Federal Data Transparency: Effective Implementation of the DATA Act Would Help Address Government-wide Management Challenges and Improve Oversight
Published: 2014-12-03T00:00:00

Fast Facts:

Highlights:
section_title: Why GAO Did This Study
paragraphs: The federal government spends $3.5 trillion annually, but data on this spending are often incomplete or have quality limitations. Effective implementation of the DATA Act would help address the federal government's persistent management and oversight challenges by providing for standardized, high-quality data. The DATA Act also will increase the accessibility of data to benefit the public and the business community by requiring, among other things, that data be made available in machine-readable and open formats.
This statement focuses on (1) the condition of information detailing federal spending as reported in our June 2014 report; (2) efforts to date to implement and plan for meeting key provisions of the DATA Act, including potential implementation challenges as well as GAO's plan; (3) the importance of the DATA Act for addressing government management and oversight challenges; and (4) results of GAO's audit of the fiscal year 2013 U.S. government's financial statements, including efforts to improve financial management at DOD.
This statement is primarily based upon our published and on-going work covering GAO's work on federal data transparency, fragmentation, overlap and duplication, improper payments, and government efficiency, effectiveness, and financial reporting.
GAO has made numerous recommendations to OMB, Treasury, and other executive branch agencies in these areas, and this statement reports on the status of selected recommendations.
section_title: What GAO Found
paragraphs: GAO's prior work on federal data transparency has found persistent challenges related to the quality and completeness of the spending data agencies report to USAspending.gov. For example, GAO reported in June 2014 that roughly $619 billion in assistance awards were not properly reported. In addition, few reported awards—between 2 and 7 percent—contained information that was fully consistent with agency records for all 21 data elements GAO examined. GAO's work also found that a lack of government-wide data standards limits the ability to measure the cost and magnitude of federal investments and hampers efforts to share data across agencies to improve decision-making and oversight.
The Digital Accountability and Transparency Act of 2014 (DATA Act) was enacted to help address these challenges. Among other things, the DATA Act requires (1) the establishment of governmentwide data standards by May 2015, (2) disclosure of direct federal spending with certain exceptions, (3) agencies to comply with the new data standards, and (4) Inspectors General audits of the quality of the data made available to the public.
Initial implementation efforts are focused on obtaining public input, developing data standards and establishing plans to monitor agency compliance with DATA Act provisions. These efforts include, for example, a data transparency town hall meeting co-hosted by the U.S. Department of the Treasury (Treasury) and the Office of Management and Budget (OMB) to obtain public stakeholder input on the development of data standards, and Treasury Inspector General's efforts, in consultation with GAO, to develop a comprehensive audit framework to assess agency compliance and ensure new standardized data elements are effective once implemented. Effective implementation will need to address key technical issues including developing and defining common data elements across multiple reporting areas and enhancing data transparency while protecting individual privacy and national security.
Effective implementation would help promote transparency to the public and address ongoing government management challenges by expanding the quality and availability of federal spending data. Having better data also will make it possible to gauge the magnitude of the federal investment, help agencies make fully informed decisions about how federal resources should be allocated, and provide agencies and the audit community with additional data analytic tools to detect and prevent improper payments and fraudulent spending.
GAO also reports on its annual audit of the consolidated financial statements of the U.S. government. Almost all of the 24 Chief Financial Officers Act agencies received unmodified (“clean”) opinions on their respective entities' fiscal year 2013 financial statements. However, three long-standing major impediments, including serious financial management problems at the U.S. Department of Defense (DOD), prevented GAO from expressing an opinion on the U.S. government's 2013 accrual-based consolidated financial statements. In addition, while progress has been made to reduce the deficit in the near term, comprehensive long-term fiscal projections, consistent with GAO's recent simulations, show that absent policy changes, the federal government continues to face an unsustainable long-term fiscal path.

section_title: Letter
paragraphs: Thank you for the opportunity to discuss the implementation of the Digital  Accountability and Transparency Act of 2014 (DATA Act) and its potential  for addressing persistent government management challenges. I would  like to begin by commending the Committee for its central role in the  passage of the DATA Act earlier this year and for holding this hearing to  help promote its effective implementation. Without the Committee’s  sustained attention and leadership over time, the DATA Act would not be  a reality. While the full promise of the act will not be realized for several  years, early planning and careful oversight can help build a foundation so  that key provisions of the act are effectively implemented in a timely  manner.
As you know, the federal government faces long standing management  and oversight challenges: overlapping programs and improper payments  are just two examples. Addressing these challenges is difficult in part  because of the limited quality and availability of federal spending data.  Our earlier work also demonstrated the importance of data standards for  improving the quality of federal spending information made available to  the public. the quality and completeness of the data that agencies must provide to  the government website, USASpending.gov, in order to make information  on federal spending more accountable, transparent, and accessible. The  act also requires the Department of the Treasury (Treasury) to establish  common standards for financial data provided by all government  agencies. These actions would help make spending data comparable  across programs, allowing executive branch agencies and Congress to  accurately measure the costs and magnitude of federal investments as  well as to help identify fraudulent spending.
