Department of Homeland Security: Challenges and Steps in Establishing Sound Financial Management
Published: 2003-09-10T00:00:00

Fast Facts:

Highlights:
section_title: Why GAO Did This Study
paragraphs: Based on its budget, the Department of Homeland Security (DHS) is the largest entity in the federal government that is not subject to the Chief Financial Officers (CFO) Act of 1990. The department, with an estimated $39 billion in assets, an almost $40 billion fiscal year 2004 budget request, and more than 170,000 employees, does not have a presidentially appointed CFO subject to Senate confirmation and is not required to comply with the Federal Financial Management Improvement Act (FFMIA) of 1996. In addition, we designated implementation and transformation of DHS as high risk based on three factors: (1) the implementation and transformation of DHS is an enormous undertaking that will take time to achieve in an effective and efficient manner, (2) components to be merged into DHS already face a wide array of existing challenges, and (3) failure to effectively carry out its mission would expose the nation to potentially very serious consequences. In light of these conditions, Congress asked GAO to testify on the financial management challenges facing DHS, steps for establishing sound financial management and business processes at DHS, and GAO's comments on H.R. 2886, The Department of Homeland Security Financial Accountability Act.
section_title: What GAO Found
paragraphs: The Homeland Security Act of 2002 brought together 22 agencies to create a new cabinet-level department focusing on reducing U.S. vulnerability to terrorist attacks, and minimizing damages and assisting in recovery from attacks that do occur. Meeting this mission will require a results-oriented environment with a strong financial management infrastructure. Creating strong financial management at DHS is particularly challenging because most of the entities brought together to form the department have their own financial management systems, processes, and in some cases, deficiencies. Four of the seven major agencies that transferred to DHS reported 18 material weaknesses in internal control for fiscal year 2002 and five of the seven major agencies had financial management systems that were not in substantial compliance with FFMIA. For DHS to develop a strong financial management infrastructure, it will need to address these and many other financial management issues. Through the study of several leading private and public sector finance organizations (Creating Value Through World-class Financial Management, GAO/AIMD-00-134), GAO has identified success factors, practices, and outcomes associated with world-class financial management. Four steps DHS can take to begin developing sound financial management and business processes are to: (1) make financial management an entity-wide priority, (2) redefine the role of the finance organization, (3) provide meaningful information to decision makers; and (4) build a team that delivers results. H.R. 2886 can help facilitate the creation of a first-rate financial management architecture at DHS by providing the necessary tools and setting high expectations. The bill would (1) make DHS a CFO Act agency, (2) require DHS to obtain an opinion on its internal controls, and (3) require DHS to include program performance information in its performance and accountability reports. GAO fully supports the objectives of the CFO Act to provide reliable financial information and improve financial management systems and controls and believes DHS should be included under the act and therefore also subject to FFMIA. Further, GAO strongly believes that auditor reporting on internal control can be a critical component of monitoring the effectiveness and accountability of an organization and supports DHS, as well as other CFO Act agencies, obtaining such opinions. In addition, GAO supports agencies including program performance information in their performance and accountability reports and strongly encourages DHS to report this information voluntarily. Finally, as introduced, H.R. 2886 provided a waiver allowing DHS to forego a financial statement audit for fiscal year 2003. We understand an agreement has been reached to remove this waiver from the proposed legislation. DHS has committed to a 2003 financial statement audit, which is already underway. GAO supports dropping this provision from H.R. 2886.

section_title: Letter
paragraphs: This is a work of the U.S. government and is not subject to copyright protection in the  United States. It may be reproduced and distributed in its entirety without further  permission from GAO. However, because this work may contain copyrighted images or  other material, permission from the copyright holder may be necessary if you wish to  reproduce this material separately.
I am pleased to be here today to discuss the major financial management  challenges facing the Department of Homeland Security (DHS), steps for  establishing sound financial management and business processes, and our  comments on H.R. 2886, The Department of Homeland Security Financial  Accountability Act. The perspective we offer in this testimony is derived  from an extensive body of work on these topics completed by inspector  generals, independent auditors, as well as from GAO reports; executive  guidance; and testimony related to financial management and DHS.
The Homeland Security Act of 2002 brought together 22 diverse agencies  and created a new cabinet-level department to help prevent terrorist  attacks in the United States, reduce the vulnerability of the United States to  terrorist attacks, and minimize the damage and assist in recovery from  attacks that do occur. Efforts to improve homeland security will require a  results-oriented approach to ensure mission accountability and  sustainability over time, and DHS must have a strong financial management  infrastructure to support these goals. As stated in the President’s  Management Agenda, accurate and timely financial information is needed  to secure the best performance and highest measure of accountability for  the American people.
DHS has stated its commitment to becoming a model of efficiency and  effectiveness for the federal government. To achieve this goal, it must first  overcome significant challenges in integrating 22 separate agencies and  their systems into a single, effective department, as well as correct the wide  array of existing management challenges in the inherited components.  Developing a financial management architecture with integrated systems  and business processes is one of the many difficult challenges the new  department faces. We designated implementation and transformation of  DHS as high risk based on three factors: (1) the implementation and  transformation of DHS is an enormous undertaking that will take time to  achieve in an effective and efficient manner, (2) components to be merged  into DHS already face a wide array of existing challenges, and (3) failure to  effectively carry out its mission would expose the nation to potentially very  serious consequences. Our high-risk program has helped the executive  branch and the Congress to galvanize efforts to seek lasting solutions to  high-risk problems and challenges.
