Federal Financial Management: Critical Accountability and Fiscal Stewardship Challenges Facing Our Nation
Published: 2007-03-01T00:00:00

Fast Facts:

Highlights:
section_title: Why GAO Did This Study
paragraphs: The foundation laid by the Chief Financial Officers Act of 1990 and other management reform legislation provided a much needed statutory basis to improve the accountability of government programs and operations. Such reforms were intended to produce reliable, timely, and useful financial information to help manage day-to- day operations and exercise oversight and promote fiscal stewardship. This testimony, based on GAO's prior work, addresses (1) the progress made and challenges remaining to improve federal financial management practices, and (2) the serious challenges posed by the government's deteriorating long-range fiscal condition and the Comptroller General's views on a possible way forward.
section_title: What GAO Found
paragraphs: Since the enactment of key financial management reforms, the federal government has made substantial progress in improving financial management activities and practices. Federal financial systems requirements have been developed, and internal control has been strengthened. Nonetheless, the federal government still has a long way to go to address the six principal challenges to fully realizing strong federal financial management: (1) transforming financial management and business practices at DOD, (2) improving agency financial and performance reporting, (3) modernizing financial management systems, (4) addressing key remaining internal control weaknesses, (5) building a financial management workforce for the future, and (6) strengthening consolidated financial reporting. From a broad financial management perspective, the federal government's financial condition and fiscal outlook are worse than many understand. We are currently experiencing strong economic growth and yet running large on-budget (operating) deficits that are largely unrelated to the Global War on Terrorism. The federal government faces large and growing structural deficits in future years due primarily to known demographic trends and rising health care costs. If it is assumed that recent tax reductions are made permanent and discretionary spending keeps pace with the growth of our economy, GAO's long-term simulations suggest that by 2040, federal revenues may be adequate to pay little more than interest on debt held by the public and some Social Security benefits. Neither slowing the discretionary spending growth nor allowing certain tax provisions to expire--nor both together--would eliminate the imbalance.

section_title: Letter
paragraphs: I am pleased to be here today to testify on the progress made towards a  results-oriented, accountable, and relevant government and the challenges  that must be addressed to provide accountability and exercise  stewardship. The foundation laid by the Chief Financial Officers (CFO)  Act of 1990 and other management reform legislation provides a basis to  improve the accountability of government programs and operations as  well as to routinely produce valuable cost and operating performance  information. While certain material weaknesses in internal control and in  selected accounting and financial reporting practices continue to prevent  GAO from being able to issue an opinion on the consolidated financial  statements of the U.S. government, the federal government has come a  long way since enactment of the CFO Act. At the same time, there is a  continuing need to address persistent, long-standing accountability  problems and to take financial management to the next level. This will be  important as the federal government faces difficult fiscal challenges that  will require reliable cost and performance information to support timely  decisions on spending and, at the same time, pressures to address fraud,  waste, abuse, and mismanagement will only intensify.
From a broad financial management perspective, the federal government’s  deteriorating long-range financial condition and long-term fiscal imbalance  are matters of increasing concern. We face large and growing structural  deficits due primarily to known demographic trends and rising health care  costs. There is a need to engage in a fundamental review, reprioritization,  and reengineering of the base of government. Understanding and  addressing the federal government’s financial condition and long-term  fiscal imbalance are critical to maintain fiscal flexibility so that we can  respond to emerging social, economic, and security challenges.
Your decision to begin this Congress with a hearing on these important  issues demonstrates the seriousness with which this Subcommittee views  the financial management challenges facing the federal government and  your commitment to address them. Today I would like to:    outline progress made to date and the key challenges in improving  federal financial management practices, and    highlight the challenges posed by the government’s fiscal condition and  my views on a possible way forward.
Our prior work on which this testimony is based was performed in  accordance with generally accepted government auditing standards.
subsections: section_title: Progress Made and the Key Challenges that Remain in Improving Federal Financial Management Practices
paragraphs: The federal government has made substantial progress in financial  management. If I were to summarize in just a few words the environment  in 2007 as compared to prior to enactment of key financial management  laws, financial management has gone from the backroom to the  boardroom. There has been a cultural change in how financial  management is viewed and carried out in the agencies and a recognition of  the value and need for good financial management throughout  government, which was not the case in 1990 when the Congress passed the  CFO Act. Financial management systems and internal control have been  strengthened. Generally accepted government accounting standards have  been developed. For fiscal year 2006, 19 of 24 CFO Act agencies received  clean audit opinions on their financial statements, up from just 6 for fiscal  year 1996. While there has been marked progress in federal financial  management, a number of challenges still remain, including transforming  financial management and business practices at DOD, modernizing  financial management systems, and building a financial management  workforce for the future. Fully meeting these challenges will enable the  federal government to provide the world-class financial management  anticipated by the CFO Act and other management reform legislation.
subsections: section_title: Progress Made since Passage of Key Federal Financial Management Legislation
paragraphs: First, I would like to briefly highlight the legislative framework that  governs federal financial management. The Congress has long recognized  the importance of the federal government implementing strong financial  management practices. Towards this end, the Congress has passed a series  of management reform legislation aimed at improving and providing a  strong foundation for federal financial management. This series of  legislation started with the Federal Managers’ Financial Integrity Act of  1982 (FMFIA), which the Congress passed to strengthen internal control  and accounting systems throughout the federal government, among other  purposes. In accordance with FMFIA, GAO has issued Standards for  Internal Control in the Federal Government, which provides the  standards that are directed at helping agency managers implement  effective internal control, an integral part of improving financial  management systems.
While agencies had achieved some early success in identifying and  correcting material internal control and accounting system weaknesses,  their efforts to implement FMFIA had not produced the intended results.  Therefore, the Congress passed additional management reform legislation  to improve the general and financial management of the federal  government. This legislation includes the (1) CFO Act of 1990, (2)  Government Performance and Results Act of 1993 (GPRA), (3)  Government Management Reform Act of 1994 (GMRA), (4) Federal  Financial Management Improvement Act of 1996 (FFMIA), (5) Clinger- Cohen Act of 1996, (6) Accountability of Tax Dollars Act of 2002  (ATDA), and (7) Improper Payments Information Act of 2002 (IPIA).
The CFO Act is the most comprehensive and far-reaching financial  management improvement act since the Budget and Accounting  Procedures Act of 1950. The CFO Act established a leadership structure,  provided for long-range planning, required audited financial statements  and modern financial systems, and strengthened accountability reporting  for certain agencies. Three years later, the Congress enacted GPRA, which  required certain agencies to develop strategic plans, set performance  goals, and report annually on actual performance compared to goals.