GAO, Federal Data Transparency: Opportunities Remain to Incorporate Lessons  Learned as Availability of Spending Data Increases, GAO-13-758 (Washington, D.C.;  Sept. 12, 2013).
Congress, the administration, and federal managers must have ready  access to reliable and complete financial and performance information— both for individual federal entities and for the federal government as a  whole. Overall, significant progress has been made since the enactment  of key federal financial management reforms in the 1990s; however, our  report on the U.S. government’s consolidated financial statements  underscores that much work remains to improve federal financial  management and that these improvements are urgently needed.
My testimony today will address four topics: 1) the condition of  information detailing federal spending; 2) efforts to date to implement and  plan for meeting key provisions of the DATA Act, including potential  implementation challenges, as well as GAO’s plan; 3) the importance of  the DATA Act for addressing government management and oversight  challenges; and  4) results of our audit of the fiscal year 2013 U.S.  government’s financial statements, including efforts to improve financial  management at the Department of Defense (DOD). As you know, to avoid  interference with the auditability of DOD’s financial statements, the DATA  Act provides DOD with the opportunity to request from OMB up to three  6-month extensions to report financial and payment information in  accordance with data standards established under the act.
GAO, Data Transparency: Oversight Needed to Address Underreporting and  Inconsistencies on Federal Award Website, GAO-14-476 (Washington, D.C.: June 30,  2014) and Electronic Government: Implementation of the Federal Funding Accountability  and Transparency Act of 2006, GAO-10-365 (Washington, D.C.: Mar. 12, 2010).
Accountability and Transparency Office, the Recovery Accountability and  Transparency Board (Recovery Board) and Treasury, and presentations  on data standards from federal agencies and entities representing a  range of federal fund recipients. We also met with Treasury and Office of  Management and Budget (OMB) officials to discuss the plans and status  of DATA Act implementation.
We conducted the work that informs this testimony in accordance with  generally accepted government auditing standards. Those standards  require that we plan and perform the audit to obtain sufficient, appropriate  evidence to provide a reasonable basis for our findings and conclusions  based on our audit objectives. We believe that the evidence obtained  provides a reasonable basis for our findings and conclusions based on  our audit objectives.
subsections: section_title: Much Work Remains to Improve the Quality of Federal Spending Data
subsections: section_title: Congress and the Administration Have Acted to Make More Data Available and Accessible
paragraphs: The federal government spends more than $3.5 trillion annually, but data  on this spending lack transparency. Moreover, the data are often  incomplete or have quality limitations. To address these data issues,  several statutes were enacted over the last decade, including:
The first, the Federal Funding Accountability and Transparency Act of  2006 (FFATA), required OMB to establish a website to provide  information on grant and contract awards, and subawards.information is available at www.USASpending.gov.
The second, the American Recovery and Reinvestment Act of 2009  (Recovery Act), which provided approximately $840 billion in funding,  required that funding recipients’ reports on award and spending data  be made available on a website.funding is available at www.Recovery.gov. Information on the  spending and distribution of Hurricane Sandy funds are available on  that site as well.
Today, data related to Recovery Act
The third, the Digital Accountability and Transparency Act of 2014  (DATA Act), expands FFATA so that taxpayers and policy makers can  track federal spending more effectively. When fully implemented in  2018, the DATA Act will require federal agencies to disclose their  direct expenditures and link federal contract, loan, and grant spending  information to agency programs. That data are to be available on the  web in machine-readable and open formats. The act also requires the  establishment of government-wide financial data standards and  simplified reporting requirements for entities receiving federal funds.  Lastly, to improve the quality of data submitted to USAspending.gov,  the act requires Inspectors General (IG) to assess the completeness,  timeliness, quality, and accuracy of the spending data submitted by  their respective agencies and the use of the data standards. To assist  with that effort, the DATA Act also calls for the establishment of a pilot  program, with participants to include, among others, a diverse group  of recipients of federal awards. The purpose of the pilot program is to  develop recommendations for 1) the standardization of reporting  elements across the federal government, 2) the elimination of  unnecessary duplication in financial reporting, and 3) the reductions of  compliance costs for recipients of federal funds.
section_title: Persistent USASpending.gov Challenges Highlight the Need for Strong Leadership of DATA Act Implementation
paragraphs: Strong and consistent leadership will be needed to ensure the DATA Act  is fully implemented. Our work underscores this point, as we have found  that unclear guidance and weaknesses in oversight have contributed to  persistent challenges with data on USASpending.gov. These challenges  relate to the quality and completeness of data submitted by federal  agencies. In 2010, we reported that USAspending.gov did not include  information on awards from 15 programs at nine agencies for fiscal year  2008. Also in that report, we looked at a sample of 100 awards on the  website and found that each award had at least one data error. To  address this problem, we recommended that OMB include all required  data on the site, ensure complete reporting, and clarify guidance for  verifying agency-reported data. OMB generally agreed with our findings  and recommendations, and subsequently issued additional guidance on  agency responsibilities. Our most recent report on this subject reinforces  these earlier findings.
