNMENT EFFICIENCY, FINANCIAL

MANAGEMENT AND INTERGOVERNMENTAL RELATIONS,

COMMITTEE ON GOVERNMENT REFORM,

Washington, DC.

The subcommittee met, pursuant to notice, at 2:01 p.m., in room

2247, Rayburn House Office Building, Hon. Stephen Horn (chairman of the subcommittee) presiding.

Present: Representatives Horn, Putnam, Schakowsky, and Kanjorski.

Staff present: J. Russell George, staff director and chief counsel;

Bonnie Heald, deputy staff director; Henry Wray, senior counsel;

Rosa Harris, GAO detailee; Justin Paulhamus, clerk; David

McMillen, minority professional staff member; and Jean Gosa, minority clerk.

Mr. HORN. This hearing of the Subcommittee on Government Efficiency, Financial Management and Intergovernmental Relations

will come to order. We’re here today to examine H.R. 4685, the Accountability of Tax Dollars Act of 2002, introduced by Representative Patrick Toomey from Pennsylvania. Mr. Toomey will present

the merits of his bill as our first witness. This legislation would extend the requirement of annual audits to all Federal agencies with

total annual budget authority of $25 million or more.

Since fiscal year 1996, the Chief Financial Officers Act, as

amended, has required the 24 major departments and agencies in

the executive branch to prepare annual financial statements and

have them audited. Although few of these Federal agencies can

provide reliable and useful information on a day-to-day basis, the

act’s requirement for audited financial statements has clearly

brought agencies closer toward providing that sorely needed information.

Few agencies dispute the benefits of the audit process. Last year,

the General Accounting Office surveyed 26 non-Chief Financial Officers Act agencies and found that 21 of the 26 believe that it is

beneficial to have audited financial statements.

Our second panel of witnesses will include a representative of the

General Accounting Office, who will discuss that survey. In addition, the panel will include representatives from four of the 26

agencies that would be affected by the legislation. We also have a

written statement from the chairman of the Securities and ExVerDate 11-MAY-2000 10:52 May 07, 2003 Jkt 000000 PO 00000 Frm 00005 Fmt 6633 Sfmt 6633 D:\DOCS\86451.TXT HGOVREF1 PsN: HGOVREF1
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change Commission which, without objection, will be included in

the hearing record.

I welcome all of our guests today and I look forward to your testimony.

[The prepared statement of Hon. Stephen Horn and the text of

H.R. 4685 follow:]

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Mr. HORN. And we will first have the gentleman from Pennsylvania, Mr. Toomey, explain his proposal.

STATEMENT OF THE HON. PATRICK J. TOOMEY, A REPRESENTATIVE IN CONGRESS FROM THE STATE OF PENNSYLVANIA

Mr. TOOMEY. Thank you very much, Chairman Horn. I appreciate you conducting this hearing today.

Specifically, I want to thank you for two things: one, for giving

me the opportunity to testify on H.R. 4685, the Accountability of

Tax Dollars Act, and for taking an interest in the bill.

I’d also like to thank you for your leadership in the need to improve financial management practices of Federal agencies and for

making agencies more accountable to taxpayers.

I first introduced the Accountability of Tax Dollars Act in the

106th Congress as a good government measure to combat waste,

fraud and abuse at Federal agencies. I recently reintroduced this

legislation with bipartisan support, including the support of one

subcommittee member, Mr. Kanjorski of Pennsylvania, as an original cosponsor. I decided to introduce legislation when I learned, to

my surprise, that many Federal agencies are simply not required

by law to prepare audited financial statements, even though this

is a fundamental part of good management and oversight.

So why do we need this bill? Well, first, oversight of Federal

agencies is certainly a fundamental responsibility of Congress, and

it’s a responsibility we should not shirk. But to carry out that responsibility, we need to see audited financial statements that can

be relied upon.

Second, we also have a responsibility to the taxpayers to monitor

how their tax dollars are spent, but also to enable them to see how

their tax money’s being spent and to ensure that it is spent most

efficiently.

Third, required audited financial statements is really a reasonable standard of oversight. In fact, Federal law currently requires

publicly held private companies with budgets of a lot less than $25

million, which is the threshold in my bill, to file audited financial

statements with the SEC. Ironically, the SEC itself does not have

to prepare their own statement.

At my request, the GAO did a survey of agencies who are not required to prepare audited financial statements in order to determine several things: first, whether $25 million is a cost-effective

threshold for requiring audits; second, what degree of effort would

be required for agencies to comply with that requirement; and finally, whether non-CFO agencies that voluntarily conduct these

audits have realized any benefits for doing so.

The GAO survey say that overall the surveyed agencies reported

they either achieved significant benefits or they anticipate achieving such benefits from auditing financial statements. Twenty-one of

the 26 agencies reported that Federal agencies should, in their

opinion, have their financial statements audited. All of the surveyed agencies that have voluntarily audited reported significant

benefits from those audits, including enhancing accountability,

identifying inefficiencies and weaknesses, improving internal conVerDate 11-MAY-2000 10:52 May 07, 2003 Jkt 000000 PO 00000 Frm 00012 Fmt 6633 Sfmt 6633 D:\DOCS\86451.TXT HGOVREF1 PsN: HGOVREF1
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trols, meeting statutory requirements and monitoring assets and liabilities.

I think one of the most convincing results of the GAO survey was

that 13 of the 14 agencies who do not currently prepare audited financial statements reported that the absence of a statutory requirement was a primary reason that they do not do so. The list

of agencies not required to audit financial statements includes

some very large agencies charged with significant regulatory fiduciary responsibilities, including the Federal Communications Commission, the Securities and Exchange Commission, and the National Labor Relations Board.

As the members of this committee know, the Chief Financial Officers [CFO] Act currently requires the 24 major agencies and departments to prepare and audit financial statements annually. This

information provides Congress with valuable insight into the agencies’ financial systems and, most importantly, performance results.

H.R. 4685, the Accountability of Tax Dollars Act of 2002, would

simply extend the CFO requirements currently imposed on the

major agencies to all Federal agencies with gross budget authority

of at least $25 million. The agencies that would be covered by this

bill have a combined annual budget of roughly $20 billion, a significant amount of money that, frankly, should be accounted for more

rigorously.

Now, understanding that some of the agencies will be required

to fully implement the requirements of the CFO Act, H.R. 4685

gives the OMB Director discretion for the first 2 years of implementation to waive application of all or part of the requirements.

In our current climate of budget constraints, a Federal agency

should being able to demonstrate measurable outcomes in the

budget process. Audits make agency transactions public, so an

agency can be evaluated on how well their programs performed and

whether the public received the benefits they’re intended to. And

frankly, rewarding success can only be achieved with complete and

accurate financial information available. I believe H.R. 4685 would

take us one step closer to achieving this goal of proper oversight.

I’d like to thank the GAO and Gary Engel, in particular, who is

testifying today for their work on this issue. I relied on their expertise and insight regarding the benefits of the audit process for affected agencies when crafting the bill. I also look forward to the

testimony of the representatives of the agencies who would be covered by this bill, including the experience of those agencies that

have voluntarily submitted to audits in the past and achieved good

results.

Again, thank you for bringing attention to this bill and for giving

me the chance to make my presentation. I’d be happy to answer

any questions you might have.

[The prepared statement of Hon. Patrick J. Toomey follows:]

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Mr. HORN. Thank you very much. I will ask two questions and

then we’ll have the statement of the ranking member.

How was the $25 million threshold determined?

Mr. TOOMEY. That was a subjective process, admittedly. I think

it must be necessarily so. If we applied the audited financial standard to every agency, I think a case could be made that for very

small budget authorities, it might be more onerous and more costly

to comply with than the benefits that would be accrued from having that.