Complicating DHS’s efforts to develop a strong financial management  infrastructure are the many known financial management weaknesses and  vulnerabilities in the agencies DHS inherited. For example, for four of the  seven major agencies that transferred to DHS on March 1, 2003—the  Immigration and Naturalization Service (INS), the Transportation Security  Administration (TSA), the Customs Service, and the Federal Emergency  Management Agency (FEMA)—auditors reported 18 material weaknesses  in internal control for fiscal year 2002. Further, for five of the seven major  agencies, auditors reported that the agencies’ financial management  systems were not in substantial compliance with the Federal Financial  Management Improvement Act (FFMIA) of 1996.
Building an effective financial management infrastructure will require  sustained leadership from top management. Currently, based on its budget,  DHS is the largest entity in the federal government that is not subject to the  Chief Financial Officers (CFO) Act of 1990. As such, this department, with  a fiscal year 2004 budget request of nearly $40 billion and currently more  than 170,000 employees, does not have a presidentially appointed CFO  subject to Senate confirmation and is not required to comply with FFMIA.  The goals of the CFO Act and related financial reform legislation, such as  FFMIA, are to provide the Congress and agency management with reliable  financial information for managing and making day-to-day decisions and to  improve financial management systems and controls to properly safeguard  the government’s assets. DHS should not be the only cabinet-level  department not covered by what is the cornerstone for pursuing and  achieving the requisite financial management systems and capabilities in  the federal government.
The creation of DHS presents an opportunity for the federal government to  ensure that it designs and implements a world-class organization with a  first-rate financial management systems architecture. Providing DHS with  the necessary tools, which would be facilitated by the passage of H.R. 2886,  and setting high expectations are of paramount importance to its success.  First, however, DHS must overcome many financial management  challenges, which I will now discuss.
subsections: section_title: DHS Faces Significant Financial Management Challenges
paragraphs: Although many of the larger agencies that transferred to DHS have been  able to obtain unqualified or “clean” audit opinions on their annual  financial statements, most employed significant effort and manual work- arounds to do so in order to overcome a history of poor financial  management systems and significant internal control weaknesses.  Furthermore, some of the entities that transferred may also have  weaknesses not yet identified or reported on merely because the problems  were considered small or immaterial in relation to their large parent  departments, such as the Department of Defense or the U.S. Department of  Agriculture. Such weaknesses may become evident now that these smaller  agencies are proportionately larger as a part of DHS, add to the known  extensive existing challenges, and may therefore be subjected to increased  levels of audit scrutiny. Cumulatively, these weaknesses and the efforts  needed to resolve them to achieve sound financial management and  business processes are an important reason for amending the CFO Act to  include DHS and measuring DHS’s financial management systems and  internal control against the same important financial reform legislation and  performance expectations as other federal departments and agencies.
DHS, like other federal agencies, has a stewardship obligation to prevent  fraud, waste, and abuse, to use tax dollars appropriately, and to ensure  financial accountability to the President, the Congress, and the American  people. For the most part, DHS’s component entities are using legacy  financial management systems that have a myriad of problems, such as  disparate, nonintegrated, outdated, and inefficient systems and processes.  DHS will need to focus on building future systems as part of its enterprise  architecture approach to ensure an overarching framework for the agency’s  integrated financial management processes. Plans and standard accounting  policies and procedures must be developed and implemented to bridge the  many financial environments in which inherited agencies currently operate  to an integrated DHS system.
Another significant challenge for DHS is fixing the previously identified  weaknesses that the agencies bring with them to DHS, a number of which I  will now discuss.
subsections: section_title: Immigration and Naturalization Service
paragraphs: While receiving unqualified audit opinions on its fiscal year 2001 and 2002  financial statements, the former INS under the Department of Justice  (DOJ) faces numerous challenges in achieving a sound financial  management environment. Although INS was abolished and split into  multiple bureaus within DHS, its prior financial management weaknesses  will still need to be addressed and could be further complicated by this  realignment.
For fiscal year 2002, INS’s financial statement auditors reported three  material internal control weaknesses and that its systems were not in  substantial compliance with FFMIA. Specifically, auditors noted limitations  in the design and operation of INS’s financial accounting system, thereby  requiring it to use stand-alone systems or obtain the required financial  information via manual processes and nonroutine adjustments as part of  the financial statement preparation process. Having systems that can  routinely produce information for financial reporting on demand for day-to- day decision making is one of the expected results of the President’s  Management Agenda, as well as one of the goals of FFMIA.
In addition, for both fiscal years 2001 and 2002, auditors reported that INS  did not have a reliable system for providing regular, timely data on the  numbers of completed and pending immigration applications, and the  associated collections of fees valued at nearly $1 billion for fiscal year 2002.  Accordingly, INS was not able to accurately and regularly determine fees it  earns without relying on an extensive servicewide, year-end physical count  of over 5.4 million pending applications, as was the case in fiscal year 2002.  INS has been developing a new tracking system to facilitate its inventory  process. However, until the new system is implemented, INS must rely on  inefficient manual processes that significantly disrupt its operations. These  and other inherent weaknesses in INS’s financial management process limit  its ability to produce useful, accurate, and timely financial information.
