Department of Agriculture: Status of Efforts to Address Major Financial Management Challenges
Published: 2003-06-10T00:00:00

Fast Facts:

Highlights:
section_title: Why GAO Did This Study
paragraphs: In January, we issued our Performance and Accountability Series on management challenges and program risks at major agencies, including the U.S. Department of Agriculture (USDA). The report for USDA focused on a number of major management challenges, including enhancing financial management, and continued the high risk designation for Forest Service financial management. For many years, USDA struggled to improve its financial management activities, but inadequate accounting systems and related procedures and controls hampered its ability to get a clean opinion on its financial statements. After eight consecutive disclaimers of opinion, USDA's Office of Inspector General issued an unqualified opinion on USDA's fiscal year 2002 financial statements and reported that significant progress had been made in improving overall financial management. For each of USDA's agencies that prepared separate financial statements for fiscal year 2002, the audit opinions were also positive. Specifically, unqualified audit opinions were issued on the financial statements of the Forest Service, Federal Crop Insurance Corporation/Risk Management Agency, Commodity Credit Corporation, the Rural Development mission area, and the Rural Telephone Bank. While we consider these clean opinions a positive step, some of these could not have been rendered without extraordinary efforts by the department and its auditors. Achieving financial accountability will require more than heroic efforts to obtain year-end numbers for financial statement purposes. Without reliable financial systems and sound internal controls, it is not possible to have sound data on a timely basis for decision making. Before USDA can achieve and sustain financial accountability, and thus be in a position to have reliable system-generated data as needed, it and its component agencies, particularly the Forest Service, must address a number of serious problems that USDA's Office of the Inspector General (OIG) or we have reported.
section_title: What GAO Found
paragraphs: In the past, USDA had several persistent weaknesses in internal control and in accounting and financial reporting that contributed to the OIG's inability to render an opinion on the department's consolidated financial statements. The OIG reported, among other things, that USDA was unable to provide sufficient, competent evidential matter to support numerous material line items on its financial statements including accounts receivable, fund balance with the Department of the Treasury and property, plant, and equipment. The OIG also reported that USDA was unable to estimate and reestimate loan subsidy costs for its net credit program receivables, rendering it unable to implement the Federal Credit Reform Act of 1990, and related accounting standards. USDA has taken actions over the last several years to improve its financial management and to address the weaknesses identified by its OIG and us. For example, in fiscal year 2000, Food and Nutrition Service was, for the first time, able to estimate its gross accounts receivable and related estimate of uncollectible amounts resulting from over-issued benefits in its Food Stamp Program. Further, for the first time since credit reform agencies were able to estimate and reestimate loan subsidy costs for the department's net credit program receivables, which totaled about $74 billion as of September 30, 2001. Because of USDA's achievement in this area, along with that of other key lending agencies, this item was no longer a factor contributing to our disclaimer of opinion on the financial statements of the U.S. government.

section_title: Letter
paragraphs: agencies, particularly the Forest Service, must address a number of  serious problems that USDA’s OIG or we have reported.
Today I will focus my testimony on USDA’s efforts to improve its financial  management and the Forest Service’s progress toward achieving financial  accountability.
subsections: section_title: USDA’s Financial Management
paragraphs: In the past, USDA had several persistent weaknesses in internal control  and in accounting and financial reporting that contributed to the OIG’s  inability to render an opinion on the department’s consolidated financial  statements. The OIG reported, among other things, that USDA was unable  to:    provide sufficient, competent evidential matter to support numerous  material line items on its financial statements including accounts  receivable, fund balance with the Department of the Treasury (Treasury),  and property, plant, and equipment; and    estimate and reestimate loan subsidy costs for its net credit program  receivables, rendering it unable to implement the Federal Credit Reform  Act of 1990 and related accounting standards.
The OIG also identified internal control weaknesses over USDA’s security  controls for information technology and financial management systems  that do not always process and report departmentwide financial  information accurately.  Further, the OIG reported that many USDA  financial management systems are not fully integrated with other USDA  systems. These are some of the factors that required extraordinary effort  to derive reliable financial information. Further, we reported in December  2001 that USDA had not yet fully implemented certain key provisions of  the Debt Collection Improvement Act (DCIA) of 1996.
I will now elaborate on USDA’s progress in correcting these problems and  what challenges still remain.
USDA has taken actions over the last several years to improve its financial  management and to address the weaknesses identified by its OIG and us.  For example, in fiscal year 2000, Food and Nutrition Service was, for the  first time, able to estimate its gross accounts receivable and related  estimate of uncollectible amounts resulting from over-issued benefits in its  Food Stamp Program. Further, for the first time since credit reform  reporting requirements were implemented in 1994, USDA’s lending  agencies were able to estimate and reestimate loan subsidy costs for the  department’s net credit program receivables, which totaled about $74  billion as of September 30, 2001. Because of USDA’s achievement in this  area, along with that of other key lending agencies, this item was no longer  a factor contributing to our disclaimer of opinion on the financial  statements of the U.S. government.