GPRA’s emphasis on performance management complements the  concepts in the CFO Act. GPRA was followed by GMRA, which made  permanent the pilot program in the CFO Act for annual audited agency- level financial statements, expanded this requirement to all CFO Act  agencies, and established a requirement for the preparation and audit of  governmentwide consolidated financial statements. In 1996, FFMIA built  on the foundation laid by the CFO Act by reflecting the need for CFO Act  agencies to have systems that can generate reliable, useful, and timely  information with which to make fully informed decisions and to ensure  accountability on an ongoing basis. The Clinger-Cohen Act of 1996 (also  known as the Information Technology Management Reform Act of 1996)  sets forth a variety of initiatives to support better decision making for  capital investments in information technology, which has led to the  development of the Federal Enterprise Architecture and better-informed  capital investment and control processes within agencies and across  government. ATDA required most executive agencies that were not  otherwise required by statute or exempted by OMB, to prepare annual  audited financial statements and to submit such statements to the  Congress and the Director of OMB. Finally, IPIA has increased visibility  over improper payments by requiring executive agency heads, based on  guidance from the OMB, to identify programs and activities susceptible to  significant improper payments, estimate amounts improperly paid, and  report on the amounts of improper payments and their actions to reduce  them. The combination of reforms ushered in by these laws, if successfully  implemented, provides a solid foundation to improve the accountability of  government programs and operations as well as to routinely produce  valuable cost and operating performance information.
The five key financial management improvements that we have noted from  a governmentwide perspective are as follows.
Achieving Cultural Change—We have seen true cultural change in  how financial management is viewed. This has been accomplished  through a lot of hard work by OMB and the agencies and continued  strong support and oversight by the Congress. At the top level, federal  financial management reform has gained momentum through the  committed support of top federal leaders. For example, improved  financial performance is one of the governmentwide initiatives in the  President’s Management Agenda (PMA). Under this initiative, agency  CFOs share responsibility—both individually and through the efforts of  the CFO Council—for improving the financial performance of the  government. The Executive Branch Management Scorecard, developed  as part of the PMA, has been an effective tool to monitor progress and  help drive much needed improvements.
Establishing a Governmentwide Leadership Structure—The Joint  Financial Management Improvement Program (JFMIP) Principals— the Secretary of the Treasury, the Director of OMB, the Director of  OPM, and myself, the Comptroller General—have provided leadership  by holding periodic meetings that have resulted in unprecedented  substantive deliberations and agreements focused on key reform issues  such as improving accounting for and reporting on social insurance,  accelerating issuance of audited agency financial statements, and  advocating audit committees. GAO has led by example in this regard,  by establishing an audit advisory committee to help us in overseeing  the effectiveness of our current financial reporting and audit processes.
As established by the CFO Act, the Office of Federal Financial  Management (OFFM), the OMB organization with governmentwide  responsibility for federal financial management for executive agencies,  has demonstrated leadership by undertaking a number of initiatives  related to improving financial management capabilities ranging from  requiring the use of commercial off-the-shelf financial systems to the  promotion of cost accounting to improve the availability of  management information for decision making. In addition to assessing  the status of agencies’ progress in improving financial performance for  the PMA, OFFM has also issued bulletins, circulars, and other guidance  to provide a broad-based foundation for transforming agencies’  financial management operations.
Strengthening Internal Control—In December 2004, OMB revised its  Circular No. A-123, Management’s Responsibility for Internal Control,  to provide guidance to federal managers on improving the  accountability and effectiveness of federal programs and operations by  establishing, assessing, correcting, and reporting on management  controls. Requiring federal managers, at the executive level, to focus on  internal control demonstrates a renewed emphasis on identifying and  addressing internal control weaknesses. As we testified in 2005, many  internal control problems have been identified and fixed, especially at  the lower levels where internal control assessments were performed  and managers could take focused actions to fix relatively simple  problems. As a recent case in point, based on our 2006 assessment of  high-risk programs, two programs previously designated as high risk,  largely due to financial management weaknesses, were removed from  the list.
Agencies have also made progress in implementing processes and  controls to identify, estimate, and reduce improper payments. After  passage of IPIA, OMB established Eliminating Improper Payments in  2005 as a new program-specific initiative under the PMA. This separate  PMA program initiative was established in this manner to ensure that  agency managers are held accountable for meeting the goals of IPIA  and are, therefore, dedicating the necessary attention and resources to  meeting IPIA requirements. OMB also issued guidance in August 2006  to help clarify and update requirements to support governmentwide  IPIA compliance.
Improving Financial Management Systems and Operations—Since  enactment of financial management reform legislation, federal financial  management systems requirements have been developed for the core  financial system; managerial cost system; and other administrative and  programmatic systems, such as grants, property, revenue, travel, and  loans, which are part of an overall financial management system. After  the realignment of the JFMIP Program Management Office, OFFM has  continued the practice of issuing these requirements. Beginning in  1999, OMB required agencies to purchase commercial off-the-shelf  software that had been tested and certified by the federal government  against the systems requirements that I just mentioned. With these  requirements, the federal government has better defined the  functionality needed in its financial management systems, which has  helped the vendor community understand federal agencies’ needs.
OMB continues to move forward on initiatives that support the PMA  with the further development of the financial management line of  business to promote leveraging shared service solutions to enhance the  government’s performance and services. The financial management  line of business initiative is modeled after the consolidation of agencies  processing payroll, which were dramatically reduced from 22 to 4  systems. OMB, in conjunction with an interagency task force, estimated  that these efforts could save billions of taxpayer dollars. Ultimately,  this initiative is expected to (1) reduce the number of systems that each  individual agency must support, (2) promote standardization, and (3)  reduce the duplication of efforts.
Preparing Auditable Financial Statements—Unqualified audit  opinions for CFO Act agencies’ financial statements have grown from 6  in fiscal year 1996 to 19 in fiscal year 2006. Improvements in timeliness  have been even more dramatic over the years. Agencies were able to  issue their audited financial statements within the accelerated  reporting time frame—all 24 CFO Act agencies issued their audited  financial statements by the November 15, 2006, deadline, set by OMB,  just 45 days after the close of the fiscal year. Just a few years ago, most  considered this accelerated time frame unrealistic and unachievable.
Another definitive example of progress made to date is the  establishment of the Federal Accounting Standards Advisory Board  (FASAB). In conjunction with the passage of the CFO Act, the OMB  Director, Secretary of the Treasury, and the Comptroller General  established FASAB to develop accounting standards and principles for  the newly required financial statements. The concepts and standards  are the basis for OMB’s guidance to agencies on the form and content  of their financial statements and for the government’s consolidated  financial statements. FASAB is comprised of a 10-member advisory  board of 4 knowledgeable individuals from government and 6  nonfederal members selected from the general financial community,  the accounting and auditing community, and academia to promulgate  proposed accounting standards designed to meet the needs of federal  agencies and other users of federal financial information. The mission  of FASAB is to develop accounting standards after considering the  financial and budgetary information needs of congressional oversight  groups, executive agencies, and other users. These accounting and  reporting standards are essential for public accountability and for an  efficient and effective functioning of our democratic system of  government. The standards developed by FASAB have been recognized  by the American Institute of Certified Public Accountants as generally  accepted accounting standards for federal entities.