Despite the importance and prevalence of information technology (IT)  systems in accomplishing its core missions, INS has not yet established and  implemented effective controls for managing its IT resources. The root  cause of INS’s systems problems has been an absence of effective  enterprise architecture management and an IT investment management  process. To address such weaknesses, INS has been developing an  enterprise architecture, including a current and target architecture, as well  as a transition plan. Similarly, INS has taken steps to implement rigorous  and disciplined investment management controls. However, with the  transfer to DHS and the splitting of INS, these plans will have to be  reanalyzed, further delaying implementation of effective systems and  complicating DHS’s ability to produce reliable, timely, and accurate  financial statements and information.
section_title: Federal Emergency Management Agency
paragraphs: FEMA, the only CFO Act agency to transfer in its entirety to DHS, faces  several major financial management challenges, in spite of receiving an  unqualified opinion on its fiscal year 2002 financial statements. In fiscal  year 2002 FEMA’s auditors reported six material internal control  weaknesses and that FEMA’s financial management systems were not in  substantial compliance with the requirements of FFMIA. One major  weakness was FEMA’s inability to efficiently prepare accurate financial  statements as called for in the President’s Management Agenda. For  example, auditors reported that for fiscal year 2002, FEMA did not have an  integrated financial reporting process that could generate financial  statements as a byproduct of already existing processes, and that its  financial statements were prepared late and required significant revisions.
In addition, auditors reported in fiscal year 2001 and again in fiscal year  2002 that FEMA did not have adequate accounting systems and processes  to ensure that all property, plant, and equipment were properly recorded,  accurately depreciated, and tracked in accordance with its polices and  applicable federal accounting standards. As a result, FEMA’s property  management system cannot track items to supporting documentation or to  a current location. Furthermore, FEMA lacks procedures to ensure that   (1) equipment is consistently recorded on either a system or a component  basis, (2) procedures are in place to ensure that property inventories are  performed properly, and (3) all equipment is entered into its personal  property management system. As a result, there is an increased risk that  equipment and other property could be lost, stolen, or improperly recorded  in its accounting records.
Since FEMA was the only agency to transfer to DHS in its entirety, it, unlike  all of the other agencies, is left without a legacy department to prepare  financial statements for the first 5 months of activity for fiscal year 2003 or  an Office of Inspector General (OIG) to audit them, leaving FEMA’s  financial management information for the first 5 months of this fiscal year  vulnerable to omissions, errors, and ultimately material misstatements.  Given the weaknesses in, among other things, FEMA’s property controls,  we are initiating a review of FEMA’s disbursement activity and property  management controls covering this 5-month period. We will keep this  Subcommittee informed of our progress in this review. Until corrective  actions are implemented to address weaknesses, FEMA will not be able to  achieve effective financial accountability or ensure that property is  properly accounted for.
section_title: U.S. Customs Service
paragraphs: In fiscal year 2002, Customs under Treasury received a qualified opinion on  a limited scope review of its internal controls. This qualified opinion was  due to the identification of four material weaknesses in Customs’ internal  controls by its independent auditors. For example, auditors reported that  Customs’ financial systems did not capture all transactions as they  occurred during the year; did not record all transactions properly; were not  fully integrated; and did not always provide for essential controls with  respect to override capabilities. As a result, extensive manual procedures  and analysis were required to process certain routine transactions and  prepare year-end financial statements.
Customs, which typically collects and processes over $23 billion in fees  annually, was found to have poor collection procedures throughout the  agency. Ongoing weaknesses in the design and operation of Customs’  controls over trade activities and financial management and information  systems continue to inhibit the effective management of these activities  and protection of trade revenue. For example, auditors reported that  Customs’ Automated Commercial System could not provide summary  information on the total unpaid assessments for duties, taxes, and fees by  individual importer. The system also could not generate periodic  management information on outstanding receivables, the age of  receivables, or other data necessary for managers to effectively monitor  collection procedures. Such a capability would allow Customs to give  managers timely access to program revenue information and more  effectively present performance measures, which is critical for  implementation of the President’s Management Agenda.
Despite Customs’ progress in implementing recommendations GAO and  others have made over the years, numerous weaknesses continue to hinder  progress toward developing Customs’ planned import system, the  Automated Commercial Environment (ACE). ACE is intended to replace  the current system used for collecting import-related data and ensuring,  among other things, that trade-related revenue is properly collected and  allocated. To ensure proper implementation of these initiatives, DHS’s  management must continue to provide a sustained level of commitment to  its successful implementation. Until this system is fully implemented,  billions in trade-related revenue will continue to be tracked by systems  with inadequate controls. In addition, like INS, Customs faces additional  financial management challenges because it was split into various  components.
section_title: Transportation Security Administration
paragraphs: TSA was created by the Aviation and Transportation Security Act under  the Department of Transportation (DOT) in November 2001, to develop  transportation security policies and programs that contribute to providing  secure transportation for the American public. Despite its short history, the  former TSA brings to DHS numerous financial management issues. In fiscal  year 2002, auditors reported five material weaknesses and that TSA’s  systems were not in substantial compliance with FFMIA. Specifically,  auditors found that TSA management had not established written  accounting policies and procedures to properly perform TSA’s financial  management and budgeting functions during fiscal year 2002. This is an  example of what can happen when a newly created entity does not  thoroughly develop and implement standard accounting policies and  procedures. DHS should carefully review TSA’s weaknesses to avoid  experiencing them on a departmentwide basis.
