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

Fast Facts:

Highlights:
section_title: Why GAO Did This Study
paragraphs: In its 2003 performance and accountability report on the Department of Education, GAO identified challenges in, among other areas, student financial aid programs and financial management. The information GAO presents in this testimony is intended to assist Congress in assessing Education's progress in addressing and overcoming these challenges. GAO is not making new recommendations in this testimony, but past reports have made specific recommendations aimed at addressing some of these major management challenges.
section_title: What GAO Found
paragraphs: Education has taken steps to address its continuing challenges of reducing vulnerabilities in its student aid programs and improving its financial management, such as establishing a senior management team to address management problems, including financial management, throughout the agency. And, while Education has made significant progress, weaknesses remain that will require the continued commitment and vigilance of Education's management to resolve. Education needs to reduce vulnerability of student aid programs to fraud, waste, abuse, and mismanagement. Education has made considerable changes to address the ongoing challenges in administering its student aid programs. However, Education needs to continue to address systems integration issues, reduce fraud and error in student aid application and disbursement processes, collect on student loan defaults, and improve its human capital management. Education also needs to improve financial management. Education has implemented many actions to address its financial management weaknesses. Significant progress was made earlier this year when Education received an unqualified--or "clean"--opinion on its financial statements for fiscal year 2002. While this is an important milestone for the department, internal control and systems weaknesses remain that impede Education's ability to produce timely, accurate, and useful financial information for its managers and stakeholders.

section_title: Letter
paragraphs: I am pleased to be here today to discuss the major management challenges  faced by the Department of Education, its progress in addressing them,  and challenges that remain.
As you know, this January, we issued our Performance and Accountability  Series on management challenges and program risks at major agencies,  including the Department of Education. The report for Education focused  on a number of management challenges and continued the high risk  designation for student aid programs. You asked me to focus my testimony  on two areas in that report. These are Education’s efforts to (1) reduce  fraud, waste, abuse, and mismanagement in its student aid programs while  continuing to ensure access to postsecondary education and (2) improve  its financial management to help build a high-performing agency.  Education has taken steps to meet these challenges, such as establishing a  senior management team to address management problems, including  financial management, throughout the agency. And, while Education has  made significant progress, including receiving a clean opinion on its fiscal  year 2002 financial statements, weaknesses remain that will require the  continued commitment and vigilance of Education’s management to  resolve. I will discuss Education’s student aid programs and financial  management in turn.
subsections: section_title: Student Aid Programs
paragraphs: Ensuring access to postsecondary education while reducing vulnerability  of student financial aid programs to fraud, waste, abuse, and  mismanagement is one of the key management challenges Education  faces. Education helps millions of students enroll in higher education  programs by providing for more than $50 billion in grants and loans  annually. The department is responsible for ensuring that these programs  are efficiently managed, establishing procedures to ensure that loans are  repaid, and preventing fraud and abuse. Since 1990, we have identified  Education’s grant and loan programs as high risk for fraud, waste, abuse,  and mismanagement.
Both Education and Congress have made changes to address management  challenges in the student financial aid programs. Congress established  Education’s Office of Federal Student Aid (FSA) as a performance-based  organization in 1998. Its purpose is to increase accountability of officials,  provide greater flexibility in management, integrate information systems,  reduce costs, and develop and maintain a system that contains complete,  accurate and timely data that can ensure program integrity. In 2001,  Education established a Management Improvement Team (MIT) of senior  managers to formulate strategies to address key management problems  throughout the department. According to Education, MIT has developed a  system to identify, track, and resolve audit and management issues both  agencywide and in the student financial aid programs.
Education has faced challenges in four areas related to its grant and loan  programs. These are (1) financial aid system integration issues, (2) fraud  and error in student aid application and disbursement processes,   (3) defaulted student loans, and (4) human capital management. I would  now like to briefly discuss each of these challenges.