section_title: Financial Management Challenges Facing the Federal Government
paragraphs: While there has been marked progress in federal financial management, a  number of challenges still remain. The principal challenges remaining are  (1) transforming financial management and business practices at DOD,   (2) improving financial and performance reporting, (3) modernizing  financial management systems, (4) tackling long-standing internal control  weaknesses, (5) building a financial management workforce for the future,  and (6) strengthening consolidated financial reporting. Fully meeting these  challenges will enable the federal government to provide the world-class  financial management anticipated by the CFO Act and other management  reform legislation. While there continues to be much focus on the agency  and governmentwide audit opinions, getting a clean audit opinion, though  important in itself, is not the end goal. The end goal is the establishment of  a fully functioning CFO operation that includes (1) modern financial  management systems that provide reliable, timely, and useful information  to support day-to-day decision making and oversight, and for the  systematic measurement of performance; (2) sound internal controls that  safeguard assets and help ensure proper accountability; and (3) a cadre of  highly qualified CFOs and supporting staff.
subsections: section_title: Transforming DOD’s Financial and Business Management Practices
paragraphs: DOD’s long-standing financial and business management difficulties are  pervasive, complex, and deeply rooted in virtually all business operations  throughout the department. Resolution of these serious problems is  essential to improving financial management governmentwide and  achieving an opinion on the U.S. government’s consolidated financial  statements. Of the 27 areas on GAO’s high-risk list, DOD has 8 of its own  high-risk areas and shares responsibility for 7 governmentwide high-risk  areas. These weaknesses adversely affect the department’s and the federal  government’s ability to control costs; ensure basic accountability;  anticipate future costs and claims on the budget; measure performance;  maintain funds control; prevent fraud, waste, and abuse; and address  pressing management problems. Additionally, the department invests  billions of dollars each year to operate, maintain, and modernize its  business systems. But despite this significant annual investment, the  department has been continually confronted with the difficult task of  implementing business systems on time, within budget, and with the  promised capability.
We also have concerns about the reasonableness, reliability, and  transparency of DOD’s budget requests, especially the supplemental  budget requests the department has submitted to the Congress in recent  years. Reasonableness and reliability are critical factors not only for  financial information, but also for budget data. As I testified last year, our  prior work found numerous problems with DOD’s processes for recording  and reporting costs for the Global War on Terrorism (GWOT), the funding  for which has been provided through regular appropriations as well as  supplemental appropriations. These problems included long-standing  deficiencies in DOD’s financial management systems and business  processes, the use of estimates instead of actual cost data, and the lack of  adequate supporting documentation. As a result, neither DOD nor the  Congress have reliable information on GWOT costs or the use of  appropriated funds and also lack historical data useful in considering  future funding needs.
The nature and severity of DOD’s financial management, business  operations, and system deficiencies not only affect financial reporting, but  also impede the ability of DOD managers to receive the full range of  information needed to effectively manage day-to-day operations. Such  weaknesses have adversely affected the ability of DOD to control costs,  ensure basic accountability, and prevent fraud. The following examples  illustrate DOD’s continuing problems.
We found that hundreds of separated battle-injured soldiers were  pursued for collection of military debts incurred through no fault of  their own, including 74 soldiers whose debts had been reported to  credit bureaus, private collection agencies, and the Treasury Offset  Program at the time we initiated our audit. Overpayment of pay and  allowances (entitlements), pay calculation errors, and erroneous leave  payments caused 73 percent of the reported debts.
Over the past several years, we have reported on significant pay  problems experienced by mobilized Army National Guard and Army  Reserve (Army Guard and Reserve) soldiers in the wake of the  September 11, 2001, terrorist attacks. These reports included examples  of hundreds of soldiers receiving inaccurate and untimely payroll  payments due to a paper-intensive, error-prone pay process and the  lack of integrated pay and personnel systems. In response to our  reports, DOD has taken some action to improve controls designed to  pay Army Guard and Reserve soldiers accurately and on time,  especially those who had become sick or injured in the line of duty.
In March 2006, we reported that DOD’s policies and procedures for  determining, reporting, and documenting cost estimates associated  with environmental cleanup or containment activities were not  consistently followed. Further, none of the military services had  adequate controls in place to help ensure that all identified  contaminated sites were included in their environmental liability cost  estimates. These weaknesses not only affected the reliability of DOD’s  environmental liability estimate, but also that of the federal  government as a whole.
In May 2005, we reported that DOD did not have management controls  in place to assure that excess inventory was reutilized to the maximum  extent possible. We found significant waste and inefficiency because  new, unused, and excellent condition items were transferred and  donated outside of DOD, sold for pennies on the dollar, or destroyed.  Root causes for the waste and inefficiency included (1) unreliable  excess property inventory data; (2) inadequate oversight and physical  inventory control; and (3) outdated, nonintegrated excess inventory  and supply management systems.
The department is provided billions of dollars annually to operate,  maintain, and modernize its stovepiped, duplicative, legacy business  systems. Despite this significant investment, the department is severely  challenged in implementing business systems on time, within budget, and  with the promised capability. Many of the problems related to DOD’s  inability to effectively implement its business systems can be attributed to  its failure to implement the disciplined processes necessary to reduce the  risks associated with these projects to acceptable levels. Disciplined  processes have been shown to reduce the risks associated with software  development and acquisition efforts and are fundamental to successful  systems acquisition. The weaknesses that we found in DOD business  systems implementations such as the Defense Travel System, the  Logistics Modernization Program, and the Navy’s Enterprise Resource  Planning (ERP) efforts illustrate the types of system acquisition and  investment management controls that need to be effectively implemented  in order for a given investment to be successfully acquired and deployed.
Meeting the Challenge of Transforming DOD Financial and Business  Management Practices. Successful reform of DOD’s fundamentally flawed  financial and business management operations must simultaneously focus  on its systems, processes, and people. DOD’s top management has  demonstrated a commitment to transforming the department and has  launched key initiatives to improve its financial management processes  and related business systems such as the Financial Improvement and  Audit Readiness (FIAR) Plan. However, DOD still lacks two key elements  that are needed to ensure a successful and sustainable transformation  effort.
As we have previously recommended, DOD should develop and  implement an integrated and strategic business transformation plan.  Since 1999, we have recommended the need for a comprehensive,  integrated strategy and action plan for reforming DOD’s major business  operations and support activities. Critical to the success of DOD’s  ongoing transformation efforts will be top management attention and  structures that focus on transformation from a broad perspective and a  clear, comprehensive, integrated, and enterprisewide plan that, at a  summary level, addresses all of the department’s major business areas.