Auditors also reported that TSA did not maintain complete and accurate  records of its passenger and baggage screening equipment, most notably its  Explosive Detection System (EDS) equipment. For example, a significant  amount of fixed assets were found to not be recorded in the financial  statements and an adjustment of approximately $149 million was made  after year-end to properly record construction in progress for the  manufacture of EDS equipment. Until such weaknesses are resolved,  millions of dollars spent on new equipment and other fixed assets could go  unaccounted for or be improperly recorded, leaving TSA and DHS  vulnerable to fraud, waste, and abuse.
Another weakness reported by DOT’s OIG was TSA’s inadequate controls  over security screener contracts. Policies and procedures were not  established to provide an effective span of control to monitor contractor  costs and performance. This lack of oversight enabled contractors to  charge TSA up to 97 percent more than the contractors charged air carriers  prior to the federalization of the screener workforce. This weakness  provides further evidence of the importance of carefully documenting  policies and procedures early in the implementation of a new organization.
section_title: Office of Domestic Preparedness
paragraphs: Established in 1998, the former Office of Domestic Preparedness (ODP)  under DOJ’s Office of Justice Programs provides grant funds and direct  support to, among other things, help address the equipment, training, and  technical assistance needs of state and local jurisdictions for responding to  terrorism and terrorist-related activities.
Since its inception, auditors have reported deficiencies in ODP’s ability to  administer grant funds. In fiscal year 2002, we reported grant  management as one of DOJ’s major performance and accountability  challenges. DOJ’s OIG has found that while millions of dollars had been  awarded, the funds were not awarded expeditiously, and grantees were  very slow to spend the requested monies. According to the OIG, more  than half of the monies requested and granted over the past few years  remained unspent and some of the equipment purchased by state and local  jurisdictions was unavailable for use because grantees did not properly  distribute the equipment, could not locate it, or were inadequately trained  to use it.
Since the DOJ OIG reported on this issue in fiscal year 2002, DHS has  released more than $4.4 billion in grants to state and local governments and  private sector organizations. This increased level of grants will only  exacerbate these problems unless DHS works with grantees to improve the  accountability over these funds.
section_title: Coast Guard
paragraphs: Unlike many of the larger agencies that transferred to DHS, the Coast  Guard did not have a stand-alone financial statement audit, but was audited  as part of DOT’s consolidated audit. Although the auditors for DOT have  not reported significant financial management weaknesses at the Coast  Guard in recent years, the Coast Guard still uses DOT’s Departmental  Accounting and Financial Information System, which, among other things,  was unable to produce auditable financial statements based on the  information within the system. In addition, we have listed the Coast Guard  as part of DHS’s major management challenges due to its dual missions of  maritime safety and homeland security.
Concerns have also been reported regarding the Coast Guard’s Deepwater  Procurement Project, which currently has an estimated cost of $17 billion  over 20 years. It is intended to replace or modernize by 2022 all assets used  in missions that generally occur offshore. However, due to the events of  September 11th and the Coast Guard’s expanded role in homeland security,  additional project requirements have been identified, including  accelerating the project to be completed in 10 years. These changes may  result in increased annual funding needs for the project, thus increasing the  vulnerability to ineffective and inefficient use of funds.
section_title: Secret Service
paragraphs: The Secret Service, formerly under the Department of the Treasury  (Treasury), has also not had a stand-alone financial statement audit, but  was audited as part of Treasury’s consolidated audit. Although from an  audit perspective the Secret Service was relatively small in relation to the  Internal Revenue Service and Bureau of the Public Debt at Treasury, its  missions of protecting the President and investigating financial crimes are  sensitive. Auditors for Secret Service may identify internal control  weaknesses that were not previously known, but may now be identified  since the Secret Service is proportionately a larger component of DHS than  it was under Treasury, and may therefore be subjected to increased levels  of audit scrutiny.
section_title: Other Entities
paragraphs: Aside from the known weaknesses at the 7 larger component agencies  comprising DHS, some of the 15 smaller entities that transferred to DHS  may also have weaknesses not previously identified. As with the Secret  Service, these entities may be proportionately more significant at DHS than  they were at their legacy departments. In addition, once combined, certain  areas may be cumulatively subject to more audit scrutiny than when they  were dispersed throughout other departments. Any such weaknesses will  only exacerbate the extensive existing challenges.
section_title: Financial Reporting Challenges
paragraphs: DHS plans to prepare financial statements for the 7 months ending  September 30, 2003. We support DHS’s decision to do so, but recognize that  it will be very challenging given the problems DHS inherited, compounded  by the additional complexity of merging a number of diverse entities, which  literally has had to hit the ground running from day one. Obtaining a  consolidated DHS financial statement audit for that same period will be  equally challenging, but also worthwhile.