We discussed this with the folks at GAO. We looked at their report, and thought that $25 million was an appropriate point to

make that cutoff. As I mentioned in my testimony, any publicly

traded company with a security registered on the SEC is required

to comply with this; and of course, many of them have smaller annual sales volumes. But we thought this was an appropriate level.

Mr. HORN. Was a cost-benefit analysis performed in determining

the dollar threshold for the audits?

Mr. TOOMEY. I would refer to the GAO study on this. They did

take that into account and considered the costs that they have estimated, the range of costs that would accrue in compliance. It is difficult, admittedly, to know—to quantify the benefits, in part because in some cases we may not know yet what we might find

when financial statements are properly audited.

Mr. HORN. Did you have any questions, as well as your statement?

Ms. SCHAKOWSKY. Thank you, Mr. Chairman.

I think there are some questions implicit in my opening remarks,

so maybe you’d like to, or not, respond to that.

I want to thank you, Mr. Chairman. The bill before us today is

a reasonable effort to require financial audits in those agencies not

currently required to do so. As the chairman has often pointed out,

the current law requires audits of 95 percent of the Federal authority. It is not clear to me how much of the remaining 5 percent

would be covered by this bill.

I do, however, have a few concerns about this bill that I hope we

can address before the bill comes before us to be marked up. First,

there is an issue of resources both for these agencies that have an

Inspector General and for those that do not. These additional audits will not be free, and with the changes in audit practices following the Enron disaster, audits are more expensive than ever.

The bill before us today does not address either the financial or

personnel resources necessary to carry out the functions it requires.

Without adequate resources, this bill will force the Inspectors General to divert funds that would otherwise be used for investigations

of fraud, waste and abuse. It would be unfortunate if the unintended consequence of this bill was to weaken the efforts to prevent

the fraud, waste and abuse of government funds.

I, too, want to raise a question about the $25 million threshold

in the bill. With time, it seems to me nearly all agencies will be

above this threshold. If that is the intent, then we should just include those agencies today. If the intent is to exempt small agenVerDate 11-MAY-2000 10:52 May 07, 2003 Jkt 000000 PO 00000 Frm 00055 Fmt 6633 Sfmt 6633 D:\DOCS\86451.TXT HGOVREF1 PsN: HGOVREF1
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cies, then we probably should build in some correction for inflation.

I want to thank you, Mr. Toomey, and all the witnesses who

have agreed to testify today. I look forward to hearing their comments.

[The prepared statement of Hon. Janice D. Schakowsky follows:]

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Mr. TOOMEY. If I could just respond to the points. I think you

certainly raised legitimate concerns.

I would point out, as to the cost of doing this, the Federal Government imposes a very comparable requirement on all publicly

traded companies. We require that financial statements be audited

if you’re going to list your securities with the SEC on an exchange.

That includes companies that have much lower annual budgets

than $25 million. It seems that if it’s reasonable to require this, for

the benefit of private investors, it’s reasonable to have this taxpayer requirement. Although in my bill we don’t set a strenuous

threshold because we do have the $25 million cutoff.

Whether that’s an appropriate level in the future, it’s something

that could be addressed at a later date. If inflation were to boost

budget levels to the point where most or all were above that level,

then it might very well justify reconsideration.

Ms. SCHAKOWSKY. Let me just say beacuse it’s worthy doesn’t

mean the money appears. I know that I have a number of worthy

things on my agenda, as well, and if you compared them to the private sector, they would also be comparable. But the question of resources, of personnel, of dollars is still an issue I think, if we’re responsible, we’re going to have to consider.

Thank you. I appreciate it.

Mr. TOOMEY. If I could make just one other comment, and that

is to observe that the many agencies do voluntarily audit their financial statements; although they’re not required by law. The overwhelming majority of them believe that it is beneficial to the agency to do so. So that’s their point of view.

Mr. HORN. Mr. Putnam.

Mr. PUTNAM. I have no questions at this time, Mr. Chairman.

Thank you.

Mr. HORN. Delighted to have you.

Mr. PUTNAM. Mr. Toomey is on the right track.

Mr. TOOMEY. Thank you, sir.

Mr. HORN. Now, you’re certainly welcome to come up here.

There’s five witnesses we’re going to hear from, and if you have the

time, just——

Mr. TOOMEY. I very much appreciate the invitation, Mr. Chairman, but I have a conflict in my schedule which does not allow me

to do so. Thank you for inviting me to be here today and for giving

me the chance to testify.

Mr. HORN. Thank you very much for coming.

Now we’ll get to the five members of panel two. As you know, we

ask that the oath be affirmed by our witnesses and that the people

who are assistants to you also be affirmed and take the oath.

We’re now taking Mr. Engel, Mr. Reger, Mrs. Doone, Mr. Zirkel,

and Mr. Brachfeld. Raise your right hand. The clerk will get those

names.

[Witnesses sworn.]

Mr. HORN. The clerk will note five at the table and about two

or three behind the table.

So let us start the agenda with Gary T. Engel as the Director,

Financial Management and Assurance of the U.S. General Accounting Office. We will go down the line and have the various Members

here ask questions.

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So Mr. Engel, proceed.

STATEMENTS OF GARY T. ENGEL, DIRECTOR, FINANCIAL MANAGEMENT AND ASSURANCE, U.S. GENERAL ACCOUNTING OFFICE; MARK A. REGER, CHIEF FINANCIAL OFFICER, FEDERAL COMMUNICATIONS COMMISSION; ALISON L. DOONE,

DEPUTY STAFF DIRECTOR FOR MANAGEMENT, FEDERAL

ELECTION COMMISSION; FREDERICK J. ZIRKEL, INSPECTOR

GENERAL, FEDERAL TRADE COMMISSION; AND PAUL

BRACHFELD, INSPECTOR GENERAL, NATIONAL ARCHIVES

AND RECORDS ADMINISTRATION

Mr. ENGEL. Thank you, Mr. Chairman.

Mr. HORN. Your statements automatically go in the record when

I call on you. We’d obviously like you to give a summary of them

in 5 minutes or so.

Mr. ENGEL. Yes, sir.

Mr. HORN. Thank you, Mr. Engel, for coming.

Mr. ENGEL. Thank you, Mr. Chairman and members of the subcommittee. Good afternoon.

I’m pleased to be here today to discuss the proposed Accountability of Tax Dollars Act of 2002, H.R. 4685. We agree with the thrust

of the proposed amendment to extend the financial management

audit requirements of the CFO Act to additional Federal agencies.

GAO’s long-standing position has been that the preparation and

audit of financial statements are important to agencies’ development of reliable, timely and useful financial information. For agencies already covered by the CFO Act, financial statement audits

have been the primary catalyst to increasing the reliability of financial data, improving financial information and enhancing accountability.

In connection with work we did at the request of Congressman

Toomey in 2001, GAO surveyed 26 Federal agencies not covered by

the CFO Act to find out their views on having financial statement

audits. Twelve of these agencies had had financial statement audits in the past 5 years. Overall, the surveyed agencies reported

that they had either achieved significant benefits or expected to

achieve such benefits from having their financial statements audited.

As the exhibit shows, and you should have a document in front

of you, the most significant benefit cited by the 12 agencies that

had had financial statement audits were enhancing accountability

and identifying inefficiencies and weaknesses. Other significant

benefits including improving internal control and enhancing public

perception of the agency.

The 14 surveyed agencies that had not had their financial statements audited reported they would anticipate benefits from audits,

but to a much lesser extent than the achieved benefits reported by

the 12 audited agencies. Half of the 12 audited agencies reported

that the benefits of their first audits outweighed the costs. And

about three-fourths reported that the benefits achieved outweighed

the costs of subsequent audits.

According to the size and other characteristics of the agencies,

the level of effort to prepare financial statement audits for the 12

audited agencies reported varied. The reported number of staff

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days to prepare for the first audit ranged from 50 to 750 days, and

estimated fiscal year 2000 audit costs ranged from $11,000 to

$350,000.