The OIG also noted that USDA made significant progress during fiscal year  2002 in reconciling its Fund Balance accounts with Treasury’s accounts,  thus enabling the OIG to validate this line item on USDA’s fiscal year 2002  financial statements. However, the OIG continued to report this area as a  material internal control weakness in fiscal year 2002 due to continuing  deficiencies in USDA’s reconciliation processes. For example, USDA had a  large backlog of unreconciled items that needed to be researched and  resolved. As a result, USDA adjusted its records to agree with the Treasury  without reconciling the differences. Over $180 million (net) of year-end  adjustments were not supported by transaction-level details.
Further, USDA will need to continue its actions in addressing weaknesses  in its financial management information systems. In its fiscal year 2002  audit report, the OIG stated that USDA made significant improvements in  its overall financial management, such as implementation of a  departmentwide standard accounting system, the Foundation Financial  Information System (FFIS). At the same time, USDA must fundamentally  improve its underlying internal controls, financial management systems,  and operations to allow for the routine production of accurate, relevant,  and timely data to support program management and accountability.  Specifically, the Federal Financial Management Improvement Act (FFMIA)  of 1996 requires agencies to institute financial management systems that  substantially comply with federal financial systems requirements,  applicable federal accounting standards, and the federal government’s  Standard General Ledger (SGL). Every year since FFMIA was enacted, the  OIG has reported that USDA’s systems did not substantially comply with  the act’s requirements. The OIG reported that the lack of compliance  stems from USDA’s many disparate accounting systems that are not  integrated; material internal control weaknesses; and, as explained earlier,  the inability to prepare auditable financial statements on a routine basis.  For example, USDA and its agencies operate at least 80 program and  administrative systems that support financial management. The  longstanding problems associated with these legacy systems were caused,  primarily, by the absence of corporate level oversight and planning when  these systems were initially developed and upgraded. USDA needs to  continue to address the problems with its legacy systems to improve  integration of the financial management architecture, timely reconcile its  property system with the general ledger, and correct inconsistencies in its  accounting processes.
Additionally, the OIG continued to report that USDA’s systems are not  designed to provide the reliable and timely cost information required to  comply with Statement of Federal Financial Accounting Standards No. 4,  Managerial Cost Accounting Concepts and Standards. Specifically, the  OIG’s review of user fees disclosed that two USDA agencies were not  including the full costs of their user fee programs when determining fees  and thus, were not recovering the full costs of performing services for  their individual programs.
Under the President’s Management Agenda for improved financial  management performance, agencies are expected to improve the  timeliness, enhance the usefulness, and ensure the reliability of financial  information. The expected result is integrated financial and performance  management systems that routinely produce information that is (1) timely,  to measure and effect performance immediately, (2) useful, to make more  informed operational and investing decisions, and (3) reliable, to ensure  consistent and comparable trend analysis over time and to facilitate better  performance measurement and decision making. This result is key to  successfully achieving the goals set out by the Congress in the Chief  Financial Officers Act and other federal financial management reform  legislation.
In addition, the Joint Financial Management Improvement Program  (JFMIP) Principals have defined success measures for financial  management performance that go far beyond an unqualified audit opinion  on financial statements and include measures such as financial  management systems that routinely provide timely, reliable, and useful  financial information and no material internal control weaknesses or  material noncompliance with laws and regulations and FFMIA  requirements. They also significantly accelerated financial statement  reporting to improve timeliness for decision making and to discourage  costly efforts designed to obtain unqualified opinions on financial  statements without addressing underlying systems challenges.
The OIG reported that the Office of the Chief Financial Officer has  developed plans to review USDA’s legacy systems, and consolidate and  update the systems to meet present accounting standards and  management needs. Further, USDA’s September 30, 2002, FFMIA  Remediation Plan discussed a number of remedial actions that the  department expects to complete by the end of fiscal year 2006.
Another financial management challenge for USDA is federal nontax  delinquent debt collection. USDA reported holding $6.9 billion of federal  nontax debt that was delinquent more than 180 days as of September 30,  2002. The Debt Collection Improvement Act of 1996 (DCIA) gave federal  agencies a full array of tools to collect such delinquent debt. Among other  things, DCIA provides (1) a requirement for federal agencies to refer  eligible debts delinquent more than 180 days to the Department of the  Treasury for collection action, and (2) authorization for agencies to  administratively garnish the wages of delinquent debtors.
In December 2001, we reported that two USDA agencies, Rural  Development’s Rural Housing Service (RHS) and the Farm Service Agency  (FSA) had failed to make DCIA a priority since its enactment in 1996.  Specifically, RHS had not implemented an effective and complete process  to refer debts to Treasury mainly because of systems limitations, debt  reporting problems, and lack of regulations needed to refer losses  resulting from claims paid under its guaranteed single family housing loan  program. FSA lacked effective procedures and controls to identify and  promptly refer eligible delinquent debts to Treasury. Moreover, USDA had  not utilized administrative wage garnishment to collect delinquent nontax  debts. Consequently, opportunities for maximizing the collection of  delinquent nontax debts as contemplated by DCIA were being missed.