Since DHS is a new entity, its auditors have already begun performing audit  procedures on beginning balances (i.e., transferred balances) as of March  1, 2003, the activity for the 7 months ending September 30, 2003, and ending  balances. The transfer date of March 1 represents a unique challenge  because it does not fall on the end of a typical accounting period, such as  the end of the fiscal year or reporting quarter. In addition, legacy  departments’ goals of reaching accelerated reporting dates for fiscal year  2003 may be impaired if DHS cannot provide intragovernmental  information needed by these departments on time. OMB and Treasury  require agencies to reconcile selected intragovernmental activity and  balances with their “trading partners” (i.e., other agencies) and to report on  the extent and results of intragovernmental activity and balance  reconciliation efforts. This information is necessary, not only for the  agencies’ financial statements and reports, but also for the U.S.  Consolidated Financial Statements.
These are unique challenges that must be addressed to ensure that  accounts and amounts transferred to DHS are complete and accurate and  that legacy departments’ reporting is not negatively impacted. Any  significant problems encountered could also negatively impact the  preparation and audit of the U.S. government’s fiscal year 2003 financial  statements.
In the longer term, DHS can only overcome its many challenges if it  establishes systems, processes, and controls that help to ensure effective  financial management and insists on the adherence to strong financial  practices. In addition to addressing the many ongoing challenges existing  in the programs of incoming agencies, DHS will need to focus on building  future systems as part of its enterprise architecture approach to ensure an  overarching framework for the agency’s integrated financial management  processes. Plans and standard accounting policies and procedures must be  developed and implemented to bridge these financial environments into an  integrated DHS system.
Mr. Chairman, I would now like to discuss steps DHS should take to  establish sound financial management and business processes.
section_title: Steps for Establishing Sound Financial Management and Business Processes
paragraphs: Successful financial management of DHS will depend on the department  producing financial information that provides useful information for  executive decision making. In April 2000, we issued an executive guide that  provided guidance in creating value through financial management. After  studying the financial management practices and improvement efforts of  nine leading private and public sector finance organizations, we identified  several success factors, practices, and outcomes associated with world- class financial management. The organizations we studied include The  Boeing Company, Chase Manhattan Bank, General Electric Company,  Hewlett-Packard, Owens Corning, Pfizer Inc., and the states of  Massachusetts, Texas, and Virginia.
First and foremost, establishing the following goals is key to developing a  world-class finance organization with sound financial management and  business processes: (1) make financial management an entitywide priority,  (2) redefine the role of the finance organization, (3) provide meaningful  information to decision makers, and (4) build a team that delivers results. I  will discuss each of these goals in more detail below, including several best  practices that are critical in meeting these goals. These practices lead to  finance organizations that provide timely information that is relevant to  management, useful in the decision-making process, and adds value to the  organization. Since it is a newly created entity, DHS has a unique  opportunity to implement the identified practices when developing  financial policies and activities to establish sound financial management  and business processes.
subsections: section_title: Establish Financial Management as an Entitywide Priority
paragraphs: Based on our study of world-class financial organizations, making financial  management an entitywide priority is encouraged through the following  best practices: (1) providing clear, strong, executive leadership, (2)  building a foundation of control and accountability, and (3) using training  to change the culture and engage line managers.
Top leadership involvement is essential for a successful realignment of this  magnitude. Top leadership is responsible for allocating the resources  needed to improve financial management and for building and maintaining  the organization’s commitment to doing business in a new way. The CFO  Act established the position of CFO in 24 agencies (app. I lists the original  24 CFO Act agencies—FEMA has transferred to DHS since the act was  enacted) in the federal government. These CFOs are given oversight  authority regarding financial management matters and are responsible for  ensuring that sound financial management is in place. As you know, DHS is  not currently subject to the provisions of the CFO Act, and thus has no  legal requirement to comply with its provisions. Although Secretary Ridge  pledged financial management as a priority in his May 1, 2003, testimony,  passage of H.R. 2886, which would amend the CFO Act to include DHS, is  important to ensure the department’s long-term commitment to  establishing sound financial management and business processes.
Further, as DHS continues to integrate its 22 entities, it must build a strong  overall foundation of control and accountability. Management should begin  by considering any significant control issues with agencies that are being  integrated to form DHS, many of which I have already highlighted. These  issues must be addressed within the specific agencies, as well as  departmentwide to ensure they do not continue to be control issues within  the newly formed department. Additionally, increases in accountability  should be encouraged through the production of financial and performance  reports for major programs on a regular and frequent basis to help in the  decision-making process and strategic planning. Ultimately, the foundation  for regular and frequent reporting will be through development of an  integrated financial management system—one capable of capturing data at  an appropriate level of detail and producing relevant and reliable  information for users based on their needs. In the case of DHS, the  challenge of combining, integrating, modernizing, and in some cases  replacing the systems of many disparate agencies will require careful  planning if the conversion is to be successful.
section_title: Redefine the Role of the Finance Organization
paragraphs: As discussed earlier, many of the larger agencies that transferred to DHS  have a history of poor systems and inadequate financial management. In  order to establish sound financial management and business processes, we  found that world-class finance organizations redefined the role of the  finance organization and implemented an integrated financial management  structure that: (1) assessed the finance organization’s role in meeting the  department’s mission, (2) maximized the efficiency of day-to-day  accounting activities, and (3) organized the finance organization to add  value.