Because of the complexity and long-term nature of DOD’s business  transformation efforts, we again reiterate the need for a chief  management officer (CMO) to provide sustained leadership and  maintain momentum, as we have previously testified. The National  Defense Authorization Act for Fiscal Year 2006 directs the department  to study the feasibility of a CMO position in DOD. In this regard, the  Institute for Defense Analysis issued its report in December 2006 and,  among other things, called upon the Congress to establish a Deputy  CMO (level III official) at the department. Further, in May 2006, the  Defense Business Board recommended, among other things, the  creation of a Principal Under Secretary of Defense, as a level II official  with a 5-year term appointment, to serve as CMO. I strongly support a  level II official and believe that someone at this level is needed to be  successful given the magnitude of the challenge and the need to effect  change across the department. It is important to note that a CMO  would not assume the responsibilities of the undersecretaries of  defense, the service secretaries, or other DOD officials for the day-to- day management of the department. Rather, the CMO would be  responsible and accountable for planning, integrating, and executing  the overall business transformation effort. The reason I am so  passionate about the need for a CMO at DOD is that progress at DOD  has historically been painfully slow. A host of well-intended past  improvement initiatives has largely failed. I am concerned that without  a CMO who is responsible and accountable for demonstrable results  and sustained success, history will continue to repeat itself.
section_title: Improving Agency Financial and Performance Reporting
paragraphs: In the area of agency financial and performance reporting, I see obtaining  unqualified opinions on financial statements at all CFO Act agencies as the  primary challenge. While significant progress has been made by many CFO  Act agencies to prepare timely annual financial statements that can pass  the scrutiny of a financial audit, several agencies continue to struggle to  reach this milestone. For fiscal year 2006, five CFO Act agencies—DOD,  DHS,  National Aeronautics and Space Administration (NASA), and the  Departments of Energy and Transportation—failed to meet this basic  requirement. Problems at NASA and the Department of Energy stem from  deficiencies in those agencies’ implementation of new financial  management systems, among other things. The Department of  Transportation auditors cited significant problems with a key accounting  practice at the Federal Aviation Administration as the underlying cause for  qualifying their opinion on the department’s financial statements. As I  previously discussed, the problems faced by DOD are so pervasive that in  accordance with section 1008 of the fiscal year 2002 National Defense  Authorization Act, for the sixth year, DOD acknowledged that its systems  could not support material amounts on DOD’s fiscal year 2006 financial  statements and accordingly, the auditors did not perform auditing  procedures and disclaimed an opinion. At DHS, the auditors recognized  that the department has not yet established the infrastructure and internal  control necessary and disclaimed an opinion on its financial statements.  Problems at these agencies also significantly impact our ability to provide  an opinion on the U.S. government’s consolidated financial statements.
Meeting the Challenge of Improved Financial and Performance  Reporting. Addressing the financial and performance reporting  weaknesses that impede CFO Act agencies from obtaining unqualified or  clean opinions on the respective agency financial statements will vary  depending upon the circumstances at the agency. Developing and  implementing corrective action plans to address the identified problems  are time-honored methods for resolving such problems. For example, the  DOD Comptroller launched the FIAR Plan to guide improvements to  address financial management deficiencies and achieve clean financial  statement audit opinions. This plan incorporates our prior  recommendations and ties planned improvement activities at the  component and department levels together with accountable personnel,  milestones, and required resources. We view the incremental line item  approach, integration plans, and oversight structure outlined in the FIAR  plan for examining DOD’s operations and preparing for an audit as a  significant improvement over prior financial improvement initiatives.  However, we continue to stress that the effectiveness of DOD’s FIAR plan  will ultimately be measured by the department’s ability to provide timely,  reliable, and useful information for day-to-day management and decision  making.
section_title: Modernizing Financial Management Systems
paragraphs: Since the passage of the CFO Act and FFMIA, there has been progress in  achieving the financial systems requirements of these landmark laws.  While improvements have been made throughout government, much work  remains to fulfill the underlying goals of the CFO Act and FFMIA. In fiscal  year 1997, 20 agencies were reported as having systems that were not in  substantial compliance with at least one of the three FFMIA systems  requirements, while in fiscal year 2006, auditors for 17 of the CFO Act  agencies reported that the agencies’ financial management systems did not  substantially comply with at least one of the three FFMIA requirements.  The major barrier to achieving compliance with FFMIA continues to be the  inability of agencies to meet federal financial management systems  requirements, which involve not only core financial systems, but also  administrative and programmatic systems. While the problems are much  more severe at some agencies than at others and progress has been made  in addressing financial management systems’ weaknesses, the lack of  substantial compliance with the three requirements of FFMIA, and the  associated deficiencies, indicates that the financial management systems  of many agencies are still not able to routinely produce reliable, useful,  and timely financial information. Consequently, the federal government’s  access to relevant, timely, and reliable data to effectively manage and  oversee its major programs, which is the ultimate objective, was and  continues to be restricted.
What is most important is that the problem has been recognized. Across  government, agencies have efforts under way to implement new financial  management systems or to upgrade existing systems. Agencies expect that  the new systems will provide reliable, useful, and timely data to support  day-to-day managerial decision making and assist taxpayer and  congressional oversight. Whether in government or the private sector,  implementing and upgrading information systems is a difficult job and  brings a degree of new risk. Organizations that follow and effectively  implement accepted best practices in systems development and  implementation (commonly referred to as disciplined processes) can  manage and reduce these risks to acceptable levels. For example, as part  of our work at DOD, NASA, and other agencies that have experienced  significant problems in implementing new financial management systems,  we have consistently found that these agencies were not following the  necessary disciplined processes, human capital practices, and information  technology management practices for efficient and effective development  and implementation of such systems.
Challenges also exist in implementing OMB’s financial management line of  business initiative that is aimed at significantly improving the financial  data government managers need to make timely and successful decisions  and reduce the cost of government operations. For example, as we  reported in March 2006, the requirements for agencies and private sector  firms to become shared service providers and the services they must  provide have not been adequately documented or effectively  communicated to agencies and the private sector. We made several  recommendations that focused on reducing the risk of this important  initiative. During 2006, OMB addressed some of the weaknesses by issuing  an initial version of migration planning guidance and publishing  competition guidance for shared service providers and agencies. However,  as OMB acknowledged in the Federal Financial Management Report  2007, it has not yet developed several critical elements needed to  minimize risk, provide assurance, and develop understandings with  software vendors, shared service providers, and agencies on topics such as  standard business processes and common accounting codes. Further, a  governmentwide concept of operations has not been developed that would  identify interrelationships among federal financial systems and which  financial management systems should be operated at an agency level and  which should be operated at a governmentwide level and how those would  integrate. In addition, processes have not been put in place to facilitate  agency decisions on selecting a provider or focusing investment decisions  on the benefits of standard processes and shared service providers.
Meeting the Challenge of Modernizing Financial Systems. As the federal  government moves forward with ambitious financial management system  modernization efforts that identify opportunities to eliminate redundant  systems and enhance information reliability and availability, adherence to  disciplined processes, sound human capital practices, and proven  information technology management practices is crucial to reduce risks to  acceptable levels.
To help address the underlying problems agencies face in  implementing financial management systems that will help them  adhere to the requirements of the CFO Act and FFMIA, we have made  numerous specific recommendations to agencies to address the  specific shortcomings we identified. For example, at NASA we made a  total of 45 recommendations aimed at addressing weaknesses we  identified in NASA’s acquisition and implementation strategy for a new  integrated financial management system.
The key to avoiding these long-standing problems is to provide specific  guidance to agencies that incorporate the best practices identified by  the Software Engineering Institute, the Institute of Electrical and  Electronic Engineers, and other experts. Toward this end, we have  recommended that OMB develop such guidance to help minimize the  waste of scarce resources from modernization failures.