The 26 surveyed agencies responded that the most important factors to consider in determining whether agencies should have financial statement audits are: one, whether the agency has fiduciary responsibilities; two, risks associated with the agency’s operations, 13 of the 14 unaudited agencies said that the absence of a

statutory audit requirement was a reason for them not having audits.

Other reasons cited by six of the 14 agencies included an insufficient number of financial management personnel and insufficient

funding. Twenty-one of the 26 surveyed agencies, including all 12

that had audits, said that, in general, agencies should have financial statement audits.

I would now like to offer two points for consideration. First,

using the fixed dollar threshold to trigger the audit requirement

has the benefit of simplicity. Over time, however, agencies could

move above or below this dollar threshold, depending upon annual

changes in their budget authority. Also, as mentioned earlier, because of inflation the number of entities that would meet this

threshold are likely to increase.

One way to deal with these issues and still employ a dollar

threshold would be to give OMB the authority to add or exclude

agencies based in part on the factors identified during our survey.

My second point involves the waiver that the proposed legislation

would authorize OMB to grant to agencies for the first 2 fiscal

years beginning after the date of enactment. We support this waiver provision, and we would support making a similar waiver available to OMB for agencies that do not initially meet, but subsequently do meet the audit threshold.

The importance of having financial audits goes far beyond obtaining an unqualified opinion. The preparation and audit of financial statements contributes to reliable, timely and useful financial

information which helps management ensure accountability, measure and control of their costs, will allow timely and fully informed

decisions.

Preparing audited financial statements also leads to improvements in internal controls and financial management systems.

Therefore, we view much of the effort involved in preparing financial statements and having them audited as an integral part of effective financial management.

Mr. Chairman, this concludes my summary remarks. Again, we

agree with the thrust of the proposed bill and stand ready to assist

the subcommittee with the language and concepts in H.R. 4685. I

would be pleased to answer any questions that you or other members of the subcommittee may have.

[The prepared statement of Mr. Engel follows:]

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Mr. HORN. All right. We will move to Mark A. Reger, the Chief

Financial Officer for the Federal Communications Commission.

Mr. REGER. Mr. Chairman and members of the Government Reform Subcommittee on Government Efficiency, Financial Management and Intergovernmental Relations, I appreciate your invitation

to testify concerning the Federal Communications Commission’s experience with compiling its auditable annual financial statements.

I serve as the Chief Financial Officer for the FCC. The FCC is

committed to using the taxpayer’s money responsibly and to facilitating financial integrity and complete financial reporting.

Let me begin by describing the Commission’s financial situation,

which is different from many other small independent agencies. We

are an agency of 1,975 people. Our appropriated budget is rather

small, $26.3 million in direct appropriations for fiscal year 2002

with a total budget of $245 million.

We generate 89 percent of that budget by our collection of statu- torily mandated regulatory fees. We also collect approximately $25

million from statutorily mandated licensing fees. Those, however,

are not the only moneys included in our financial portfolio. We also

administer the auction of radio spectrum and oversee the administration of other funds.

For example, in fiscal year 2001, the Commission collected over $17.8 billion in auction receipts, managed a loan portfolio valued

at just over $5.9 billion, and oversaw the administration of a fund

which an annually collects and disburses $4 billion.

These additional programs substantially increase the level of sophistication of our accounts. It became apparent to us that we

needed to improve our financial recordkeeping process to reflect

this increased sophistication.

On its own motion, in 1998, the FCC initiated efforts to compile

auditable financial statements. We were not required to do so by

the Chief Financial Officers Act of 1990, but nonetheless began efforts to prepare financial statements and subject them to an audit,

as would have been required under the CFO Act.

Subsequently, in September 1998, the U.S. Treasury Department

directed the FCC to prepare certain auditable information for inclusion in the Treasury’s annual financial statements. Treasury had

directed the FCC to pursue the compilation of auditable statements

because of the financial implications of the spectrum auction program on total receipts recorded in the consolidated U.S. Government statements and the value of the auctions’ loan portfolio to

asset values in those same statements.

As a result of both the Commission’s efforts and Treasury’s directive, the FCC compiled its first generally accepted accounting principles balance sheet and accompanying notes for fiscal year 1999.

With that action complete, we generated a full set of CFO Act-compliant financial statements for fiscal year 2000 and subjected them

to an audit.

We enlisted the aid of two professional accounting firms to assist

in these efforts. One firm provided credit subsidy information concerning the Commission’s auction loan portfolio, which had not previously been treated under the provisions of credit reform, and assisted the limited finance staff in actually compiling the statements. The second firm audited the results of the statement efforts

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on behalf of the FCC’s Office of Inspector General. Incidentally, the

FCC received an unqualified opinion on that first set of fully compliant CFO Act statements.

As a result of the efforts to prepare statements, the FCC has:

Compiled financial operating procedures; conducted a full agency

inventory of property; implemented an annual inventory review

system; redesigned the Commission’s revenue systems; implemented a customer numbering and tracking system; altered the

agency’s financial record keeping to record transactions in the U.S.

Standard General Ledger formats; formalized financial reporting

processes and responsibilities; compiled loan files, standardized

loan processing functions and initiated the transfer of loan servicing functions to an outside loan servicer; implemented credit reform reporting; and initiated efforts to link objectives and performance measures to the strategic plan and annual financial statements.

This auditing process is still very new to the FCC. Fiscal year

2001 is only the second year we have issued fully compliant statements, and we continue to make improvements in our financial accounting systems and safeguards. Complying with the accounting

reporting requirements of the CFO Act is a time-consuming and expensive process. We were in a position to cover most of these costs

through the use of auctions generated funding.

For the FCC, the preparation of an auditable financial statement

has been necessary and beneficial. Because of the additional financial programs, we are not ‘‘typical’’ as compared to other small

agencies. I cannot speak to the difficulty other agencies may experience in preparing annual financial statements and having them

audited, but I do know from our experience that it is an arduous

undertaking.

Again, thank you, Mr. Chairman, for the opportunity to offer this

testimony. The FCC is very proud of the financial improvements it

has made over the last few years. We still face many formidable

challenges in this regard.

[The prepared statement of Mr. Reger follows:]

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Mr. HORN. Alison L. Doone is the Deputy Staff Director for Management of the Federal Election Commission.

Welcome.

Ms. DOONE. Good afternoon, Mr. Chairman, and members of the

subcommittee. I serve as the FEC’s Chief Financial Officer. It’s a

pleasure to be here today to testify regarding the utility of audited

financial statements for the FEC. The FEC is a small independent

bipartisan regulatory agency charged with administering and enforcing the Federal Election Campaign Act, the statute that governs the financing of Federal elections.

In October 2001, the FEC responded to the GAO survey on Expansion of Financial Statement Audit Requirements. The FEC responses mirrored those of the surveyed agencies, as mentioned in

the November 30, 2001, GAO survey results.

The fiscal year 2002 FEC appropriation is $43.7 million and 362

FTE; 70 percent of the budget is spent on salaries and benefits, 10

percent on information technology projects, and 8 percent on rent.

The remaining 12 percent funds FEC operations including contracts, travel, training, equipment and supplies.

FEC assets are nominal. As of September 30, 2001, FEC assets

totaled $9.4 million. Of that, $6.7 million, 72 percent of the total,

is the cumulative FEC appropriated fund balance of unobligated

and unexpended funds from fiscal years 1996 through 2001. Only

$2.7 million is equipment.

FEC liabilities are also modest. As of September 30, 2001, FEC

liabilities totaled $2 million and consisted primarily of accrued annual leave and accrued payroll.

Like other survey respondents, the FEC believes that an agency’s

fiduciary responsibilities, risks associated with agency operations,

amount of liabilities, amount of assets and amount of budget authority are all important factors to consider in determining the

need for audited financial statements.