The ever-increasing competition for resources requires careful allocation of  funds. Without the support of an effective finance organization, program  managers may not be able to determine costs associated with government  activities, defend those costs, or identify the benefits derived from them.  The finance organization must understand the department’s mission and be  able to provide information in support of that mission. Of key importance is  the ability of the finance organization to efficiently complete routine  accounting activities, thus freeing resources to focus on other finance- related priorities that are in support of the department’s mission. As I  previously discussed, many of the larger agencies that transferred into DHS  spend significant time preparing financial statements using manual work- arounds and have a history of poor financial management systems and  significant internal control weaknesses. Such a time-consuming method of  routine financial statement preparation does not allow for efficient use of  finance staff. As DHS develops its financial management and businesses  processes, it should focus on developing the abilities to (1) efficiently and  effectively complete routine processing activities and (2) compile the data  needed to measure performance so that information is available to  management on a day-to-day basis.
section_title: Provide Meaningful Information for Decision Makers
paragraphs: The overarching goal of the President’s Management Agenda is the  improvement of government performance. The finance organization must  play a pivotal role in providing decision makers with the information they  need to measure performance. To efficiently and effectively provide  reliable information to decision makers, we identified three best practices  in our study of world-class finance organizations: (1) develop systems that  support the partnership between finance and operations, (2) reengineer  processes in conjunction with new technology, and (3) translate financial  data into meaningful information.
To help agencies set goals and measure performance, the Congress enacted  the Government Performance and Results Act (GPRA) in 1993. As part of  GPRA, agencies, including DHS, are required to prepare a 5-year  performance plan and annual performance reports. These required reports  provide a strategic planning and management framework intended to  improve federal performance and hold agencies accountable for achieving  results. GPRA was intended, in part, to improve congressional decision  making by giving the Congress comprehensive and reliable information on  the extent to which federal programs are fulfilling their statutory intent.  Additionally, the President’s Management Agenda includes improved  financial management performance as one of the five governmentwide  management goals. This initiative is aimed at ensuring that federal financial  systems produce accurate and timely information to support operating,  budget, and policy decisions. The finance organization is a key component  of a department’s ability to meet its requirements under GPRA and the  objectives of the President’s Management Agenda.
section_title: Build an Effective Finance Team
paragraphs: Over the years, the federal government has had difficulty attracting and  retaining talented financial management officials. Improving financial  performance is difficult without experienced leadership and staff who are  committed to success. Our study of several world-class finance  organizations indicated the following as best practices to build a team that  can deliver results: (1) develop a finance team with the right mix of skills  and competencies, and (2) attract and retain talent.
Given the current demand on resources and the competition for qualified  employees, developing and retaining a talented finance team that is capable  of meeting the changing demands of the federal financial workplace is an  important goal. The lack of highly qualified financial management  professionals can hamper effective federal financial management  operations. The CFO Act requires OMB’s Deputy Director for Management  to develop and maintain qualification standards for agency CFOs and their  deputies; provide advice to agencies on the qualification, recruitment,  performance, and retention of financial management personnel; and assess  the adequacy of financial management staffs throughout the government.  Additionally, the CFO Act places responsibility with the CFO to recruit,  select, and train finance personnel.
To help department leaders manage their people and integrate human  capital considerations into daily decision making and the program results  they seek to achieve, we developed a strategic human capital model. This  model is applicable to department leadership as a whole but is also  applicable to finance organization leadership as they seek to attract,  develop, and retain talent. The two critical success factors identified in our  model to assist organizations in creating results-oriented cultures are  (1) linking unit and individual performance to organizational goals and (2)  involving employees in the decision-making process. Agency leaders have  other opportunities for displaying their commitment to human capital.  Continuous learning efforts, employee-friendly workplace policies,  competency-based performance appraisal systems, and retention and  reward programs are all ways in which agencies can value and invest in  their human capital. The sustained provision of resources for such  programs can show employees and potential employees the commitment  agency leaders have to strategic human capital management. DHS should  adopt these success factors in building a financial management team that  delivers results.
It is well recognized that mergers of the magnitude of DHS carry significant  risks, including lost productivity and inefficiencies. Successful  transformations of large organizations generally can take from 5 to 7 years  to achieve. Necessary management capacity, communication and  information systems, as well as sound financial management and business  processes must be established. Though creating and maintaining these  structures will be demanding and time consuming, it is necessary to  effectively implement the national homeland security strategy.