We have also made a number of recommendations to OMB to help it  provide a solid foundation for the financial management line of  business initiative. OMB has projects under way to develop standard  business processes, a common accounting code, and specific measures  to assess the performance of the shared service providers to help  address some shortcomings we identified. While all of these projects  are important, developing a concept of operations is an important step  because it lays the foundation for many subsequent decisions.
section_title: Addressing Long-standing Internal Control Weaknesses
paragraphs: While continuing progress has been made in strengthening internal  control, at the same time, the federal government faces numerous internal  control problems, some of which are long-standing and are well- documented at the agency level and governmentwide. As we have reported  for a number of years in our audit reports on the U.S. government’s  consolidated financial statements, the federal government continues to  have material weaknesses and reportable conditions in internal control  related to property, plant, and equipment; inventories and related  property; liabilities and commitments and contingencies; cost of  government operations; and disbursement activities, just to mention a few  of the problem areas. Particularly problematic to the U.S. government’s  consolidated financial statements is the lack of internal controls to  adequately account for and reconcile intragovernmental activity and  balances between federal agencies. Although OMB and Treasury require  the CFOs of 35 executive departments and agencies to reconcile  intragovernmental activity and balances on a quarterly basis, and report  annually to GAO and others on reconciliation efforts at the end of the  fiscal year, a substantial number of agencies did not adequately perform  these reconciliations. To help address this problem, OMB worked with  Treasury and the CFO Council to revise the business rules for  intragovernmental transactions. Because these new rules became effective  on October 1, 2006, it is too soon to tell if they will have the desired effect  of strengthening internal controls. Resolving the intragovernmental  transactions problem remains a difficult challenge and will require a  strong commitment by agencies to fully implement the recently issued  business rules and continued strong leadership by OMB.
As we testified in February 2005, we support OMB’s efforts to revitalize  internal control assessments and reporting through the December 2004  revisions to Circular No. A-123. These revisions recognize that effective  internal control is critical to improving federal agencies’ effectiveness and  accountability and to achieving the goals established by the Congress.  They also considered the internal control standards issued by GAO,  which provide an overall framework for establishing and maintaining  internal control and for identifying and addressing major performance and  management challenges and areas at greatest risk of fraud, waste, abuse,  and mismanagement. OMB reported in its Federal Financial Management  Report 2007, that CFO Act agencies identified new financial reporting  material weaknesses under this revised guidance, which is an important  first step. As agencies expand their assessments and all agencies complete  a full-scope assessment of internal control over financial reporting, they  will develop a better understanding of the full nature and extent of  material weaknesses.
Effective internal control, as envisioned in the revised Circular No. A-123,  inherently includes a successful strategy for addressing improper  payments. Attacking improper payment problems requires a strategy  appropriate to the organization involved and its particular risks. We have  found that entities using successful strategies to address their improper  payment problems shared a common focus of improving the internal  control system—the first line of defense in safeguarding assets and  preventing and detecting errors and fraud. The Congress acted strongly to  address the improper payment problem by passing IPIA and in fiscal year  2005, OMB began to separately track the elimination of improper  payments under the PMA. As I pointed out in testimony before this  Subcommittee in December 2006, while agencies are making progress in  reporting under IPIA, three major challenges remain in meeting the goals  of the act. First, the existing reporting was incomplete because some  agencies still had not instituted systematic methods to review all programs  and some program estimates were not based on a valid statistical sampling  methodology as required. Second, 10 risk-susceptible programs with  outlays totaling over $234 billion in fiscal year 2005 had not provided  improper payment estimates. Finally, OMB’s implementing guidance  includes specific criteria that limit the disclosure and transparency of  agencies’ improper payments.
Meeting the Challenge of Addressing Internal Control Weaknesses.  Actions can be taken on several fronts to help resolve internal control  weaknesses.
As pointed out in our February 2005 testimony on internal controls,  there are six issues critical to effectively implementing the changes to  Circular No. A-123—specifically, the need for: (1) development of  supplemental guidance and implementation tools to help ensure that  agency efforts are properly focused and meaningful; (2) vigilance over  the broader range of controls covering program objectives; (3) strong  support from managers throughout the agency, and at all levels; (4)  risk-based assessments and an appropriate balance between the costs  and benefits of controls; (5) management testing of controls in  operation to assess if they are designed adequately and operating  effectively, and to assist in formulating corrective actions; and (6)  management accountability for control breakdowns.
Addressing the multitude of problems in financial reporting internal  controls, including reconciling intragovernmental activity and balances,  that have been identified to date will require a significant effort over a  long time. Many of these problems have been around for years and  have proven resistant to actions to resolve them. Continuous  monitoring by top agency management and OMB along with oversight  by the Congress will be critical to successfully resolving these material  weaknesses and enhancing financial management.
The ultimate success of efforts to reduce improper payments depends,  in part, on each agency’s continuing diligence and commitment to  meeting the requirements of IPIA and the related OMB guidance. Full  and reasonable disclosure of the extent of the problems could be  enhanced by modifying the act’s underlying criteria used to identify  which programs and activities are susceptible to significant improper  payments and we asked the Congress to consider amending IPIA to do  so. We also recommended that OMB’s implementing guidance be  strengthened in several areas.
section_title: Building a Financial Management Workforce for the Future
paragraphs: The financial management workforce plays a critical role in government  because the scale and complexity of federal activities requiring financial  management and control are monumental. The federal government has  always faced the challenge of sustaining the momentum of transformation  because of the limited tenure of key administration officials. The current  administration’s PMA has served as a driver for governmentwide financial  management improvements. It has been clear from the outset that the  current administration is serious about improved financial management.  We have been fortunate that, since the passage of the CFO Act, all three  administrations have been supportive of financial management reform  initiatives. And, as I discussed earlier, we have seen a positive cultural  shift in the way the federal government conducts business. Given the long- term nature of the comprehensive changes needed and challenges still  remaining to fully realize the goals of the CFO Act, it is unlikely they will  all occur before the end of the current administration’s term. Therefore,  sustaining a commitment to transformation in future administrations will  be critical to ensure that key management reforms, such as the CFO Act,  are fully attained.
Changing the way business is done in a large, diverse, and complex  organization like the federal government is not an easy undertaking.  According to a survey of federal CFOs, federal finance organizations of  the future will have fewer people, with a greater percentage of analysts, as  opposed to accounting technicians. However, today most functions within  federal finance organizations are focused primarily on (1) establishing and  administering financial management policy; (2) tracking, monitoring, and  reconciling account balances; and (3) ensuring compliance with laws and  regulations. While they recognize the need for change, according to the  CFOs surveyed, many questions remain unanswered regarding how best to  facilitate such changes.
When it comes to world-class financial management, our study of nine  leading private and public sector financial organizations found that leading  financial organizations often had the same or similar core functions (i.e.,  budgeting, treasury management, general accounting, and payroll) as the  federal government. However, the way these functions were put into  operation varied depending on individual entity needs. Leading  organizations reduced the number of resources required to perform  routine financial management activities by (1) consolidating activities at a  shared service center and (2) eliminating or streamlining duplicative or  inefficient processes. Their goal was not only to reduce the cost of finance  but also to organize finance to add value by reallocating finance resources  to more productive and results-oriented activities like measuring financial  performance, developing managerial cost information, and integrating  financial systems.