In June 2014, we reported that while agencies generally reported contract  information as required, many assistance programs (e.g., grants or loans)  were not reported. Specifically, we found agencies did not appropriately  submit the required information on 342 assistance award programs  totaling approximately $619 billion in fiscal year 2012, although many  reported the information after we informed them of the omission. In  addition, we found few awards on the website contained information that  was fully consistent with agency records. We found that only between 2  percent and 7 percent of the awards contained information that was fully  consistent with agencies’ records for all 21 data elements we examined.  The element that identifies the name of the award recipient was the most  consistent, while the elements that describe the award’s place of  performance were generally the most inconsistent. To address these  problems, we recommended the Director of OMB (1) clarify guidance on  reporting award information and maintaining supporting records and (2)  develop and implement oversight processes to ensure that award data  are consistent with agency records. OMB generally agreed with our  recommendations and we will continue to monitor OMB’s implementation.
section_title: DATA Act Implementation Efforts Under Way Need to Address Known Challenges
subsections: section_title: Initial Actions Are Focused on Data Standards, Stakeholder Outreach, and Establishing Plans to Monitor Compliance
paragraphs: Across the federal government, initiatives are under way to implement  key provisions of the DATA Act. Among these provisions is a requirement  for OMB and Treasury to consult with public and private stakeholders in  establishing data standards. In response, Treasury and OMB convened a  data transparency town hall meeting in late September 2014 so the public  could provide input to Treasury officials responsible for developing data  standards. The event drew more than 200 participants from the public  and private sector, including congressional staff and representatives from  federal agencies, state and local governments, private industry, and  transparency advocacy organizations. Agency officials provided  information on efforts to standardize federal financial management data  and members of the public shared their views on the importance of data  standards and recommendations for successful implementation.
In addition, on September 26, 2014, Treasury published notice in the  Federal Register seeking public comment on the establishment of  financial data standards by November 25, 2014. These actions are  consistent with our recommendations based on lessons learned from the  implementation of both USAspending.gov and Recovery.gov. These  lessons stressed the importance of obtaining input from federal agencies,  recipients, and subrecipients early in the development of new  transparency systems to minimize reporting burden.
The DATA Act also calls on Treasury to establish a data analysis center  or to expand an existing service, to provide data, analytic tools, and data  management techniques for preventing or reducing improper payments  and improving the efficiency and transparency in federal spending. The  act also directs Treasury to work with federal agencies, including IGs and  federal law enforcement agencies, to provide data from the data analysis  center to identify and reduce fraud waste and abuse and for use in the  conduct of criminal investigations, among other purposes. In response  to this requirement, Treasury established the Data Transparency Office  which is working with the Recovery Board to transfer assets from the  board’s Recovery Operations Center to Treasury.assumed program responsibility for USAspending.gov to display accurate  government-wide spending data to the public, as called for in the act.
Building on lessons learned from the implementation of the Recovery Act,  the DATA Act’s provisions also ensure that implementation will be closely  monitored. These provisions require IGs and us to assess the  implementation of the act throughout the next 7 years (see figure 1 for a  timeline of key DATA Act provisions). The DATA Act requires the  Inspectors General to assess the completeness, timeliness, quality and  accuracy of spending data submitted by their respective agencies and the  use of the data standards. These reports are due 18 months after OMB  and Treasury issue data standards guidance and then within 2 and 4  years after that. The Treasury IG is leading the IG community’s efforts to  develop a comprehensive framework of audit procedures, in consultation  with us, to ensure IGs meet their auditing and reporting responsibilities  under the act. The Treasury IG is also reviewing Treasury’s standup of a  Transparency Office and Treasury’s efforts to improve USASpending.gov,  as well as Treasury’s plans to implement its responsibilities under the  DATA Act.
We are fully prepared to meet the DATA Act’s oversight and consultative  roles for us as well. The act requires us to review IG reports on agency  spending data quality and use of data standards in compliance with the  act, and IGs are to consult with us to assess the completeness and  accuracy of agency data. We are working with the Treasury IG and  through the Council of Inspectors General for Integrity and Efficiency to  develop common audit procedures and practices across the federal  accountability community to avoid duplication. We are also working to  ensure that the Treasury’s implementation efforts follow good consultative  practices, and that views from both federal and nonfederal stakeholders  are appropriately considered as data standards are developed. We also  will evaluate the data standards to ensure that they are complete, clear,  and at the right level of specificity. Toward that end, we plan to provide an  interim report to the Congress in 2015 on the establishment of the  standards.