Over the past several months, we have met with DHS’s CFO, Acting  Inspector General and Assistant Inspector General for Audits, and its  independent auditors performing its financial statement audit for 2003. We  are committed to working in a coordinated effort with the Congress, DHS,  and its auditors to provide advice to DHS on developing a sound financial  management structure that will facilitate, and not hamper, its mission of  securing the homeland. We believe that passage of H.R. 2886 will further  assist DHS in meeting this goal.
section_title: Comments on H.R. 2886
paragraphs: Mr. Chairman, as you know, H.R. 2886 as introduced on July 24, 2003 would  amend the CFO Act to (1) add DHS as a CFO Act agency and remove FEMA  as a CFO Act agency, (2) require DHS to obtain an audit opinion on its  internal controls, and (3) require DHS to include program performance  information in its performance and accountability reports. In addition, H.R.  2886 as introduced would have provided a waiver allowing DHS to forego a  financial statement audit for fiscal year 2003. We understand an agreement  has been reached to remove this waiver from the proposed legislation.  DHS’s 2003 audit is already underway and the department has stated it is  committed to obtaining this audit. The waiver option is, therefore, no  longer needed, and we support dropping the provision from H.R. 2886.
subsections: section_title: Inclusion of DHS as a CFO Act Agency
paragraphs: We supported passage of the CFO Act in 1990 and continue to strongly  support its objectives of (1) giving the Congress and agency decision  makers reliable financial, cost, and performance information both annually  and, most important, as needed throughout the year to assist in managing  programs and making difficult spending decisions, (2) dramatically  improving financial management systems, controls, and operations to  eliminate fraud, waste, abuse, and mismanagement and properly safeguard  and manage the government’s assets, and (3) establishing effective  financial organizational structures to provide strong leadership. Achieving  these goals is critical for establishing effective financial management, and  we fully support amending the CFO Act to include DHS.
In developing the CFO Act, the Congress viewed the CFO as being a critical  player in the management of an agency. At the time, financial management  was not a priority in most federal agencies and was all too often an  afterthought. All too often, the top financial management official wore  many hats, which left little time for financial management; did not  necessarily have any background in financial management; and focused  primarily on the budget. By establishing statutorily the position of CFO,  requiring that the person in the position have strong qualifications and a  proven track record in financial management, and giving this person status  as a presidential appointee, the Congress sought to change the then  existing paradigm. Of the 24 agencies named in the 1990 CFO Act, 16 were  designated as Level IV, Presidential appointee Senate confirmation  positions and eight were career positions. Today, CFOs have become  influential across government and the quality of the appointees has borne  out the wisdom of the Congress’s insistence that this position be elevated  (meaning it reported to the top and had standing with other top officials).  We have seen an evolution of the CFO position and a quantum change in  the expertise and abilities of CFOs and the attractiveness of this position to  someone having the type of proven track record in financial management  that is needed in the federal government. In the end, the key attribute is the  quality of the person in the position to affect change and carry out the role  of CFO and whether the head of the agency supports the CFO and  empowers that person to do the job needed. Appointment of the CFO by  the President, subject to Senate confirmation, is one way to help ensure  that the goals of the CFO Act are met and that has proven itself over time.
The CFO Act, as expanded by the Government Management Reform Act of  1994, also requires agencies to prepare and have audited financial  statements. The Congress added further emphasis to the importance of  sound financial management when it enacted FFMIA. Under the  Accountability of Tax Dollars Act of 2002, DHS, as an executive branch  agency with budget authority greater than $25 million, would be required to  obtain annual financial statement audits; however, its auditors would not  have to report on compliance with FFMIA. Although DHS has appropriately  contracted with independent auditors to report on its systems compliance  with FFMIA for fiscal year 2003, it is not legally required to do so. FFMIA  requires that agencies implement and maintain financial management  systems that substantially comply with (1) federal systems requirements,  (2) federal accounting standards, and (3) the U.S. Government Standard  General Ledger. The ability to produce the data needed to efficiently and  effectively manage the day-to-day operations of the federal government and  provide accountability to taxpayers has been a long-standing challenge at  most federal agencies. As we discussed earlier, auditors reported that many  of the larger agencies that transferred to DHS were not in substantial  compliance with FFMIA prior to their transfer to DHS. Given these  preexisting compliance issues, in addition to issues that may arise with  system integration initiatives, it is critical that DHS be legally required to  comply with these important financial management reforms.
section_title: Opinion on Internal Controls
paragraphs: Current OMB guidance for audits of government agencies and programs  requires auditor reporting on internal control, but not at the level of  providing an opinion on internal control effectiveness. However, we have  long believed and the Comptroller General has gone on record in congressional testimony that auditors have an important role in providing  an opinion on the effectiveness of internal control over financial reporting  and compliance with laws and regulations in connection with major federal  departments and agencies. For a number of years, we have provided  separate opinions on internal control effectiveness for the federal entities  that we audit because of the importance of internal control to protecting  the public’s interest. Specifically, we provide separate opinions on internal  controls and compliance with laws and regulations for our audits of the  U.S. government’s consolidated financial statements, the financial  statements of the Internal Revenue Service and Federal Deposit Insurance  Corporation, the Schedules of Federal Debt managed by the Bureau of the  Public Debt, and numerous small entities’ operations and funds. Our  reports and related efforts have engendered major improvements in  internal control.
As part of the annual audit of our own financial statements, we practice  what we recommend to others and contract with an independent public  accounting firm for both an opinion on our financial statements and an  opinion on the effectiveness of our internal control over financial reporting  and compliance with laws and regulations. Our goal is to lead the way in  establishing the appropriate level of auditor reporting on internal control  for federal agencies, programs, and entities receiving significant amounts  of federal funding. Additionally, three agencies, Social Security  Administration (SSA), General Services Administration (GSA), and the  Nuclear Regulatory Commission (NRC) voluntarily obtain separate  opinions on internal control effectiveness from their auditors, which is  commendable.