The federal financial workforce that supports the business needs of today  is not well-positioned to support the needs of tomorrow. A JFMIP study  indicated that a significant majority of the federal financial management  workforce performs transaction support functions of a clerical and  technical nature. These skills do not support the vision of tomorrow’s  business which will depend on an analytic financial management  workforce providing decision support. A 2005 survey of senior level  federal CFO executives noted that the respondents still believed that mid-  and lower-level personnel lack the skills needed for modern financial  management. The 2005 survey indicated that the federal CFO community  thought that overly complex civil service rules made it difficult to recruit  entry-level talent and nearly impossible to hire middle managers from  outside the government. Our work has shown that staffing shortages,  particularly at key agencies such as DOD, DHS, and Treasury can  adversely impact financial management operations. For example, as part  of our work on the U.S. government’s consolidated financial statements,  we found that personnel at Treasury’s Financial Management Service had  excessive workloads that required an extraordinary amount of effort and  dedication to compile the consolidated financial statements and that there  were not enough personnel with specialized financial reporting experience  to help ensure reliable financial reporting by the reporting date.
Meeting the Challenge of Building the Financial Management Workforce.  We have previously identified several factors that are critical to resolving  financial management human capital issues.
Part of the commitment to transformation is the establishment of  skilled and sustained leadership through the creation of a chief  management officer (CMO) at selected federal agencies. The CMO  would serve as the strategic, enterprisewide integrator of efforts to  transform agency business operations, including financial management.  While we have called for the creation of such a position specifically at  DOD and DHS, in July 2006, a major global consulting firm  recommended that the concept of a chief operating officer be instituted  in many federal agencies as the means to help achieve the  transformation that many agencies have undertaken.
Building a world-class financial workforce will require a workforce  transformation strategy devised in partnership between CFOs and  agency human resource departments, now established in law as Chief  Human Capital Officers, working with OMB and OPM. Agency financial  management leadership must identify current and future required  competencies and compare them to an inventory of skills, knowledge,  and current abilities of current employees. Then they must strategically  manage to fill gaps and minimize overages through informed hiring,  development, and separation strategies. This is similar to the approach  that we identified when we designated strategic human capital  management as a high-risk area in 2001. Achieving a successful  financial management vision of the future will be directly determined  by the workforce that supports it. In our view, adequate succession  planning to ensure these positions and other key senior-level financial  management positions are promptly filled with highly qualified staff  will be a key success factor to help transform federal financial  management.
section_title: Strengthening Consolidated Financial Reporting
paragraphs: As you know, GAO is responsible for auditing the consolidated financial  statements included in the Financial Report of the United States  Government (Financial Report), but we have been unable to express an  opinion on them for the 10th year in a row because the federal government  could not demonstrate the reliability of significant portions of the financial  statements, especially in connection with major financial management  challenges that I discussed earlier regarding DOD. The lack of effective  internal controls to adequately account for and reconcile  intragovernmental activity and balances is another primary challenge that  impedes our ability to provide an opinion on the consolidated financial  statements. The third major impediment that prevents us from rendering  an opinion on the consolidated financial statements is the federal  government’s ineffective process for preparing the consolidated financial  statements. As I previously discussed, addressing the first two  impediments will be difficult challenges. Resolving the weaknesses in the  systems, controls, and procedures for preparing the consolidated financial  statements is also a formidable challenge.
While further progress was demonstrated in fiscal year 2006, the federal  government continued to have inadequate systems, controls, and  procedures to ensure that the consolidated financial statements are  consistent with the underlying audited agency financial statements,  balanced, and in conformity with U.S. generally accepted accounting  principles. Most of the issues we identified in fiscal year 2006 existed in  fiscal year 2005, and many have existed for a number of years. In addition,  Treasury could not provide the final fiscal year 2006 consolidated financial  statements and supporting documentation in time for us to complete all of  our planned auditing procedures. During our fiscal year 2006 audit, we  found the following:    Treasury showed progress by demonstrating that amounts in the  Statement of Social Insurance were consistent with the underlying  federal agencies’ audited financial statements and that the Balance  Sheet and the Statement of Net Cost were consistent with federal  agencies’ financial statements prior to eliminating intragovernmental  activity and balances. However, Treasury’s process for compiling the  consolidated financial statements did not ensure that the information  in the remaining three 2006 principal financial statements and notes  were fully consistent with the underlying information in federal  agencies’ audited financial statements and other financial data.
To make the fiscal years 2006 and 2005 consolidated financial  statements balance, Treasury recorded net decreases of $11 billion and  $4.1 billion, respectively, to net operating cost on the Statement of  Operations and Changes in Net Position, which it labeled “Other -  Unmatched transactions and balances.” An additional net $10.4 billion  and $3.2 billion of unmatched transactions were recorded in the  Statement of Net Cost for fiscal years 2006 and 2005, respectively.  Treasury is unable to fully identify and quantify all components of  these unreconciled activities.
The federal government did not have an adequate process to fully  identify and report items needed to reconcile the operating results,  which for fiscal year 2006 showed a net operating cost of $449.5 billion,  to the budget results, which for the same period showed a unified  budget deficit of $247.7 billion.
We also noted other deficiencies related to the adequacy of required  disclosures and whether amounts reported are complete. Treasury  continued to make progress in addressing certain other internal control  weaknesses in its process for preparing the consolidated financial  statements. However, internal control weaknesses continued to exist  involving a lack of (1) appropriate documentation of certain policies and  procedures for preparing the consolidated financial statements, (2)  adequate supporting documentation for certain adjustments made to the  consolidated financial statements, and (3) effective management reviews.
As in previous years, Treasury did not have adequate systems and  personnel to address the magnitude of the fiscal year 2006 financial  reporting challenges it faced, such as (1) the Governmentwide Financial  Report System (GFRS) undergoing further development and not yet being  fully operational, and (2) weaknesses in Treasury’s process for preparing  the consolidated financial statements noted above. One of the underlying  causes of these weaknesses, as I discussed earlier, is the lack of sufficient  personnel with specialized financial reporting experience to help ensure  reliable financial reporting by the reporting date.
Meeting the Challenge of Strengthening Consolidated Financial  Reporting. During fiscal year 2006, Treasury, in coordination with OMB,  developed and began implementing corrective action plans and milestones  for short-term and long-range solutions for certain internal control  weaknesses we have previously reported regarding the process for  preparing the consolidated financial statements. In April 2006, we  reported in greater detail on these issues and provided recommendations  to OMB and Treasury. Resolving some of these internal control  weaknesses will require a strong commitment from Treasury and OMB as  they execute and implement their corrective action plans.
Overcoming current challenges will be difficult, but after a decade of  reporting at the governmentwide level perhaps now is an appropriate time  to step back and consider the need for further revisions to the current  federal financial reporting model, which would affect both consolidated  and agency financial reporting. While the current reporting model  recognizes some of the unique needs of the federal government, a broad  reconsideration of the federal financial reporting model could address the  following types of questions.
What kind of information is most relevant and useful for a sovereign  nation?
Do traditional financial statements convey information in a  transparent manner?
What is the role of the balance sheet in the federal government  reporting model?
How should items that are unique to the federal government, such  as social insurance commitments and the power to tax, be  reported?