We note the survey respondents ranked fiduciary responsibility

and risks associated with agency operations as the most important

considerations, and placed equal weight on the amount of assets,

liabilities and budget authority as the next most important factors.

We agree with those rankings.

The amount of budget authority is not the most important factor

in whether an agency should prepare annual audited financial

statements and should not be the sole determinant in the decision.

Materiality is measured by more than just the size of an agency’s

budget.

The agency operations and the types of programs administered

by an agency should be more important than size of budget in determining the need for audited financial statements. For example,

an agency with a budget less than $25 million that has fiduciary

responsibility for a trust fund, administers a grant program or operates revenue-generating programs may be the type of agency that

should prepare audited financial statements. Whereas, the FEC,

with a budget greater than $25 million with none of those features,

with minimal assets and liabilities and with a budget that primarily funds personnel costs and rents, should not be required to

prepare audited financial statements.

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The issue of whether audited financial statements would increase

internal controls also varies among agencies. The FEC has strong

internal controls and senior management review and oversight of

financial operations and allocation and expenditure of funds. FEC

audited financial statements would not result in greater accountability or tighter controls.

Audited financial statements for agencies with the characteristics

that I just mentioned may be necessary. In agencies lacking those

features, like the FEC, preparation of audited financial statements

would increase costs with few or no material benefits.

I would like to thank you, Mr. Chairman, and the subcommittee

for the opportunity to appear before you to present our views. I

would be delighted to answer any questions you may have.

Mr. HORN. Thank you.

[The prepared statement of Ms. Doone follows:]

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Mr. HORN. We’ll go to the next presenter, the Honorable Frederick J. Zirkel, Inspector General, Federal Trade Commission.

Mr. ZIRKEL. Good morning, Mr. Chairman and members of the

subcommittee. I am Frederick Zirkel, Inspector General of the Federal Trade Commission. I’m pleased to testify before the subcommittee today in support of financial statement audits.

The FTC is a non-CFO agency that has its financial statements

audited annually by the OIG. To accomplish its competition and

consumer protection missions, the agency was authorized approximately $156 million and 1,074 work-years for fiscal year 2002.

Funds are provided the agency from two major sources:

premerger filing fee collections and annual appropriations. For financial statement reporting purposes the Financial Accounting

Standards Advisory Board defines the agency’s premerger filing

fees as ‘‘exchange’’ revenue; that is, funds that the agency has

earned and can use with its annual appropriation to pay for salaries and other operating expenses to achieve its mission objectives.

The FTC also receives ‘‘nonexchange’’ revenues. For example, the

agency collects civil penalties. Civil penalties cannot be used to pay

for agency operating expenses, but instead must be remitted to the

U.S. Treasury. An agency with substantial nonexchange revenue is

expected to prepare as part of its financial statement package,

under the CFO Act, a ‘‘Statement of Custodial Activity.’’

I mention these accounting concepts and authorities because the

FTC, as part of its financial statement package, prepares a custodial activity statement. During the years under audit the FTC’s

nonexchange revenue has always exceeded its exchange revenue.

Yet, without a financial statement audit, this major area of financial activity would receive little, if any, scrutiny.

Furthermore, for the FTC, the preparation and audit of the custodial activity statement has helped management integrate its financial and program management systems. In addition, the statement provides information that interested third parties could use

to judge how well the agency is meeting its basic mission responsibilities.

A word about audit approach: At the FTC, the annual financial

statement audit is performed by an audit team comprised of OIG

staff and an independent public accounting firm under contract to

the OIG. As IG, I sign the audit opinion. In each of the 5 years the

audit has been conducted the agency has received a clean opinion.

A word about audit benefits: I believe that annual audits are

worth the expenditure of agency funds for many of the reasons

stated in the GAO survey. The benefits specific to the FTC include

improvements of internal control, strengthening of financial management systems and enhanced accountability.

Of course, obtaining a clean audit opinion is not an end in itself,

but merely the first step to improving agency financial management. It is also, I believe, a necessary step if an agency is to fully

implement GPRA, that is, tie performance measures and/or objectives to audited costs contained in the Statements of Net Cost.

A word about audit cost: The OIG at the FTC is provided with

an annual budget of 5 work-years and contracting dollars of about

$100,000. The OIG budget, when adjusted for inflation, has stayed

relatively constant over the past 5 years for the time span we have

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been conducting financial statement audits. From this budget, my

office commits approximately $60,000 per year to an IPA contract

to perform the financial statement audit.

In addition, my office also applies approximately one-half to

three-quarters of an FTE, or work-year, to the audit. Consequently,

conducting a financial statement audit is a major commitment of

my office. Yet, I believe the resource commitment is a wise expenditure of taxpayer funds.

A few comments on management cost: A financial statement

audit should be, or I view it as, a quality control activity that is

an integral part of the overall management process. It provides

needed feedback to management. The absence of such audits in

past years may explain in part why government financial management is often viewed in low esteem.

Finally, when considering management costs, I think it is important to distinguish between the incremental cost that an audit requires managers to incur from the need to incur costs to correct a

procedural weakness or respond to a system breakdown.

These points lead me to a general statement about auditing

costs. All other things being equal, the better managed the unit or

organization being audited, the lower the cost of the audit will be

for the management team. The more knowledge the audit team has

of the organization being audited, the lower the cost will be for the

audit organization.

A word about lessons learned: First, the process is evolutionary.

It improves with age. As you go through it, you get better. Second,

I think you need to stay the course. It instills a discipline and improves the systems as years go on. That’s the experience that we

have had at the FTC, and I believe the systems are stronger and

the information is better.

I would like to thank you, Mr. Chairman, for this opportunity to

provide my comments. I would be happy to answer any questions.

Mr. HORN. We thank you.

[The prepared statement of Mr. Zirkel follows:]

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Mr. HORN. Our last presenter, and then we’ll go to questions, is

the Honorable Paul Brachfeld, Inspector General for the National

Archives and Records Administration.

Mr. BRACHFELD. Good afternoon. I am Paul Brachfeld, the Inspector General of the National Archives and Records Administration. I thank you for the opportunity to testify before this distinguished subcommittee.

I must first apologize for not having presented a written statement prior to my testimony, as I was just called upon yesterday to

join this distinguished panel. However, I am pleased to be here to

lend my support to this proposed legislation.

I speak as the Inspector General of the National Archives and

Records Administration and in my former capacity as Assistant Inspector General for Audits at both the Federal Communications

Commission and the Federal Election Commission.

In fiscal year 2002, NARA was appropriated an annual budget of

approximately $289 million and 2,794 full-time equivalent positions, or FTEs. The $289 million includes appropriations for operations, repairs and restoration of facilities and grants.

NARA operations are spread throughout 37 facilities nationwide

to include archives and records services facilities and Presidential

libraries. NARA also publishes the Federal Register, administers

the Information Security Oversight Office and makes grants for

historical documentation through the National Historical Publication and Records Commission.

In addition to our annual appropriation, Public Law 106–58 established the Records Centers Revolving Fund on September 29,

1999. The enabling legislation authorized NARA to charge customers for records storage and services. Income from these operations in fiscal year 2002 is estimated to be approximately $107

million.

NARA also maintains a gift fund with estimated fiscal year 2002

availability of approximately $9.2 million, and Trust Funds with

estimated fiscal year 2002 operating income of approximately $15.9

million.

I am pleased to report that in the 2 years that I have served as

the IG at NARA, the components of the agency which are subject

to financial audit have received clean or unqualified opinions.

These audits of Revolving Fund and Gift and Trust Funds were

performed under the control and direction of the OIG. While no

material weaknesses were detected, the Independent Professional

Accounting Firm [IPA], did identify opportunities to strengthen financial accounting practices and procedures and enhance internal

controls, most notably as related to information technology controls

and continuity of operations.