USDA officials made a commitment in December 2001 to substantially  improve the department’s implementation of DCIA by December 2002. In  November 2002, we testified that USDA had made progress in addressing  previously identified problems. For example, RHS began referring all  reported eligible debt to Treasury. Further, FSA had developed an action  plan to improve its process and controls for identifying and referring  eligible debts to Treasury. However, at the date of our testimony,  challenges remained that will require sustained commitment and priority  from top management. For example, RHS still had to complete regulations  to refer losses related to its guaranteed single family housing loans to  Treasury and an automated process for such referrals, and FSA needed to  complete actions needed to ensure that all of its eligible debt is promptly  referred to Treasury. In addition, USDA needed to complete regulations  that are required to implement administrative wage garnishment  department wide and get all of its component agencies to begin using this  debt collection tool to the fullest extent practicable. The OIG reported  material noncompliance with the DCIA in its fiscal year 2002 financial  statement audit report, reiterating the need for sustained commitment and  priority by top management.
Now I would like to discuss the progress that the Forest Service has made  toward achieving financial accountability and remaining challenges.
section_title: Forest Service Financial Management
paragraphs: An area of particular concern within USDA continues to be the Forest  Service. Historically, the Forest Service’s financial management systems  have not generated timely and accurate financial information for its annual  audit and for effectively managing operations, monitoring revenue and  spending levels, and making informed decisions about future funding  needs for its program. In addition, the Forest Service has had long- standing material weaknesses with regard to its two major assets—fund  balance with Treasury and property, plant, and equipment. In 1999, we  first designated financial management at the Forest Service to be “high  risk” on the basis of serious financial and accounting weaknesses that had  been identified, but not corrected, in the agency’s financial statements for  a number of years.
The Forest Service received its first-ever unqualified opinion on its fiscal  year 2002 financial statements, which represents noteworthy progress  from prior years when the OIG was unable to express an opinion. To  achieve its unqualified opinion, the Forest Service’s top management  dedicated considerable resources and focused staff efforts to address  accounting and reporting deficiencies that had prevented a favorable  opinion in the past. For example, during fiscal year 2002 the Forest Service  formed a reconciliation strike team to resolve long-standing real and  personal property accounting deficiencies. The property, plant, and  equipment reconciliation team analyzed transaction data to identify  inaccurate records and reconciled the general ledger to its supporting  detailed records. In addition, the strike team, in cooperation with the  USDA Office of the Chief Financial Officer, the USDA OIG, and  consultants, worked to ensure that property documentation supported  property records, inventories were complete, and property was valued  correctly. Further, the team worked with USDA on modifications and  enhancements to certain property feeder systems. Because the Forest  Service property comprises 80 percent of the $4.2 billion line item on  USDA’s financial statements, the OIG was able to validate this number for  its fiscal year 2002 opinion.
However, material deficiencies in the controls related to the accurate  recording of property, plant, and equipment transactions remain. For  example, the financial statement auditor reported instances in which  recorded amounts did not agree with supporting documentation and  inappropriate payroll expenses were included in property values instead of  being recorded as expenses, resulting in an overstatement of property and  an understatement of expenses. Further, the Forest Service did not have  effective controls over the initial recording of acquisition costs, in-service  date, and useful life of property items. Because the Forest Service did not  require reviews of data input for property transactions by a supervisor,  another independent person, or by automated system edit checks within  property systems, certain property items were not recorded properly.
While the Forest Service made significant progress in fiscal year 2002 to  reconcile its fund balance with Treasury accounts, the financial statement  auditor noted significant control deficiencies in its reconciliation  processes. For example, the Forest Service needs to research a large  backlog of unreconciled items and take corrective actions. In order to  bring the Forest Service’s fund balance with Treasury accounts into  balance with Treasury records as of September 30, 2002, the Forest  Service recorded an adjustment of $107 million.
Although the Forest Service reached an important milestone by attaining a  clean audit opinion on its financial statements, it has not yet proven it can  sustain this outcome, and it has not reached the end goal, as envisioned by  the President’s Management Agenda for improved financial management  and the JFMIP Principals, of routinely having timely, accurate, and useful  financial information. The Forest Service continues to commit  considerable resources to correcting its financial management  weaknesses; however, much work remains. In our January 2003 high-risk  update, we again designated financial management at the Forest Service as  “high risk” on the basis of its serious internal control weaknesses.
In closing, Mr. Chairman, I want to emphasize that USDA has made  significant progress in addressing its major challenges related to financial  management and continues to do so. At the same time, before USDA is  able to sustain financial accountability and produce relevant, reliable, and  timely information to effectively manage the department, it and its  component agencies, particularly the Forest Service, must resolve some  very difficult issues.
This concludes my statement. I would be happy to answer any questions  you or other members of the subcommittee may have.
section_title: Contact and Acknowledgments
paragraphs: For information about this statement, please contact McCoy Williams,  Director, Financial Management and Assurance, at (202) 512-6906, or  Alana Stanfield, Assistant Director, at (202) 512-3197. You may also reach  them by e-mail at williamsm1@gao.gov or stanfielda@gao.gov. Individuals  who made key contributions to this testimony include Lisa Crye and Jeff  Isaacs.
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