section_title: DATA Act Implementation Needs to Address Key Technical Issues
paragraphs: To effectively implement the DATA Act, the federal government will need  to address multiple technical issues. The first of these issues involves  developing and defining common data elements across multiple reporting  areas. Among the lessons learned from the implementation of the  Recovery Act’s transparency provisions was the value of standardized  data for improving data quality and transparency, including uniform  information for contracts and financial assistance awards. To address this  issue for DATA Act implementation, the DOD and the Department of  Health and Human Services (HHS) are examining data elements used by  the procurement and grants communities to identify financial data  elements common to both communities that can be standardized.assessment focuses on 72 data elements that are linked to five data   Their  areas: (1) identification of award; (2) awardee/recipient information; (3)  place of performance; (4) period of performance; and (5) identification of  agencies. HHS and DOD were able to reach agreement on a basic set of  data elements that could be standardized across the procurement and  award communities. Some of the elements will require changes in policy,  while in other cases agencies will have to change how they collect and  report data. Plans to identify and coordinate recommended policy  changes with OMB are under way.
Another related issue is how to enhance data transparency while  protecting individual privacy and national security. The DATA Act does  not require the disclosure of any information that is exempt from  disclosure under the Freedom of Information Act, including information  that is specifically authorized to be kept secret in the interest of national  defense or foreign policy. Additionally, the DATA Act does not require  federal agencies to report direct payments to individuals. However,  some federal agencies have raised concerns about how privacy and  national security can be maintained if more data are made available.
In January 2013, we co-hosted a forum on data analytics with the  Recovery Board and The Council of Inspectors General for Integrity and  Efficiency. The forum brought together representatives from federal,  state, and local agencies and the private sector to explore the use of data  analytics—which involve a variety of techniques to analyze and interpret  data—to help identify fraud, waste, and abuse in government. Forum  participants identified opportunities to enhance data-analytics efforts,  such as consolidating data and analytics operations in one location to  increase efficiencies by enabling the pooling of resources as well as  accessing and sharing of the data to enhance oversight. The forum  participants also identified a variety of challenges that hinder their abilities  to share and use data. For example, forum participants cited statutory  requirements that place procedural hurdles on agencies wishing to  perform data matching to detect fraud, waste, and abuse, and technical  obstacles—such as the lack of uniform data standards across agencies— which make it more difficult for oversight and law enforcement entities to  share available data.coordination and data sharing, we formed the Government Data Sharing  Community of Practice (CoP). In 2013 and 2014, the CoP partnered with  a variety of organizations, including MITRE and the National  Intergovernmental Audit Forum, to host a series of events for the audit  community to discuss legal issues and technological challenges to data  sharing.
section_title: Effective Implementation of the DATA Act Would Help Address Ongoing Government Management Challenges and Enhance Oversight
paragraphs: When fully and effectively implemented, the DATA Act holds great  promise for improving the efficiency and effectiveness of the federal  government, and for addressing persistent government management  challenges. Expanding the quality and availability of federal spending  data will better enable federal program managers to make data-driven  decisions about how they use government resources to meet agency  goals. Providing open and consumable federal data will enable innovation  and help new and existing businesses to use data to inform activities. By  expanding the quality and availability of federal spending data, the DATA  Act also holds great promise for enhancing government oversight and  preventing and detecting fraud, waste and abuse.
Our work on examining fragmentation, overlap and duplication in federal  government programs has demonstrated the need for more reliable and  consistent federal data, which implementation of the DATA Act should  produce. As we have reported and I have testified before this Committee,  better data and a greater focus on expenditures and outcomes are  essential to improving the efficiency and effectiveness of federal efforts.Currently, there is not a comprehensive list of all federal programs and  agencies often lack reliable budgetary and performance information about  their programs.
Without knowing the scope, cost, or performance of programs, it is  difficult for executive branch agencies or Congress to gauge the  magnitude of the federal commitment to a particular area of activity, or the  extent to which associated federal programs are effectively and efficiently  achieving shared goals. Moreover, the lack of reliable, detailed budget  information makes it difficult to estimate the cost savings that could be  achieved should Congress or agencies take certain actions to address  identified fragmentation, overlap, and duplication. Absent this information,  Congress and agencies cannot make fully informed decisions on how  federal resources should be allocated and the potential budget trade-offs.
Implementing data standards across the federal government, as required  under the DATA Act, could help address another ongoing challenge: the  need for reliable and consistent agency program information. We recently  examined the implementation of the agency program inventory  requirements under the GPRA Modernization Act of 2010 (GPRAMA)   and found that inconsistent program definitions and program-level budget  information limit comparability among like programs. In developing the  inventory, OMB allowed for significant discretion in several areas leading  to a variety of approaches for defining programs and inconsistencies in  the type of information reported. The inconsistent definitions, along with  agencies not following an expected consultation process, led to  challenges in identifying similar programs in different agencies. The lack  of program comparability hampers decision makers’ ability to identify  duplicative programs and accurately measure the cost and magnitude of  federal investments.