Currently, NARA does not perform a financial statement audit

over our appropriated funds. The OIG does not have any funding

or resources to oversee or perform this work.

As you know, the GAO transmitted a survey to my agency dated

September 28, 2001, focusing upon whether financial statement

audit requirements should be expanded to certain agencies, including NARA. Question 54 of the survey was ‘‘Why has your agency

chosen not to have its financial statement audited?’’

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In response, the NARA Director of Financial Management Services checked all four boxes provided. They were as follows: Not

statutorily required; insufficient funding; insufficient financial

management staff; insufficient expertise in preparing financial

statements.

I think that ‘‘choice’’ should be removed from this equation and

that the OIG should be provided the necessary staffing and resources to perform in work.

At NARA, the proposed price for this first option year of a

multiyear contract with an IPA to provide financial auditing services to the Revolving Fund and Trust and Gift Funds is approximately $260,000. The OIG does not have any dedicated financial

auditors on staff to administer the contract and performance; thus,

this collateral part-time duty is shared by myself, the Assistant Inspector General for Audits and an information technology auditor.

I do not consider this to be an optimal staffing solution.

Financial accountability and stewardship over funds is too important a matter to compromise due to a lack of enabling resources.

I believe that this office should have the necessary resources to accomplish our mission and that defined by Congress and Public Law

100–504, the Inspector General amendments. Thus, should this legislation be ratified, there is a critical need to provide funding and

resources to support the intent of Congress.

I continue to face a critical shortage in resources, and in this

semiannual reporting period, I have continued to alert Congress to

the situation. I firmly support the adoption of this legislation, but

I’m well aware that without funding and, more importantly, auditors on staff with financial statement auditing expertise, the task

of performing this work will be daunting.

Over a decade ago, when I served as the Assistant Inspector

General for Audits at the FCC, I met with the chairman to brief

him on the results of my limited financial statement audit of selected balance sheet accounts that I had single handedly performed. The balance sheet line items I looked at were accounts receivable, accounts payable, and property, plant and equipment. In

this audit, constrained by lack of resources and staff I was all

alone, I identified significant deficiencies.

When I met with the former chairman and attempted to explain

my findings, he confessed that he could not follow my presentation.

Thus, I simplified them by asking him whether he would invest in

a company that couldn’t track its receivables and payables, and

didn’t place a valuation on their property, plant and equipment. He

laughed and said, ‘‘Of course not,’’ at which point I congratulated

him on being the CEO of that company.

Since that meeting I held in, I believe, 1991, the FEC has moved

quite a distance as OIG auditors, with the support of the CFO, are

now performing full financial statement audits and received unqualified clean opinions. However, this progress may not be shared

by all agencies.

I believe that we owe it to the taxpayers to demonstrate proper

stewardship of our assets and account for how we budget and

spend our money. We owe it to them to guarantee that we in the

public sector are using timely, reliable and comprehensive financial

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information when making decisions which impact upon them and

the welfare of their loved ones.

It’s not logical to me that certain Federal agencies are required

to perform annual financial statement audits while others are excluded from these requirements. I believe that sound financial auditing practices, as required by the CFO Act, can and do provide

tangible benefits to our customers and should be extended to a

broader range of agencies as called for in this proposed legislation.

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

answer any questions you or any member of the subcommittee may

have about my office’s experience related to financial or related

matters. Thank you very much.

Mr. HORN. Well, thank you.

[The prepared statement of Mr. Brachfeld follows:]

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Mr. HORN. We’re now going to go to questions. It will be 5 minutes for each of us. We’ll just start with myself and then the ranking member, then Mr. Kanjorski.

Let’s start with Mr. Engel, Director of Financial Management

and Assurance for the U.S. General Accounting Office. Mr. Engel,

your testimony generally supports the thrust of H.R. 4685. From

your experience, what do you see as the primary benefits to an

agency to prepare agency-wide financial statements and having

them audited?

Mr. ENGEL. Yes, Mr. Chairman. My experience with the CFO Act

agencies, as well as in the private sector, prior to coming into the

Federal Government, was very similar to the results that we had

seen from the surveyed agencies and that is displayed on the chart

over here.

Enhancing accountability is certainly an experience that many of

the CFO Act agencies have had during these initial audits since

the CFO Act was passed. Identifying inefficiencies and weaknesses

and improving internal controls, we’ve seen that while, as you had

mentioned earlier, a lot of the agencies still are not receiving unqualified opinions, we have seen improvements in the number of

weaknesses and reportable conditions that are being identified out

at the agencies.

The agencies are being alerted to where the real problems are,

which is one of the benefits of having a financial statement audit

by an independent auditor; and actions are being taken to address

these.

The reliability of financial information is also a key result of having a financial audit. When you recall, back to the early years of

the CFO Act and the audits of the IRS financial statements, I believe in front of this subcommittee, there were various hearings

and there was a lot of discussion about the amounts of taxes receivable.

There were large amounts that were originally on the books, but

it was through the financial statement audits that it was determined that many of those amounts were not valid receivables. In

many cases, we had duplicates, even triplicates of amounts being

counted as receivables. So we really were not reacting to an

amount that we could go after and collect.

We also did not have a very good idea of what the collectability

of those receivables were. It’s been through the audit process that

we’re getting a better handle on how much we could expect to go

after and collect so that we can plan future decisions down the

road.

These would be some of the key things I’d identify.

Mr. HORN. Mr. Engel, what changes, if any, would the General

Accounting Office propose making to H.R. 4685?

Mr. ENGEL. I think some of the key ones relate to discussions

we’ve had here today.

We had a lot of discussion about the dollar threshold. As our survey had identified, one of the factors was using the budget authority. But there were several other factors that we felt important and

the respondents, I believe, felt important as well. These included

the fiduciary responsibilities and the risks of the operations themselves.

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The idea of using a dollar threshold certainly makes it more simple to design the law itself. One way around that—again, that I

had mentioned in my testimony—if you wanted to stick with that,

but still build in the factors, is to give OMB the authority to make

decisions as to adding or excluding agencies that meet the dollar

threshold; but maybe they do not meet some of the other factors

that have been identified as important in making a decision as to

whether or not an audit should be done or not.

That would be one mechanism I think should be considered.

Another is the waiver authority that’s being authorized. The way

the legislation is drafted right now would identify and give a transition period. I believe it’s typically needed for entities that have

not been through a financial statement audit. The waiver authority

allows OMB to waive the first 2 years of audit to the agencies, but

if you do have agencies coming on subsequent to what the initial

cut-off of agencies are, we need to build something for those agencies to be able to have a transition period.

Mr. HORN. I’m going to have to move to the third question with

you. Other than the dollar threshold, what factors should be considered in deciding whether an agency should be included in the

legislation?

Mr. ENGEL. Some of the most important ones, I think, are to take

a look at that agency and determine if they are responsible for fiduciary responsibilities. Are they handling funds on behalf of others? Do they have retail operations—let’s say, more risky operations that involve the collection of funds? Do they provide insurance, do they make loans, or loan guarantees?

Those types of factors I think would be important to consider in

determining whether an agency should be audited.

Mr. HORN. Good.

Five minutes and 5 minutes, Ms. Schakowsky.

Ms. SCHAKOWSKY. Thank you, Mr. Chairman.

Mr. Engel, can you give us any kind of an estimate of the financial or personnel resources that might be necessary to carry out the

provisions of the bill?

Mr. ENGEL. I can give you some of the information that we had

from the surveys themselves. There really was a range depending

upon the size of the agency.

One of the dependencies is whether you have multiple offices.

Nonintegrated systems can contribute to what it could cost; the

range was actually from $11,000 as a low up to $350,000 for the

audit cost itself.

Now, in between there—and those really did range from an agen- cy that had less than $25 million of budget authority, didn’t have

a lot of assets or liabilities, to one that was up over $6 billion of

budget authority——

Ms. SCHAKOWSKY. You didn’t just look at agencies over the $25

million?