Engaging in a reevaluation of this nature could stimulate discussion that  would bring about a new way of thinking about the federal government’s  financial and performance reporting needs. To understand various  perceptions and needs of stakeholders for federal financial reporting, a  wide variety of stakeholders from the public and private sector should be  consulted. Ultimately, the goal of such a reevaluation would be reporting  enhancements that can help the Congress deliberate strategies to address  the federal government’s challenges, including those of our growing long- term fiscal imbalance.
More specifically, we continue to support several specific improvements  to federal financial reporting. For example, the federal government’s  financial reporting should be expanded to disclose the reasons for  significant changes during the year in scheduled social insurance benefits  and funding. It should also include a Statement of Fiscal Sustainability— providing a long-term look at the sustainability of current federal fiscal  policy in the context of all major federal spending programs and tax  policies. The reporting on fiscal sustainability should include additional  information that will assist in understanding the sustainability of current  social insurance and other federal programs, including key measures of  fiscal sustainability and intergenerational equity, projected annual cash  flows, and changes in fiscal sustainability during the reporting period. We  believe that such reporting needs to reflect the significant commitments  associated with the Social Security and Medicare programs while  recognizing a liability for the net assets (principally investments in special  U.S. Treasury securities) of the “trust funds.” We support the current  efforts of the Federal Accounting Standards Advisory Board (FASAB) to  begin a project on fiscal sustainability reporting. In addition, an easily  understandable summary annual report should be prepared and published  that includes in a clear, concise, and transparent manner, key financial and  performance information embodied in the Financial Report. Later in this  statement, I offer other suggestions for improved reporting that will help  in this regard.
section_title: Fiscal Stewardship Is an Increasingly Critical Challenge
paragraphs: Successfully addressing the six primary challenges I just described will  undoubtedly help strengthen the federal government’s financial and  performance reporting and resolve many accountability and stewardship  challenges. This will become increasingly important, because as I stated in  our audit report included in the Financial Report, testified before the  Congress, and emphasized in numerous speeches, the nation’s current  fiscal path is unsustainable and tough choices by the President and the  Congress are necessary to address the nation’s large and growing long- term fiscal imbalance.
The federal government’s financial condition and fiscal outlook are worse  than many may understand. We are currently experiencing strong  economic growth and yet running large on-budget (operating) deficits that  are largely unrelated to the Global War on Terrorism. Despite an increase  in revenues in fiscal year 2006 of about $255 billion, the federal  government reported that its costs exceeded its revenues by $450 billion  (i.e., net operating cost) and that its cash outlays exceeded its cash  receipts by $248 billion (i.e., unified budget deficit). Further, as of  September 30, 2006, the U.S. government reported that it owed (i.e.,  liabilities) more than it owned (i.e., assets) by almost $9 trillion. In  addition, the present value of the federal government’s major reported  long-term “fiscal exposures”—liabilities (e.g., debt), contingencies (e.g.,  insurance), and social insurance and other commitments and promises  (e.g., Social Security, Medicare)—rose from about $20 trillion to over $50  trillion in the last 6 years.
The federal government faces large and growing structural deficits in the  future due primarily to known demographic trends and rising health care  costs. These structural deficits—which are virtually certain given the  design of our current programs and policies—will mean escalating and  ultimately unsustainable federal deficits and debt levels. Based on various  measures—and using reasonable assumptions—the federal government’s  current fiscal policy is unsustainable.
subsections: section_title: The Long-Term Fiscal Outlook
paragraphs: In addition to considering the federal government’s current financial  condition, it is critical to look at other measures of the long-term fiscal  outlook of the federal government. An evaluation of the nation’s long-term  fiscal outlook should include not only liabilities included in the Financial  Report but also the implicit promises embedded in current policy and the  timing of these longer-term obligations and commitments in relation to the  resources available under various assumptions.
Over the next few decades, the nation’s fiscal outlook will be shaped  largely by known demographic trends and rising health care costs. As the  baby-boom generation retires, federal spending on current retirement and  health care programs—Social Security, Medicare, and Medicaid—will  grow dramatically. A range of other federal fiscal commitments, some  explicit and some representing implicit public expectations, also bind the  nation’s fiscal future. Absent policy changes, a growing imbalance  between expected federal spending and tax revenues will mean escalating  and ultimately unsustainable federal deficits and debt levels.
There are various ways to consider and assess the long-term fiscal  outlook, including  the Statement of Social Insurance,    major reported long-term fiscal exposures, and   long-term fiscal simulations.
Statement of Social Insurance. The Statement of Social Insurance in the  Financial Report displays the present value of projected revenues and  expenditures for scheduled benefits of certain benefit programs that are  referred to as social insurance (e.g., Social Security, Medicare). For Social  Security and Medicare alone, projected expenditures for scheduled  benefits for the next 75 years exceed earmarked revenues (e.g., dedicated  payroll taxes, premiums, and existing government bonds in the trust  funds) for the same period by approximately $39 trillion in present value  terms. Stated differently, one would need approximately $39 trillion  invested today to deliver on the currently promised benefits for the next  75 years. Table 1 shows a simplified version of the Statement of Social  Insurance by its primary components.
Major Reported Long-Term Fiscal Exposures. GAO developed the  concept of “fiscal exposures” to provide a framework for considering the  wide range of responsibilities, programs, and activities that explicitly or  implicitly expose the federal government to future spending.
The concept of fiscal exposures is meant to provide a broader perspective  on long-term costs. Major reported long-term fiscal exposures in fiscal  year 2006 with a present value totaling over $50 trillion consisted of $10  trillion of liabilities reported on the Balance Sheet, $1 trillion of other  commitments and contingencies, and the $39 trillion of social insurance  responsibilities, the last two of which are reported elsewhere in the  Financial Report. This $50 trillion compares to about $20 trillion in fiscal  year 2000.
These large numbers are difficult to comprehend. Table 2 seeks to  translate them into several figures and ratios that are more  understandable.
Long-Term Fiscal Simulations. Another way to assess the U.S.  government’s long-term fiscal outlook and the sustainability of federal  programs is to run simulations of future revenues and costs for all federal  programs, based on a continuation of current or proposed policy. The  simulations GAO has published since 1992 are designed to do that. As  shown in figure 1, GAO’s long-term simulations—which are neither  forecasts nor predictions—continue to show ever-increasing long-term  deficits resulting in a federal debt level that ultimately spirals out of  control. The timing of deficits and the resulting debt buildup varies  depending on the assumptions used, but under either optimistic (“Baseline  extended”) or more realistic assumptions, the federal government’s  current fiscal policy is unsustainable.
Over the long term, the nation’s growing fiscal imbalance stems primarily  from the aging of the population and rising health care costs. Absent  significant changes on the spending or revenue sides of the budget or both,  these long-term deficits will encumber a growing share of federal  resources and test the capacity of current and future generations to afford  both today’s and tomorrow’s commitments. Continuing on this  unsustainable path will gradually erode, if not suddenly damage, our  economy, our standard of living, and ultimately our domestic tranquility  and national security.
If, for example, as shown in figure 2, it is assumed that recent tax  reductions are made permanent and discretionary spending keeps pace  with the growth of our economy, our long-term simulations suggest that by  2040 federal revenues may be adequate to pay little more than interest on  debt held by the public and some Social Security benefits. Neither slowing  the growth in discretionary spending nor allowing the tax provisions,  including the tax cuts enacted in 2001 and 2003, to expire—nor both  together—would eliminate the imbalance.