Education has spent millions of dollars to integrate and modernize its  many financial aid systems in an effort to provide more information and  better service to students, parents, institutions, and lenders. Effectively  and efficiently investing in information technology requires, among other  things, an institutional blueprint that defines in both business and  technical terms the organization’s current and target operating  environments and provides a transition road map. Because Education did  not have this blueprint, commonly called an enterprise architecture, we  recommended in 1997 that the department develop an architecture and  establish standard reporting formats and data definitions. In September  2002, Education’s Office of the Inspector General (OIG) reported that the  department had made progress in taking specific actions to lay the  groundwork for an enterprise architecture. Still, critical elements need to  be completed, including integrating separate architectures into a  departmentwide architecture and fully implementing common identifiers  for students and institutions to use in departmentwide system  applications. As part of our review of the progress federal agencies have  made to effectively develop, implement, and maintain their enterprise  architectures, we are currently evaluating the management of Education’s  enterprise architecture efforts.
With respect to modernization plans, we reported in November 2001 that  FSA selected a viable, industry-accepted means of integrating its existing  data on student loans and grants. FSA has made progress in implementing  this approach for its Common Origination and Disbursement process,  which includes the implementation of a common record that institutions  can use to submit student financial aid data for Pell Grant and Direct Loan  programs. The ultimate success of this process, however, hinges on  addressing serious postimplementation operational problems and helping  thousands of schools implement the common record. Further, as we  reported in December 2002, FSA has not completed a number of elements  that are important for managing any information technology investment.  These include determining whether expected benefits are being achieved  and tracking lessons learned related to schools’ implementation of the  common record. We have recommended that FSA develop metrics,  baseline data, and a tracking process for certain benefits expected from  the system, and that it develop and implement a process for capturing and  disseminating lessons learned to schools that have not yet implemented  the common record. FSA has begun acting on both of these issues.
Education has also faced challenges in ensuring that information reported  on student aid applications is correct and that adequate internal controls  are in place to prevent improper payments of grants and loans. The  department has taken steps, in two pilot programs with the Internal  Revenue Service (IRS), to match income reported on student aid  applications with federal tax returns. To continue this income match and  implement it on a broader scale, legislation to allow IRS to release the  information is necessary. Education has worked with the Department of  the Treasury and the Office of Management and Budget to ask that  Congress enact such legislation. The department also verifies income  information by asking 30 percent of applicants to provide copies of their  tax returns to their student financial aid offices. In addition to  strengthening its controls over student aid applications, we found that  Education also needed to address institutions that were disbursing grants  to ineligible students. The department has taken steps to analyze student  data to identify high concentrations of students over age 65 and eligible  noncitizens at individual institutions to determine whether problems exist  that warrant further review. These actions are encouraging, and if properly  implemented, should improve controls over these payments.
A continuing challenge for Education and FSA is preventing and collecting  defaulted student loans. While the national student loan default rate has  decreased from 11.6 percent in fiscal year 1993 to 5.9 percent in fiscal year  2000, the cumulative amount of defaulted student loans has increased by  almost $10 billion over the same period. Education and FSA have  implemented several default management strategies, such as establishing  electronic debiting as a repayment option, and working with some  guaranty agencies to set up alternatives to service and process claims for  defaulted loans. Our analysis of FSA’s internal documents indicated that  for fiscal years 2000 through 2002, FSA met or exceeded many of the goals  related to these strategies. However, neither Congress nor the public can  determine whether FSA’s default management goals have been met  because Education did not prepare performance reports that conform to  the requirements in the Higher Education Act. FSA’s report to Congress  on its performance in fiscal years 2000 and 2001 was not timely nor did it  indicate whether FSA met established performance goals. We have  recommended that Education and FSA prepare and issue reports to  Congress on FSA’s performance that are timely and clearly identify  whether performance goals were met.
Like other federal agencies, Education must address serious human  capital issues, such as succession planning, because about one-third of  Education’s workforce is eligible to retire. In June 2001, we recommended  that the department develop human capital goals and measures for its  performance plans. In April 2002, we recommended that the department  and FSA coordinate closely to develop and implement a comprehensive  human capital strategy. Education added a specific objective to its  strategic plan, and in 2002, issued a comprehensive 5-year human capital  plan that incorporates FSA. This plan outlines steps and time frames for  improving human capital management and specifies four critical areas  where improvements should be made: (1) top leadership commitment,   (2) performance management, (3) workforce skills enhancement, and   (4) leadership and succession planning. It will be important that Education  focus continually on implementation of the plan to achieve results.