Mr. ENGEL. We actually included in this survey some agencies that were less than $25 million. They were all above $10 million,

but there were some that were under $25 million.

Ms. SCHAKOWSKY. OK.

Ms. Doone, you raised some questions about the $25 million

threshold. What were your discussions about how we might be able

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to setup some sort of other criteria by which we gauge whether

someone would fall under this act?

Ms. DOONE. I noted in Mr. Engel’s testimony, and then in his response to the questions, giving that authority or giving some room

to OMB to make that determination based on assets, liabilities and

risks of the agencies. I think that would be an appropriate course.

That way you would be looking at budget authority as well as assets, liabilities, and fiduciary responsibilities. That I would give a

more complete picture as to the need for audited financial statements.

Ms. SCHAKOWSKY. Do you have any problem with the $25 million

number being static? Even if we were to use $25 million as the

threshold and then make other kinds of criteria?

Mr. Engel.

Mr. ENGEL. Yes. Again, what I was proposing in my statement

was that you could get around the inflationary effect of that having

a static number, again through OMB’s allowance of having the authority, if all they saw was the reason that an agency was coming

on to meet the threshold was because, over time, inflation had gotten them there, they could exclude that agency and explain to Congress that they don’t believe that agency should be added.

Ms. SCHAKOWSKY. Mr. Reger, I was interested, you indicated that

the Federal Communications Commission still has a number of formidable challenges in complying with the audit requirements.

Can you describe those challenges?

Mr. REGER. Integrating financial systems is probably one of the

largest challenges. We have a number of systems, and trying to

make them all work in a timely manager—you’re aware that the

financial CFO Act requires ever-decreasing timeframes now for providing audited financial statements.

Those timeframes are difficult for us as we try to gather information from many systems, just as an example.

Ms. SCHAKOWSKY. And so, what do you conclude with that? Are

you in support of that legislation?

Mr. REGER. The Commission hasn’t taken a position, ma’am.

Ms. SCHAKOWSKY. But you’re saying right now you would not be

in a position to comply?

Mr. REGER. No, we do in fact comply. We currently generate

auditable financial statements.

Ms. SCHAKOWSKY. But it’s hard?

Mr. REGER. It is very difficult.

Ms. SCHAKOWSKY. Mr. Brachfeld, you indicated that the burdens

of an audit requirement would strain your office’s resources.

Do you have some idea of the number of staff positions and the

budget authority you’d need if this bill were to pass?

Mr. BRACHFELD. Based upon my past experience in the Federal

Communications Commission, where I served as AIG and actually

worked with Mr. Reger, I would estimate at least two people, two

OIG staff financial auditors; and then the financial dollars, if we

brought in a contractor.

Right now, we pay, I think approximately—I quoted somewhere,

I think, about $180,000 or so for the larger part of the Revolving

Fund financial statement audit. To incorporate our appropriation,

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I would guess we’d probably look—say we’d have to bring in a vendor for probably $300,000 more, or something along those lines.

Ms. SCHAKOWSKY. Let me ask this last question. Anyone can answer.

Since this legislation does not include any increase in either personnel or financial resources to—so that you could comply, what

would happen to your agencies were it to pass without that, those

resources? Would you have to make cuts elsewhere? What would

you cut? What would you do.

Mr. BRACHFELD. On the IG’s side, we would have to honor the

request of Congress and honor the law; and we would, therefore,

have to borrow or take staff away from other projects.

But not only would we have to take staff from other projects, we

would have to have the staff in house that would have that expertise, because converting an IT order or a contract order to do financial statements is a completely different discipline.

So not only would it be a staffing in terms reallocating staff, we

may not have the skills on board to conduct this type of work.

Mr. ZIRKEL. I think for the Federal Trade Commission—since we

already go through this process, I don’t believe that as a result of

passing the law, there would be any additional cost associated with

this mandate.

I also looked at this when the original CFO Act was passed. We

at non-CFO agencies were provided an opportunity by Congress to

move forward at our own pace into this area, realizing that this

was a basic accountability responsibility or obligation that management had to the taxpayers.

And so, I know that audits and the cost of audits, whether it’s

management that’s incurring the cost or whether it’s an IG that’s

incurring the cost, there are more important things that people see

being done. But in the long list of different priorities, even if it’s

not the highest priority, I just believe it shouldn’t be ‘‘no priority’’

or off the list. It should be somewhere in there, so that, in fact,

management is held accountable to the public.

And there was one chart that I found interesting from the GAO

study, and that was a list of all of the legislation over the years

where financial statement audits were mandated. It started, I

guess, in 1934 with the Securities and Exchange Act. And while

people always question financial statement audits, it doesn’t seem

like we’ve found another alternative to meet this obligation.

So it’s one thing to say, well, you don’t have enough money, but

what are you doing to fulfill your responsibility there? That’s sort

of the middle ground here. I mean, you have to almost move to do

it until you find an alternative that is better, more cost-efficient.

Then, if you do, I’m sure a lot of people might run to that.

Without that alternative, I think what we have here seems to

work. Even if it’s not the highest priority, it should certainly fall

somewhere in the whole scheme of things.

Mr. HORN. Five minutes to the gentleman from Pennsylvania,

Mr. Kanjorski.

Mr. KANJORSKI. Thank you very much, Mr. Chairman.

I guess to the full panel, if this piece of legislation is passed, do

you anticipate any savings that may occur by doing the auditing

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process that would, therefore, pay for and justify the audits, or is

this just duplicative?

Mr. ZIRKEL. My experience is that—for example, I mentioned

that we have an IPA, and we also put in about a half a work-year

on our staff. The IPA is a CPA firm under contract to the OIG for

around $60,000 a year.

In the year 2000, for example, we found an overpayment of rent at the FTC that totaled $189,000. The FTC had closed some regional offices and, in fact, the landlord was continuing to bill the

agency. When we located that, then they went—the next year, they

went back and got a refund for the overpayment. Well, this $189,000, in essence, would pay for 3 or 4 years of my

audit.

I am not one to justify a financial statement audit based on savings. That puts a lot of pressure on the system, and it sort of setsup the wrong relationship between management and the auditors.

Nevertheless, and particularly in small agencies, savings will be

intermittent, but they will help. And this was just one example.

In most years we always have some savings and, most years,

they’re smaller. So I think that savings are a very real benefit. It’s

just difficult to say that those savings in all cases will offset all of

the costs. So in fact this is a cost-efficient approach.

In most cases, I believe it will be.

Mr. KANJORSKI. To a large extent, an audit would determine

whether or not the agency is performing its mission?

Mr. ZIRKEL. Yes.

Mr. KANJORSKI. And it is a way of Congress and the executive

branch knowing where it’s going; is that correct?

Mr. ZIRKEL. I believe for agencies that have custodial activity

statements that where we get into these fiduciary responsibilities,

that moves into the mission of the agency. And I believe it also will

help in terms of—there’s another statement called the Net Cost

Statement, and then that cost statement, I think, is audited costs

that can be used with GPRA. So in that respect, a financial statement audit with net cost will help and make sure that management is not coming up with costs to tie to a performance measure

that is not tied to anything.

Mr. KANJORSKI. Just for the efficacy, do you fear this may put

pressure, external pressure on your agency since you regulate those

of us who sit up here?

Ms. DOONE. I don’t think we would be concerned about external

pressure, but going to your previous question and the one from the

last round, we don’t think there would be any cost savings for us,

because we believe our internal controls are quite tight, and we do

think there would be, in fact, an increased cost. We have a very

small IG office, a staff of four. Either they would have to stop work

on existing projects or we would have to contract out.