In addition, we found that although GPRAMA requires agencies to identify  program-level funding, OMB did not direct agencies to include this  information in their 2013 inventories and it was not included in the May  2014 update. OMB officials told us that they put the 2014 update on hold  to determine how to merge these requirements with DATA Act  transparency requirements since both laws require web-based reporting.
Implementing data standards across the federal government, as required  under the DATA act, could help address this ongoing challenge.
Effective implementation of the DATA Act could also provide additional  data analytic tools for agencies to detect, reduce, and prevent improper  payments. Throughout the past decade, we have reported and testified  on improper payment issues across the federal government, as well as at  specific agencies. In July, we testified that federal agencies reported an  estimated $105.8 billion in improper payments in fiscal year 2013 that  were attributable to 84 programs spread among 18 agencies. The  Improper Payments Elimination and Recovery Improvement Act of 2012  is the latest in a series of laws aimed at addressing this issue. The act  requires that agencies verify benefit eligibility by checking multiple  existing databases before making a payment to a person or entity. The  act also modified requirements to promote computer matching activities  that assist in the detection and prevention of improper payments.
As we have previously found, a number of strategies across government,  some of which are under way, could help to reduce improper payments,  including (1) designing and implementing strong preventive controls  activities such as up-front validation of eligibility through data sharing and  predictive analytic tests and (2) implementing effective detection  techniques to quickly identify and recover improper payments after they  have been made. By establishing a data analysis center to provide data,  analytical tools, and data management techniques, the DATA Act could  also help address this problem.
The open data provisions of the DATA Act will also enhance the federal  government’s emerging use of data analytics capabilities to conduct  incisive analysis to support oversight, improve decision-making by federal  program managers, and foster innovation by making more federal data  available to the public. This oversight will include, but not be limited to,  the detection and prevention of fraud, waste and abuse as well as  analysis of improper payments and overlap, duplication, and  fragmentation across federal programs. For example, we plan to leverage  open data as part of our piloting of data analytic technologies, which  include (1) data mining for improper payments analysis; (2) link analysis  for fraud identification and mitigation; (3) document clustering and text  mining for overlap and duplication analysis; and (4) network analysis for  program coordination assessment, among other potential endeavors.
section_title: Results of Our Audit of the U.S. Government’s Consolidated Financial Statements for Fiscal Years 2013 and 2012
paragraphs: As in prior years, the federal government was unable to demonstrate the  reliability of significant portions of its accrual-based consolidated financial  statements for fiscal years 2013 and 2012, principally resulting from  limitations related to certain material weaknesses in internal control over  financial reporting. For example, about 33 percent of the federal  government’s reported total assets as of September 30, 2013, and  approximately 16 percent of the federal government’s reported net cost  for fiscal year 2013 relate to DOD, which received a disclaimer of opinion  on its consolidated financial statements. As a result, we were unable to  provide an opinion on the accrual-based consolidated financial  statements of the U.S. government. Further, significant uncertainties,  primarily related to the achievement of projected reductions in Medicare  cost growth reflected in the 2013, 2012, 2011, and 2010 Statements of  Social Insurance, prevented us from expressing opinions on those  statements,Social Insurance Amounts. as well as on the 2013 and 2012 Statements of Changes in  It is important to note, however, that since the enactment of key financial  management reforms in the 1990s, significant progress has been made in  improving financial management activities and practices. For fiscal year  2013, almost all of the 24 Chief Financial Officers (CFO) Act agencies  received unmodified (“clean”) audit opinions on their respective entities’  financial statements, up from 6 CFO Act agencies for fiscal year 1996.  Also, for the first time, the Department of Homeland Security was able to  obtain an unmodified audit opinion on all of its financial statements—a  significant achievement.
subsections: section_title: Addressing Impediments to an Opinion on the Accrual-Based Consolidated Financial Statements
paragraphs: Three major impediments continued to prevent us from expressing an  opinion on the U.S. government’s accrual-based consolidated financial  statements: (1) serious financial management problems at DOD that have  prevented its financial statements from being auditable, (2) the federal  government’s inability to adequately account for and reconcile  intragovernmental activity and balances between federal entities, and (3)  the federal government’s ineffective process for preparing the  consolidated financial statements.
subsections: section_title: Improving Financial Management at DOD
paragraphs: Having sound financial management practices and reliable, timely  financial information is important to ensure accountability over DOD’s  extensive resources to efficiently and economically manage the  department’s assets, budgets, mission, and operations. Accomplishing  this goal is a significant challenge given the worldwide scope of DOD’s  mission and operations; the diversity, size, and culture of the  organization; and its reported trillions of dollars of assets and liabilities  and its hundreds of billions of dollars in annual appropriations. Given the  federal government’s continuing fiscal challenges, reliable and timely  financial and performance information is important to help federal  managers ensure fiscal responsibility and demonstrate accountability; this  is particularly true for DOD, the federal government’s largest department.