Now, Mr. Chairman, I would like to discuss Education’s financial  management challenges and the progress Education has made in  addressing them.
section_title: Financial Management
paragraphs: Weaknesses in Education’s financial management and information  systems have limited its ability to achieve one of its key goals—improving  financial management to help build a high-performing agency. Significant  progress towards this goal was made earlier this year when Education  received an unqualified—or “clean”—opinion on its financial statements.  Prior to this, with the exception of 1997, Education had not received a  clean opinion since its first agencywide audit in 1995. While this is an  important milestone for the department, significant management  weaknesses remain that must be addressed for Education to meet its goal  in this area.
Beginning with the department’s first agencywide audit in 1995,  Education’s auditors have repeatedly identified significant financial  management weaknesses. These weaknesses included Education’s  inability to provide the auditors with sufficient evidence to satisfy  themselves about the accuracy or completeness of certain amounts  included in the financial statements, including billions of dollars of  adjustments to amounts reported in previous years’ financial statements.
According to Education’s auditor, these adjustments were to correct  “unnatural account balances” or otherwise adjust balances to the amount  management’s analysis supported. The auditor reported that in many  cases, the cause of the incorrect balances could not be definitively  determined, and the adjusting entry prepared by management was a  reasoned judgment of how to correct its accounts. Education’s auditors  have also consistently reported major internal control weaknesses related  to financial management systems and financial reporting. These  weaknesses included (1) the absence of a fully integrated financial  management system, (2) deficiencies in financial management practices  that require extensive analysis of accounts to resolve errors through  manual adjustments, (3) the lack of a rigorous review of interim financial  data for timely identification and correction of errors, (4) the inability to  accumulate, analyze, and present reliable financial information in the form  of financial statements, (5) the dependence on a variety of stopgap  measures to prepare financial statements, (6) the insufficiency of  compensating controls, such as top-level reviews to address and try to  compensate for systemic control weaknesses, and (7) the lack of a review  to identify and quantify improper payments. Education’s auditors also  reported that internal controls needed strengthening in numerous areas  relating to Education’s investment of millions of dollars in property and  equipment.
Education has taken actions over the last several years to improve its  financial management and to address the weaknesses identified. For  example, during 2001, Education’s MIT developed specific actions to  address issues raised in previous financial statement audits. According to  a MIT report on its accomplishments, Education began performing certain  critical reconciliations monthly and began preparing interim financial  statements, which helped identify areas needing further study. Education  also improved its internal controls over property and equipment, and its  auditor did not report this area as a weakness in fiscal year 2002. In  addition, according to Education’s auditor, during fiscal year 2002, the  department implemented a new general ledger software package and FSA  implemented a new financial management system to support management  information reporting needs. The auditor also reported that the  department implemented several processes during fiscal year 2002 to  improve its financial management, including    convening the Accounting Integrity Board, the Audit Steering Committee,  and the Accounting Assurance Group to plan, implement and manage  quality accounting change control;    establishing the Financial Statement Committee and continuing the  Financial Statement Preparation Team and other special task force teams  all of which are designed to improve the financial statement processes;  and    developing and implementing reconciliation work plans, policies, and  procedures; specialized teams; regular management reviews of the final  work products; and management review for process improvement.
While Education has made progress in addressing many of its weaknesses,  in fiscal year 2002, the auditor again reported that significant financial  management issues continued to impair the department’s ability to  accumulate, analyze, and present reliable financial information. These  problems, in part, resulted from inadequate internal controls over  Education’s financial management systems and financial reporting  process. The auditor also reported that weaknesses in the department’s  ability to report accurate financial information on a timely basis were due  to deficiencies in certain of the department’s financial management  practices, including inadequate reconciliations and account analysis early  in fiscal year 2002. The auditor added that issues associated with the  transition to a new financial management system in fiscal year 2002 also  contributed to the department’s difficulties in these areas. While the  auditor reported that it noted improvements in the latter part of the fiscal  year, it reported that it continues to believe that the department needs to  focus more on reconciliation procedures, account analysis, and financial  reporting. Until these issues are fully resolved, Education’s ability to  produce timely, accurate, and useful financial information for its managers  and stakeholders will be greatly impeded. In addition, beginning with  fiscal year 2004, Education and other major government agencies will be  required to produce audited financial statements within 45 days after the  end of the fiscal year compared to 120 days for fiscal years 2002 and 2003.  According to Education’s Fiscal Year 2004 Annual Plan, the department  plans to implement this accelerated reporting date for its fiscal year 2003  financial statements—a year earlier than required. This action will be a  good “test” of Education’s new financial system and other financial  management reforms.