Mr. KANJORSKI. We may like you to have them stop work on certain projects. Mr. Engel, I am particularly interested in the Endowment for Democracy. Are you aware of that organization? That’s

funded by Congress, too, at about $33 million a year, and is a recipient of incredible amounts of money that they send out around

the world. And it is structured, as I understand it, as a nonprofit

501(c)(3) corporation established by Congress to, I guess, aid and

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assist the State Department, CIA and other agencies of the Federal

Government, but they practically—I have been in Congress 18

years and I can’t find out everything they give their money to.

But Mr. Chairman, I have a piece from the New York Times I

would like to make part of the record of their most recent activities

in Venezuela.

Mr. HORN. Without objection, this will be put in the record.

[The information referred to follows:]

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Mr. KANJORSKI. Do you think we ought to extend the group that

we are looking at auditing and since this nonprofit organization

that is a part of the U.S. Government carries on a portion of our

foreign policy and invests in elections to unseat democratically

elected presidents sometime; that it may be worthwhile to audit

some of these independent agencies or quasi-governmental agencies

that expend government funds?

Mr. Engel.

Mr. ENGEL. I think that could be considered. It could actually be

considered and part of this legislation. If so, it would be probably

on an agency-by-agency or entity-by-entity basis and looking at the

risks.

Mr. KANJORSKI. You wouldn’t see anything that the crook here

is the fact that the agency or bureau or a quasi-government agency

is using Federal funds. That justifies our reason why to have an

audit performed?

Mr. ENGEL. Yes.

Mr. KANJORSKI. And so it wouldn’t be inconsistent with this act

or general good principles of government if we included an agency

like the Endowment for Democracy to be audited also.

Mr. ENGEL. To cover the government funding.

Mr. KANJORSKI. You are with the General Accounting Office?

Mr. ENGEL. Yes.

Mr. KANJORSKI. And you never heard for the Endowment for Democracy? Well, anybody else?

Mr. HORN. Nobody would do it from GAO unless we request it.

Sometimes you dig it up yourself. But actually, it’s is a rather fine

group. And as I remember, the leaders came mostly out of the

American labor movement because they were upset by the Stalinist, Marxist, Soviet type of labor.

Mr. KANJORSKI. It did grow out of the cold war, Mr. Chairman,

but I think the cold war ended sometime in the last decade. But

it carries on——

Mr. HORN. It hasn’t ended in Cuba at this point and it hasn’t in

some of the types of—well, even in the party now in control in part

of the Duma is Communist. As I remember when I was in the Department of Labor, that basically was to get——

Mr. KANJORSKI. So the record is clear, it just doesn’t fund the

labor movement. It is an uncanny organizational structure that has

four basic institutes: It funds the National Chamber of Commerce

and it funds the AFL–CIO Institute, so they balance off labor and

big business and they get their portion of the funds.

It also funds the Republican Institute, Republican party so it can

have a travel agency; and it funds the Democratic Party Institute

so it can have a travel agency. But above and beyond that, and far

beyond the appropriated funds, it receives actually unknown funds

from aid and other Federal agencies that get channeled. And it just

strikes me the last time I raised this issue, the Endowment for Democracy funded a poll against the President of France, for the purpose of creating some democracy, I am not sure. But there are a

great deal of funds, almost $1 million are channeled into organizations that brought about, or attempted to bring about the fall of the

democratic-elected president in Venezuela. I don’t necessarily support the policies of that democratically elected president. But I

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begin to wonder if we have an audit that we’re talking about here

with quote, executive agencies that exist out there, maybe we

ought to start auditing some of these agencies that are below the

radar screen.

Mr. HORN. Well, as I remember, they also try to get fair elections

and go as pollsters and observers and see if——

Mr. KANJORSKI. All functions could be performed by the State

Department or other executive agencies of the United States.

Mr. HORN. Well, I would think somebody’s knows that a precinct

is a lot better than a lot of the people in the Department of State.

They can analyze it. They can read the newspapers. They do a very

fine job, but if you are going to talk to real people, we ought to be

getting people from Chicago, Jan, and they would know how an

election ought to be—and hopefully it wouldn’t be a resurrection

day which has been in places like Pittsburgh, Philadelphia, Boston,

so forth. But it is very interesting. Was that a recent part of the

New York Times?

Mr. KANJORSKI. Last week, I believe.

Mr. HORN. OK. We will startup again now and use 5 minutes.

And Ms. Doone, in your testimony, you mentioned your agency already has strong internal controls and that audited financial statements would not result in greater accountability or tighter controls.

What type of controls does the Federal Election Commission currently have in place?

Ms. DOONE. We have a Finance Committee composed of commissioners who determine and propose to the full commission the allocation of our budget authority among offices and projects. Once

that is established after we have received our appropriation, we

have monthly budget execution reports which show the moneys

that have been obligated and expended for each object class for

each division within the agency.

Further, on the lowest level there must be supervisory approval

for all obligations and expenditures within each office. There is further approval going all the way up into the administrative office as

well as the finance office who puts these together. Further, when

invoices are received, the invoices go back to the procuring office

where they assign to the people who have procured the services or

goods to sign-off and certify that the amount is correct.

Before the payment is made, we have a certifying officer independent of the whole process reviewing the invoices to ensure everything is in order before payment is made. Further, when we

submit our quarterly SF133s to Treasury, we must balance with

our balances over at the Treasury Department. We do this quarterly, and annually we submit a SF 2108 so that we know our balances are in order.

With respect to contracting, the Commission must again approve

all FEC-issued contracts. We believe from the lowest level to the

highest level we have checks and balances throughout our budgetary and expenditure process.

Mr. HORN. But basically, your agency ensures financial accountability and effective internal controls without independent verifications by auditors.

Ms. DOONE. That’s correct.

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Mr. HORN. You have an internal auditor situation. Has there

ever been an audit in the history of the Federal Election Commission? Has it ever been under an audit by an outside accountant?

Ms. DOONE. In terms of the financial statements, no.

Mr. HORN. That’s right.

Ms. DOONE. For the financial statements.

Mr. HORN. So that is part of the good government that we passed

here about 10 years ago. Is your statement that the Federal Election Commission doesn’t conduct outside audits, but conduct internal controls are the equivalent?

Ms. DOONE. As I mentioned, we have an IG whose audits, because the IG is not auditing programmatic issues at the FEC, most

of their audits are confined to the administrative side. We do have

IG audits that are performed on our procurement policies, training

procedures, how we procure training. But yes, it’s correct that we

have never had audited financial statements.

Mr. HORN. How would your agency fund the cost of a financial

statement audit?

Ms. DOONE. Our IG office consists of four employees. It is unlikely that they would have the resources among the current staff

to do the audited financial statements themselves. If they were to,

they would have to stop working on other projects. If that is not

a desirable outcome, we would have to fund it from the rest of our

budget, and at this point, I don’t know where the Commission

would decide to take the funds.

Those funding decisions are made initially by the Finance Committee, and then the recommendations are submitted to the full

Commission for approval. So I don’t know at this point where we

would take the funds, but they would have to come from some program area.

Mr. HORN. What is the budget now for the Federal Election Commission?

Ms. DOONE. For fiscal year 2002, our appropriation is $43.7 million.

Mr. HORN. Now I think about eight to 10 years ago, Congress gave the FEC about $3 million to computerize your operation. They

didn’t do it. And I remember the Appropriations Committee saying

I will never do anything for that agency again, which I can understand when a group says this is what we need it for, we give it to

them, they don’t use it and just hire more people. And the question

was, how to get the clients to see the various financial matters that

we have to put as people running for office and the citizens need

to be able to access that computer base.

What can you tell me about that computer base now? What kind

of satisfaction are you giving to either reporters, to politicians, to

staff, to every citizen that wants access?