DOD continues to work toward the long-term goal of improving financial  management and full financial statement auditability. The National  Defense Authorization Act (NDAA) for Fiscal Year 2010 requires that  DOD’s Financial Improvement and Audit Readiness (FIAR) Plan set as  its goal that the department’s financial statements be validated as ready  for audit by September 30, 2017. In addition, the NDAA for Fiscal Year  2013 required that the FIAR Plan also describe specific actions to be  taken, and their associated costs, to ensure that DOD’s Statement of  Budgetary Resources (SBR) would be validated as ready for audit by  September 30, 2014.
DOD’s current FIAR strategy and methodology focus on two priorities— budgetary information and asset accountability—with an overall goal of  preparing auditable department-wide financial statements by September  30, 2017. Based on difficulties encountered in auditing the SBR of the  U.S. Marine Corps, DOD made a significant change to its FIAR Guidance  that will limit the scope of the first-year SBR audits for all DOD  components. As outlined in the November 2014 FIAR Plan Status Report and the November 2013 revised FIAR Guidance, the scope of the  SBR audits, beginning in fiscal year 2015, will be on budget activity only  related to the current year appropriations as reflected in a Schedule of  Budgetary Activity (SBA), an interim step toward achieving the audit of  multiple-year budgetary activity and expenditures required for a full audit  of the SBR. The most current FIAR Plan acknowledges that DOD did not  achieve the above noted requirement for the SBR to be validated as  ready for audit by September 30, 2014.
The military departments and other defense agencies asserted audit  readiness for their SBAs on September 30, 2014, and plan to start their  first-year SBA audits during fiscal year 2015. Even though DOD  components are moving forward with SBA audits, our work has shown  that DOD components are asserting audit readiness without fully  implementing the FIAR Guidance. For example, prior to asserting audit  readiness, the Defense Finance and Accounting Service did not fully  implement the FIAR Guidance in the areas of planning, testing, and  corrective actions for processing payments to contractors. Also, the Army  did not ensure that all budgetary processes, systems, and risks were  adequately considered and identified as required by the FIAR Guidance   For example, the Army did not adequately identify  for audit readiness.significant activity attributable to its service provider business processes  and systems. Also, the Army’s documentation and assessment of controls  were not always complete or accurate.
To meet its audit readiness goal of June 30, 2016, for asset  accountability, DOD is also continuing to implement plans that focus on  the existence and completeness of mission-critical assets to (1) ensure  accurate quantity and location information, and (2) support valuation  activities. However, with regards to meeting its goal of full auditability by  September 30, 2017, the department has not fully developed a strategy  for consolidating individual component financial statements into  department-wide financial statements.
The effects of DOD’s financial management problems extend beyond  financial reporting. Long-standing control deficiencies adversely affect the  economy, efficiency, and effectiveness of its operations. As we have  previously reported, DOD’s financial management problems have  contributed to (1) inconsistent and sometimes unreliable reports to  Congress on estimated weapon system operating and support costs,  limiting the visibility needed for effective oversight of the weapon system  programs; and (2) continuing reports of Antideficiency Act violations— 75 such violations reported from fiscal year 2007 through fiscal year  2012, totaling nearly $1.1 billion—which emphasize DOD’s inability to  ensure that obligations and expenditures are properly recorded and do  not exceed statutory levels of control.
With improvements to its financial management processes, DOD would  be better able to provide its management and Congress with reliable,  useful, and timely information on the results of its business operations.  Effectively implementing needed improvements, however, continues to be  a difficult task. While DOD has made efforts to improve its financial  management, we have reported over the past few years significant  internal control, financial management, and systems deficiencies  including the following:
Fundamental deficiencies in DOD funds control significantly impair its  ability to properly use resources, produce reliable financial reports on  the results of operations, and meet its audit readiness goals.
Risk management policies and procedures associated with preparing  auditable financial statements through the FIAR Plan were not in  accordance with widely recognized guiding principles for effective risk  management.
The effective implementation of DOD’s planned Enterprise Resource  Planning (ERP) systems is considered by DOD to be critical to the  success of all of its planned long-term financial improvement efforts;  however, as we have previously reported, DOD continues to  encounter difficulties in implementing its planned ERP systems on  schedule and within budget, and experiences significant operational  problems such as deficiencies in data accuracy, inability to generate  auditable financial reports, and the need for manual workarounds.