As we testified before the Subcommittee on Select Education in April  2002, we identified other internal control weaknesses that make Education  vulnerable to improper payments and lost assets. In our testimony and  related report,  we stated that for May 1998 through September 2000,  weak internal controls over the (1) grants and loan disbursement process  failed to detect certain improper payments, (2) third party draft processes  increased Education’s vulnerability to improper payments, and   (3) government purchase cards resulted in some fraudulent, improper, and  questionable purchases. We also reported that Education lacked adequate  internal controls over computers acquired with purchase cards and third  party drafts. Among other things, we found that computer purchases  valued at almost $400,000 were not recorded in Education’s property  records, and $200,000 of that computer equipment could not be located.
In response to our work, Education made several changes to its policies  and procedures to improve internal controls and program integrity. These  changes were a step in the right direction; but in many cases, our follow- up work indicated that they had not been effectively implemented. In  March 2002, we reported that vulnerabilities remained in all areas we  reviewed, except for third party drafts, which were discontinued  altogether. For example, we reported that Education developed a new  approval process for its purchase card program; however, our testing of   3 months of purchase card statements under the new process found that  over 20 percent lacked proper support for the items purchased. In October  2002, Education told us that new policies and procedures were  implemented and aimed at reducing the department’s vulnerability to  future improper use of purchase cards. These new policies and procedures  relate to reviewing and approving purchase card transactions and  providing related training. Further, the department told us that misuse of  purchase and travel cards is now specifically included in the department’s  Table of Penalties with the desired effect of reducing misuse and abuse of  government issued credit cards. Education also told us that it recognizes  that reviewing and improving internal controls is an ongoing task and that  it intends to remain vigilant in this area. These are positive steps that  should help reduce the instances of improper purchases.
Finally, Education will need to continue its actions in addressing  weaknesses in its financial management information systems. The Federal  Financial Management Improvement Act (FFMIA) of 1996 requires  agencies to institute financial management systems that substantially  comply with federal financial management systems requirements,  applicable accounting standards, and the U.S. Government Standard  General Ledger. Every year since FFMIA was enacted, Education’s  auditors have reported that Education’s systems did not substantially  comply with the act’s requirements. In previous years, the auditors  reported that without a fully integrated financial management system,  deficiencies in the general ledger system, deficiencies in the manual  adjustment process, and the need to strengthen other financial  management controls such as reconciliation processes, collectively impair  Education’s ability to accumulate, analyze, and present reliable financial  information. In addition, according to Education’s auditor, although the  department implemented a new financial management system during fiscal  year 2002, issues associated with the transition to the new system  contributed to difficulties in providing reliable, timely information for  managing current operations and timely reporting of financial information  to central agencies; therefore, Education still did not substantially comply  with FFMIA’s requirements.
Education also needs to address identified computer security weaknesses  in its financial management and other information systems. In September  2001, we reported that Education had made progress in correcting certain  information system control weaknesses. At the same time, we identified  weaknesses in Education’s systems that place critical financial and  sensitive grant information at risk of unauthorized access and disclosure,  and key operations at risk of disruption. We recommended that Education  correct certain information system control weaknesses and fully  implement a comprehensive departmentwide computer security  management program. In response, Education stated that it had developed  a corrective action plan and is taking steps to further strengthen and  develop a more comprehensive information security program. In addition,  Education’s auditor reported that for fiscal year 2002, the department  made progress in strengthening controls over its information technology  processes but needs to continue efforts to develop, implement, and  maintain an agencywide risk-based information security plan, programs,  and practices to provide security throughout the life cycle of all systems.
In closing, Mr. Chairman, I want to reiterate that Education is taking  actions and making substantial progress in addressing major challenges  related to its student aid programs and financial management. At the same  time, some difficult issues remain that must be resolved before Education  is able to produce relevant, reliable, and timely information to efficiently  and effectively manage the department and provide full accountability to  its stakeholders.
Mr. Chairman, 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 Linda Calbom,  Director, Financial Management and Assurance, at (202) 512-9508, or  Robert Owens, Assistant Director, at (202) 512-8579. You may also reach  them by E-mail at calboml@gao.gov or owensr@gao.gov. Individuals who  made key contributions to this testimony include Lisa Crye and Diane  Morris. Numerous other individuals made contributions to the work  supporting this testimony.
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