Ms. DOONE. Mr. Chairman, over the past few years, we have

been working very closely with the House Appropriations Committee who have been very supportive in funding our information technology projects and in fact has been earmarking funds for us over

the past few years to accomplish that. We are in the midst of converting to a client server system for our disclosure data base to

which you were referring where the financial disclosure reports are

placed. We are converting into the new environment now.

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As you may know, we implemented mandatory electronic filing

in 2001, so that now over 80 percent of our transactions are coming

into the Commission electronically. We are moving in the right direction to move toward using technology to give a more complete

picture of disclosure.

Mr. HORN. Well, we will move from you to Mr. Zirkel on the Federal Trade Commission. In your testimony, you indicated that the

Federal Trade Commission has been audited for the past 5 years;

is that correct?

Mr. ZIRKEL. Yes, that is.

Mr. HORN. And describe the level of effort that went into preparing and having audited financial statements for the first time.

Mr. ZIRKEL. The first time, the first and second year was much

more difficult because what we found is that the audit team had

to work much more closely with management in developing reconciliations. And when we would ask for, let’s say for a list of judgments, how much was the agency’s judgments for the year, that

would have to be in fact created because those lists didn’t exist. As

the audits went on over the years, what happened with the discipline of the audit was that all of a sudden systems begin to develop and the next year, the reconciliation was there. The system

was in place and we learned that the program people would discuss

and reconcile matters with the finance staff. So as the years went

on, the cost of the audit from the IG standpoint—it’s around

$120,000 a year but the cost of the audit would stay the same. The

quality of our audits is improving every year. And again, intermittently throughout the years we would find some savings in the audits to offset the cost of the audit, but we don’t focus on that.

I think the IG also has the responsibility to make use of this financial statement in order to, not just a throw it to management

when we find something where we think additional benefits are, we

will schedule another audit outside the financial statement audit to

look in that area. We have done that over the last few years and

that has paid some dividends.

Mr. HORN. Now you went through this. There are other agencies

that might go through this as well. What problems, if any, did your

agency encounter during that first year audit? What would you advise other commissions and agencies?

Mr. ZIRKEL. I think you start with the proposition that management is rather nervous about this whole process. They don’t know

what the costs are or what the outcome is going to be. I think even

in the finance units they are afraid that they are going to fail. You

have to start out with the proposition that you are there—that as

a result of this effort, we’re going to improve management at the

agency and we are working together, even though we’re independent and we are still all working for the taxpayer.

I think with that idea and also saying that we are going to provide some accounting expertise, the development and creation of

the financial statements requires a high-level of professional accounting. It requires FASP standards and understanding of OMB’s

form and content standards. I think the audit team can bring some

expertise and help management in these areas.

If they are willing to commit the resources to do that, then in the

first year, it will be successful; it will be trying but successful.

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From there, you can build on that. I believe if you get into an area

where you have an agency where there is a custodial activity statement involved, this is the fiduciary side, that it’s important for an

IG auditor to work with an IPA auditor and because a lot of these

agencies have so many unique programs. If you want to be efficient, you have to know the program and IG staff know the program. So a partnership between IPA and IG audits would keep the

audit costs down from the side of the OIG. Those were some of the

lessons we learned.

Mr. HORN. The 24 Chief Financial Officer Act agencies are also

required to issue a report on internal controls and compliance with

laws and regulations, and to state whether the agency is in compliance with the Federal Financial Management Improvement Act.

Have the Federal Trade Commission auditors prepared these reports for your agency? If so, what were the results?

Mr. ZIRKEL. Yes. We go through the—in the opinion, the overall

opinion, we not only certify to the financial statements, but we certify to internal controls. We go through that process and we do note

problems with compliance when staff reports the information, so

we have done that and the agency is generally in compliance with

its various laws and regulations.

Mr. HORN. Would you propose any changes to Mr. Toomey’s bill,

H.R. 4685?

Mr. ZIRKEL. No. I don’t have a personal opinion on the level or

the size that it should be. I know there has been some discussion

here today. I would say, though, that to the extent that an organization or an agency has no fiduciary responsibility, it has a small

budget and it has good controls. The cost of a financial statement

audit should not be excessive. My experience is that to the extent

that the financial offices are operating effectively, the cost of the

audit is way down. The extent of agency problems really raise the

cost of an audit. So getting back to answering the question, I don’t

have a limit or a dollar limit so I can’t really add to that.

Mr. HORN. Mr. Brachfeld, what about your thoughts on Mr.

Toomey’s bill? Is there anything else that we ought to look at

there?

Mr. BRACHFELD. Again, I want to reemphasize that I think it is

very valuable to do this work. I should say some Federal agencies

contract out most of their accounting to a larger agency or larger

component, and then they basically minimize their own accounting

staff. They believe that because somebody else is doing their bookkeeping, they don’t need to have seasoned financial auditors or accountants, I should say, on their staff.

That leads to a climate where I believe fraud can take place. I

have identified that on a number of occasions in my career where,

again, they think that somebody else is—they are paying the good

money to GSA or Department of Agriculture. One of the big guys

is handling their accounting and they basically go to sleep and forget about internal controls and forget they need to have an external audit oversight.

So I support the context of this bill, and again, I am just reemphasizing that I am already sinking under a volume of work, and

I would support any opportunity to put a strong reliance that the

IG should be given sufficient resources to do these audits properly.

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Mr. HORN. That is an excellent point, and we will take that into

account because you can’t just have ‘‘accountants.’’ You have to get

those documents if the leadership of the agency is going to use it

for management purposes. I think you’re right about making sure

that anybody that is handling cash or anything else, or any way

of—people, citizens, whatnot, that is a real problem. We shouldn’t

hire auditors. I had an auditor when I was president of a university. I had him practically stationed at my door. When they moved

in, sometimes people started running and it worked.

So the question is what do you do? Anything else we have here?

I have enjoyed what you have done. Is there anything else you

want to add on the Toomey bill itself?

Mr. ENGEL. I would like to point out since we had a lot of discussion about costs and benefits, I want to call attention to the results

of our survey, figure 3 in my testimony where we did discuss that

there was, for most parties, reported back that the benefits outweighed the costs. I think that’s consistent with what we’ve seen

in those CFO Act agencies as well. I know Ms. Doone had mentioned that she feels they have strong internal controls at her agency. When a lot of the CFO Act agencies were first being audited,

they were self-supporting, and many of them were identifying some

weaknesses and controls. But when you started to get external

auditors coming in and really scrutinizing the processes, you started identifying more critical control problems.

For example, you’re aware of all the problems with computer security. That is a critical issue that has been identified through

these financial audits, which you may not be able to point to a dollar savings, but you could point out there’s been the prevention of

some losses as a result of improvements made to systems controls.

So, I would say we need to take that into account. These were

the results of actual agencies that have gone through the audit

process, many of which volunteered to do this and they are saying

that in many cases, the benefits substantially outweigh the costs.

We have seen those types of benefits as well on the CFO Act agencies.

Mr. HORN. Any of you have any other thoughts? Going, going,

gone. All right, I am going to thank all those besides the witnesses

which were excellent. This is our staff: J. Russell George our staff

director and chief counsel was here; Bonnie Heald, deputy staff director; Henry Wray, our senior counsel was also here for awhile.

And we have Justin Paulhamus. He is the majority clerk, and Michael Sazonov is the professional intern. And the GAO detailee, we

are thankful to have here. She is on my left, and your right, Rosa

Harris, is doing a great job. And she will go back to the GAO and

say, ‘‘boy, let me tell you how those people on Capitol Hill do.’’ She

will start giving seminars, I think, down there.

And now we have David McMillen, professional staff, long time

excellent person; and Jean Gosa, the minority clerk. And we thank

you both. And the court reporters are Julie Thomas and Nancy

O’Rourke. And we thank you also. It is tough in these rooms and

whatnot to hear everybody. So thank you very much all and we are

adjourned.

[Whereupon, at 3:25 p.m., the subcommittee was adjourned.]

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