We have made numerous recommendations to DOD to address these  financial management issues. We are encouraged by DOD’s sustained  commitment to improving financial management and achieving audit  readiness, but several DOD business operations, including financial  management, remain on our list of high-risk programs. DOD has financial management improvement efforts under way and is monitoring  progress against milestones; however, we have found that DOD and its  components have emphasized the assertion of audit readiness by  milestone dates over the implementation of effective underlying  processes, systems, and controls. While establishing milestones is  important for measuring progress, DOD should not lose sight of the  ultimate goal—implementing lasting financial management reform to help  ensure that it has the systems, processes, and personnel to routinely  generate reliable financial management and other information critical to  decision-making and effective operations for achieving its missions.  Continued congressional oversight of DOD’s financial management  improvement efforts will be critical to helping ensure DOD achieves its  financial management improvement and audit readiness goals. To assist  Congress in its oversight efforts, we will continue to monitor DOD’s  progress and provide feedback on the status of its improvement efforts.
section_title: Reconciling Intragovernmental Activity and Balances
paragraphs: In fiscal year 2013, despite significant progress, the federal government  continued to be unable to adequately account for and reconcile  intragovernmental activity and balances between federal entities. When  preparing the consolidated financial statements, intragovernmental  activity and balances between federal entities should be in agreement  and must be subtracted out, or eliminated, from the financial statements.  If the two federal entities engaged in an intragovernmental transaction do  not both record the same intragovernmental transaction in the same year  and for the same amount, the intragovernmental transactions will not be  in agreement, resulting in errors in the consolidated financial statements.
In fiscal year 2013, Treasury continued to actively work with federal  entities to resolve intragovernmental differences. For example, Treasury  expanded its quarterly scorecard process to include all 35 significant  component entities, highlighting differences requiring the entities’  attention and encouraging the use of the dispute resolution process.a result of these and other actions, a significant number of  intragovernmental differences were identified and resolved. While such  progress was made, we continued to note that amounts reported by  federal entity trading partners were not in agreement by significant  amounts. Reasons for the differences cited by several CFOs included  differing accounting methodologies, accounting errors, and timing  differences. In addition, the auditor for DOD reported that DOD, which  contributes significantly to the unreconciled amounts, could not accurately  identify most of its intragovernmental transactions by customer, and was  unable to reconcile most intragovernmental transactions with trading  partners, which resulted in adjustments that cannot be fully supported.
Additionally, for fiscal year 2013, there continued to be unreconciled  transactions between the General Fund of the U.S. Government (General  Fund) and federal entity trading partners related to appropriations and  other intragovernmental transactions, which amounted to hundreds of  billions of dollars. because only some of the General Fund is reported in Treasury’s  department-level financial statements. For example, these financial  statements include various General Fund-related assets and liabilities  that Treasury manages on behalf of the federal government (e.g., federal  debt and cash held by Treasury), but do not include certain other  activities such as receipts and disbursements related to other federal  agencies. As a result of these circumstances, the federal government’s  ability to determine the impact of these differences on the amounts  reported in the accrual-based consolidated financial statements is  significantly impaired. In fiscal year 2013, Treasury continued to establish  processes to account for and report General Fund activity and balances,  such as providing entities information to assist them in complying with the  proper use of the General Fund as a trading partner.
The General Fund is a central reporting entity that tracks core activities fundamental to  funding the federal government (e.g., issued budget authority, operating cash, and debt  financing activities).
Over the years, we have made several recommendations to Treasury to  address these issues. Treasury has taken or plans to take actions to  address these recommendations.
section_title: Preparing the Consolidated Financial Statements
paragraphs: Treasury, in coordination with OMB, implemented corrective actions  during fiscal year 2013 to address certain internal control deficiencies  detailed in our previously issued reports regarding the process for  preparing the consolidated financial statements. These include further  developing and beginning to implement a methodology to reconcile  certain outlays and receipts between Treasury’s records and underlying  federal entity financial information and records. Nevertheless, the federal  government continued to have inadequate systems, controls, and  procedures to ensure that the consolidated financial statements are  consistent with the underlying audited entity financial statements, properly  balanced, and in accordance with U.S. generally accepted accounting  principles (U.S. GAAP). For example, Treasury was unable to properly  balance the accrual-based consolidated financial statements. To make  the fiscal years 2013 and 2012 consolidated financial statements balance,  Treasury recorded a net decrease of $9.0 billion and a net increase of  $20.2 billion, respectively, to net operating cost on the Statements of  Operations and Changes in Net Position, which were identified as  “Unmatched transactions and balances.” Treasury recorded an additional  net $5.9 billion and $1.8 billion of unmatched transactions in the  Statement of Net Cost for fiscal years 2013 and 2012, respectively.
Over the years, we have made numerous recommendations to Treasury  to address these issues. Most recently, in June 2014, we recommended  that Treasury, working in coordination with OMB, include all key elements  for preparing well-defined corrective action plans from the Chief Financial  Officers Council’s Implementation Guide for OMB Circular A-123,  Management’s Responsibility for Internal Control – Appendix A, Internal  Control over Financial Reporting, in Treasury’s and OMB’s corrective  action plans. Treasury has taken or plans to take actions to address these  recommendations.
section_title: Long-Term Federal Fiscal Challenges
paragraphs: The 2013 Financial Report includes comprehensive long-term fiscal  projections for the U.S. government that, consistent with our recent  simulations, show that while the near-term outlook has improved—absent  policy changes—the federal government continues to face an  unsustainable long-term fiscal path. Such reporting provides a much  needed perspective on the federal government’s long-term fiscal position  and outlook. The projections included in the Financial Report and our  simulations both underscore the need to take action soon to address the  long-term path to avoid larger policy changes in the future that could be  disruptive to individuals and the economy, while also taking into account  concerns about near-term economic growth.