At some point, action will need to be taken to change the nation’s fiscal  course. The sooner appropriate actions are taken, the sooner the miracle  of compounding will begin to work for the federal budget rather than  against it. Conversely, the longer that action to deal with the nation’s long- term fiscal outlook is delayed, the greater the risk that the eventual  changes will be disruptive and destabilizing. Acting sooner rather than  later will give us more time to phase in gradual changes, while also  providing more time for those likely to be most affected to make  compensatory changes.
The “fiscal gap” is a quantitative measure of long-term fiscal imbalance.  Under GAO’s more realistic simulation, assuming debt held by the public  remains at the current share of the economy (i.e., GDP), closing the fiscal  gap would require spending cuts or tax increases equal to 8 percent of the  entire economy each year over the next 75 years, or a total of about $61  trillion in present value terms. To put this in perspective, closing the gap  would require an immediate and permanent increase in federal tax  revenues of more than 40 percent or an equivalent reduction in federal  program spending (i.e., in all spending except for interest on the debt held  by the public, which cannot be directly controlled).
section_title: A Possible Way Forward
paragraphs: Although the long-term fiscal outlook is driven primarily by rising health  care costs and known demographics, we cannot ignore other government  programs and activities. There is a need to engage in a fundamental  review, reprioritization, and reengineering of the base of government.  Aligning the federal government to meet the challenges and capitalize on  the opportunities of the 21st century will require a fundamental review of  what the federal government does, how it does it, and how it is financed.  Many of the federal government’s current policies, programs, functions,  and activities are based on conditions that existed decades ago, are not  results-based, and are not well aligned with 21st century realities. We need  to address the growing costs of the major entitlement programs and also  review and reexamine all other major programs, policies, and activities on  both the spending and the revenue side of the budget. Programs that run  through the tax code—sometimes referred to as tax expenditures—must  be reexamined along with those that run through the spending side. As we  move forward, the federal government needs to start making tough  choices in setting priorities and linking resources and activities to results.
Meeting our nation’s large, growing, and structural fiscal imbalance will  require a multipronged approach:  increasing transparency and enhancing the relevancy of key financial,  performance, and budget reporting and estimates to highlight our long- term fiscal challenges; reinstituting and strengthening budget controls for both spending and  tax policies to deal with both near-term and longer-term deficits;    strengthening oversight of programs and activities, including creating  approaches to better facilitate the discussion of integrated solutions to  crosscutting issues; and reengineering and reprioritizing the federal government’s existing  programs, policies, and activities to address 21st century challenges  and capitalize on related opportunities.
In my January 2007 testimony, I proposed a number of ideas for  consideration to improve the transparency of long-term costs. In  November 2006, I provided the congressional leadership with  recommendations, based on the work of GAO, for consideration for the  agenda of the 110th Congress. These recommendations focused on three  areas: (1) targets for near-term oversight, (2) policies and programs that  are in need of fundamental reform and reengineering, and (3) governance  issues. One of the areas I pointed out that warranted congressional  attention was the development of a portfolio of outcome-based key  national indicators (e.g., economic, security, social, environmental) to help  measure progress toward national outcomes, assess conditions and trends,  and help communicate complex issues. The Congress could take a  leadership role in highlighting the need for a U.S. national indicator system  to inform strategic planning, enhance performance and accountability  reporting, inform congressional oversight and decision making, and  stimulate greater citizen engagement. In my view, this should include  consideration of a public/private partnership to help make this key  concept a reality sooner rather than later.
In order to effectively address our long-term fiscal imbalance, fundamental  reform of existing entitlement programs is essential. However, entitlement  reform alone will not get the job done. We also need to reprioritize and  constrain other federal government spending and generate more  revenues—hopefully through a reformed tax system. GAO’s 21st Century  Challenges: Reexamining the Base of the Federal Government contains  a suggested list of specific federal activities for reexamination, illustrative  reexamination questions, and perspectives on various strategies,  processes, and approaches for congressional consideration stemming from  our audit and evaluation work that can be used in reexamining the federal  base. Answers to these questions may draw on the work of GAO and  others; however, only elected officials can and should decide which issues  to address as well as how and when to address them. Addressing these  problems will require tough choices, and our fiscal clock is ticking. As a  result, the time to start is now, to help save our future.
section_title: Concluding Remarks
paragraphs: In closing, given the federal government’s current financial condition and  growing long-term fiscal imbalance, the need for the Congress and the  President to have timely, reliable, and useful financial and performance  information is greater than ever. Sound decisions on the current results  and future direction of vital federal government programs and policies are  more difficult without such information. Until the problems discussed in  this testimony are effectively addressed, they will continue to have  adverse implications for the federal government and the taxpayers.
Since enactment of federal financial management reform legislation, we  have seen continuous movement toward the ultimate goals of  accountability laid out in the different financial management statutes.  While early on some were skeptical, these laws have dramatically changed  how financial management is carried out and the value placed on good  financial management across government. Across government, financial  management improvement initiatives are underway, and if effectively  implemented, have the potential to greatly improve the quality of financial  management information as well as the efficiency and effectiveness of  agency operations. By the end of my term as Comptroller General, I would  like to see the civilian CFO Act agencies routinely producing not only  annual financial statements that can pass the scrutiny of a financial audit,  but also quarterly financial statements and other meaningful financial and  performance data to help guide decision makers on a day-to-day basis. For  DOD, my expectations are not as high given the current status of DOD’s  financial management practices, yet it is realistic for at least major  portions of DOD’s financial information to become auditable by the end of  my term. Moreover, progress on developing meaningful financial and  performance reporting on the federal government will be a key area that I  will continue to champion. I am determined to do whatever I can to help  ensure that we are not the first generation to leave our children and  grandchildren a legacy of failed fiscal stewardship and the hardships that  would bring.
Finally, I want to emphasize the value of sustained congressional interest  in these issues, as demonstrated by this Subcommittee’s leadership. It will  be key that going forward, the appropriations, budget, authorizing, and  oversight committees hold agency top leadership accountable for  resolving the remaining problems and that they support improvement  efforts that address the challenges for the future I highlighted today. The  federal government has made tremendous progress, and sustained  congressional attention has been and will continue to be a critical factor to  ensuring achievement of the goals and objectives of management reform  legislation.
Mr. Chairman, this completes my prepared statement and I want to thank  you for the opportunity to participate in this hearing and for the strong  support of this Subcommittee in addressing the need for financial  management reform and accountability. I would be happy to respond to  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 Jeffrey C. Steinhoff,  Managing Director, Financial Management and Assurance, at (202) 512- 2600 or McCoy Williams, Director, Financial Management and Assurance,  at (202) 512-9095 or williamsm1@gao.gov. Individuals who made key  contributions to this testimony include Felicia Brooks, Robert Dacey, Kay  Daly, Francine DelVecchio, Gary Engel, Susan Irving, Jay McTigue, Diane  Morris, and Paula Rascona. Numerous other individuals made  contributions to the GAO reports cited in this testimony.
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