Another consideration as the Congress decides whether to enact new  requirements is that an opinion on internal controls is what has been  prescribed by the Congress for publicly traded corporations. A final rule  issued by the Securities and Exchange Commission in June 2003 and  effective in August 2003 provides guidance for implementation of Section  404 of the Sarbanes-Oxley Act of 2002, which requires publicly traded  companies to establish and maintain an adequate internal control structure  and procedures for financial reporting and include in its annual report a  statement of management’s responsibility for and management’s  assessment of the effectiveness of those controls and procedures in  accordance with standards adopted by the Securities and Exchange  Commission. The final rule defines this requirement and requires  applicable companies to obtain a report in which a registered public  accounting firm expresses an opinion, or states that an opinion cannot be  expressed, concerning management’s assessment of the effectiveness of  internal controls over financial reporting.
Auditor reporting on internal control is a critical component of monitoring  the effectiveness of an organization’s accountability. GAO strongly believes  that this is especially important for very large, complex, or challenged  entities. By giving assurance about internal control, auditors can better  serve their clients and other financial statement users and better protect  the public interest by having a greater role in providing assurances of the  effectiveness of internal control in deterring fraudulent financial reporting,  protecting assets, and providing an early warning of internal control  weaknesses. We believe auditor reporting on internal control is appropriate  and necessary for publicly traded companies and major public entities  alike. We also believe that such reporting is appropriate in other cases  where management assessment and auditor examination and reporting on  the effectiveness of internal control add value and mitigate risk in a cost- beneficial manner.
We know that some will point to increased costs as a reason to remove this  provision from the legislation. We believe that auditors who follow the  Financial Audit Manual—which was jointly developed by GAO and the  President’s Council on Integrity and Efficiency (PCIE)—should ordinarily  have little to no incremental costs associated with such reporting.
We fully support having DHS, as well as all CFO Act agencies, obtain an  opinion on its internal control. If DHS is truly committed to becoming a  model federal agency, it should begin obtaining opinions on internal  control as soon as practical and set an example for other agencies to follow  and in keeping with the actions already taken by SSA, GSA, NRC, and GAO.
section_title: Inclusion of Performance Information in Accountability Reports
paragraphs: We also support agencies including program performance information in  agency performance and accountability reports, so that relevant  performance and financial information is presented in a consolidated and  useful manner. Agencies currently have the discretion to include this  information in a consolidated format. We strongly encourage DHS to  consolidate this information in its accountability report beginning with  fiscal year 2003.
In closing, the American people have increasingly demanded accountability  from government and the private sector. The Congress has recognized,  through legislation such as the CFO Act, that the federal government must  be held to the highest standards. We already know that many of the larger  agencies transferred to DHS have a history of poor financial management  systems and significant internal control weaknesses. These known  weaknesses provide further evidence that DHS’s systems and financial  controls should be subject to provisions of the CFO Act and thus FFMIA.  We also strongly encourage DHS to become a model agency and, as soon as  practical, obtain an opinion on its internal controls and report performance  information in its accountability reports.
Mr. Chairman, this concludes my statement. I would be happy to answer  any questions you or other Members of the Subcommittee may have at this  time.
section_title: Contacts and Acknowledgments
paragraphs: For information about this statement, please contact McCoy Williams,  Director, Financial Management and Assurance, at (202) 512-6906, or Casey  Keplinger, Assistant Director, at (202) 512-9323. You may also reach them  by e-mail at williamsm1@gao.gov or keplingerc@gao.gov. Individuals who  made key contributions to this testimony include Cary Chappell and  Heather Dunahoo.
section_title: CFO Act Agencies
subsections: section_title: 24 CFO Act Agencies
section_title: Related GAO Products
paragraphs: Fiscal Year 2002 U.S. Government Financial Statements: Sustained  Leadership and Oversight Needed for Effective Implementation of  Financial Management Reform. GAO-03-572T. Washington, D.C.: April 8,  2003.
Transportation Security Administration: Actions and Plans to Build a  Results-Oriented Culture. GAO-03-190. Washington, D.C.: January 2003.
High-Risk Series: An Update. GAO-03-119. Washington, D.C.: January  2003.
Major Management Challenges and Program Risks: Federal Emergency  Management Agency. GAO-03-113. Washington, D.C.: January 2003.
Major Management Challenges and Program Risks: Department of the  Treasury. GAO-03-109. Washington, D.C.: January 2003.
Major Management Challenges and Program Risks: Department of  Justice. GAO-03-105. Washington, D.C.: January 2003.
Major Management Challenges and Program Risks: Department of  Homeland Security. GAO-03-102. Washington, D.C.: January 2003.
Financial Management: FFMIA Implementation Necessary to Achieve  Accountability.  GAO-03-31. Washington, D.C.: October 1, 2002.
Homeland Security: Critical Design and Implementation Issues. GAO-02- 957T. Washington, D.C.: July 17, 2002.
A Model of Strategic Human Capital Management. GAO-02-373SP.  Washington, D.C.: March 2002.
Executive Guide: Creating Value Through World-class Financial  Management. GAO/AMID-00-134. Washington, D.C.: April 2000.