In the near term, deficits are expected to continue to decline from the  recent historic highs as the economy further recovers and actions taken  by Congress and the President continue to take effect. Treasury recently  reported that the deficit for fiscal year 2014 was the lowest as a share of  the economy since 2007. Both the projections in the Financial Report and  our long-term simulations reflect enactment of the Budget Control Act of  2011 (BCA), which established discretionary spending limits through   Under these limits, discretionary spending will continue  fiscal year 2021. to decline as a share of the economy and in fiscal year 2021 will be lower  than any level seen in the past 50 years. At the same time, revenues are  projected to rise in the near-term as the economy continues to recover.
The Budget Control Act of 2011, Pub. L. No. 112-25, § 302, 125 Stat. 240, 256-59 (Aug.  2, 2011). The BCA amended the Balanced Budget and Emergency Deficit Control Act  (BBEDCA), classified, as amended, at 2 U.S.C. § 901a. Our Spring 2014 simulations also  incorporate the effects of the Bipartisan Budget Act of 2013, which further amended  BBEDCA to establish higher limits on discretionary appropriations for fiscal years 2014  and 2015 and to extend sequestration for direct spending programs, as well as making  other changes to direct spending and revenue. In all, the BBEDCA, as amended through  December 2013, reduced deficits over the next 10 years in our Baseline Extended  simulation but did not significantly change the long-term federal budget outlook. Our  updated simulations for 2015 will incorporate the effects of more recently enacted  amendments to the BBEDCA.
Debt held by the public as a share of gross domestic product (GDP),  however, remains well above historical averages. Debt held by the public  at these high levels could limit the federal government’s flexibility to  address emerging issues and unforeseen challenges such as another  economic downturn or large-scale natural disaster. Further, even with  BCA and other actions taken, the U.S. government continues to face a  significant long term structural imbalance between revenues and  spending. This imbalance, which is driven on the spending side largely by  the aging of the population and rising health care costs, will cause debt  held by the public to rise continuously in coming decades. Changing this  path will not be easy, and it will likely require difficult decisions affecting  both federal spending and revenue. However, as both the projections in  the Financial Report and our long-term simulations show, delaying action  only increases the size of actions eventually needed.
Our past work has also identified a variety of fiscal exposures— responsibilities, programs, and activities that explicitly or implicitly expose   Fiscal exposures vary widely  the federal government to future spending.as to source, extent of the U.S. government’s legal commitment, and  magnitude. Over the past decade, some fiscal exposures have grown due  to events and trends and the U.S. government’s response to them.  Increased attention to these fiscal exposures will be important for  understanding risks to the federal fiscal outlook and enhancing oversight  over federal resources.
In conclusion, to operate as effectively and efficiently as possible, and to  address persistent government-wide challenges that exacerbate the  federal government’s fiscal challenges, Congress, the administration,  federal managers, the public and the accountability community must have  ready access to consistent, reliable and complete financial data. When  fully and effectively implemented, the DATA Act will improve the  accountability and transparency of federal spending data (1) by  establishing government-wide financial data standards so that data are  comparable across agencies and (2) by holding federal agencies more  accountable for the quality of the information disclosed. Such increased  transparency provides opportunities for improving the efficiency and  effectiveness of federal spending; increasing the accessibility of data to  benefit the public and the business community; and improving oversight  to prevent and detect fraud, waste, and abuse of federal funds.
While the process to implement the DATA Act has begun, more work  remains. We are committed to being a continuing presence to monitor  Treasury’s, OMB’s, and agencies’ progress as data standards are  developed and implemented, and to work with Inspectors General to  ensure an effective audit process is in place to help ensure data quality.
Chairman Issa, Ranking Member Cummings, and Members of the  Committee, this concludes my prepared statement. I would be pleased to  answer questions.
section_title: GAO Contacts
paragraphs: For further information regarding this testimony, please contact J.  Christopher Mihm, Managing Director, Strategic Issues at (202) 512-6806  or Gary Engel, Director, Financial Management and Assurance at (202)  512-3406.
section_title: Staff Acknowledgement
paragraphs: In addition to the contact names above, key contributions to this  testimony were made by Nabajyoti Barkakati, Kathleen M. Drennan, Joah  Iannotta, Thomas J. McCabe, Timothy Persons, James Sweetman, Jr.,  and staff on our Consolidated Financial Statement audit team.
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