Overall, agencies are taking high-risk problems seriously, trying to correct them, and making progress in many areas. The Congress has also acted to address several problems affecting these high-risk areas through oversight hearings and specific legislative initiatives. Full and effective implementation of legislative mandates, our suggestions, and corrective measures by agencies, however, has not yet been achieved because the high-risk areas involve long-standing problems that are difficult to correct. The following discussion provides a quick synopsis of progress and remaining challenges related to many high-risk areas. Detailed information on the current status of all 25 high-risk areas, which are listed in appendix I, is available in our overview report, quick reference guide, and individual reports included in our set of 1997 high-risk reports. Reports included in this series are listed at the end of this testimony. Our high-risk initiative has monitored five areas that affect accountability and cost-effective management of Department of Defense (DOD) programs: financial management, contract management, inventory management, weapon systems acquisition, and the Corporate Information Management (CIM) initiative. These areas are key to effectively managing DOD’s vast resources, including a budget of over $250 billion in fiscal year 1996 and over $1 trillion in assets worldwide. While improvement activities have been started, DOD’s high-risk problems are especially serious and much remains to be done to resolve them. First, DOD’s lingering financial management problems are among the most severe in government. For example, the Department has acknowledged over 30 material weaknesses that cross the spectrum of its financial operations, including continuing problems in accurately accounting for billions of dollars in problem disbursements. Also, DOD has reported that of its nearly 250 financial systems only 5 conform fully with governmentwide financial systems standards. Further, financial audits have highlighted significant deficiencies in every aspect of DOD’s financial management and reporting, resulting in the failure of any major DOD component to receive a positive audit opinion. Since 1990, auditors have made over 400 recommendations aimed at helping to correct these weaknesses. Deficiencies such as these prevent DOD managers from obtaining the reliable financial information needed to make sound decisions on alternate uses for both current and future resources. DOD’s financial management leaders have recognized the importance of tackling these problems and have many initiatives under way to address widespread financial management problems. Fixing DOD’s financial management problems is also critical to the resolution of the Department’s other high-risk areas. In addition, as DOD seeks to streamline its contracting and acquisition processes—including contract administration and audit—to adjust to reduced staffing levels, new business process techniques will be key to accomplishing effective and efficient oversight in the future. DOD contracts now cost about $110 billion annually. Without an improved and simplified contract payment system, DOD continues to risk overpaying contractors millions of dollars. DOD is aware of the seriousness of its payment problems and is taking steps to address them. Also, DOD needs to further strengthen its oversight of contractor cost-estimating systems, which are critical to ensuring sound price proposals and reducing the risk that the government will pay excessive prices. While DOD has improved its oversight of contractors’ cost-estimating systems, poor cost-estimating systems remain an area of concern at some contractor locations. Further, about half of DOD’s centrally managed inventory of spare parts, clothing, medical supplies, and other secondary inventory items, which totaled about $70 billion in September 1995, does not need to be on hand to support war reserves or current operating requirements. DOD has had some success in addressing its inventory management problems and is in the midst of changing a culture that believed it was better to overbuy items than to manage with just the amount of stock needed. Also, with reduced force levels and the implementation of some of our recommendations, DOD has reduced its centrally managed inventory by about $20 billion. DOD has implemented certain commercial best practices, but only in a very limited manner and has made little progress in developing the management tools needed to help solve its long-term inventory management problems. Consequently, inventory managers continue to have difficulty managing DOD’s multibillion dollar inventory supply systems efficiently and effectively. Also, despite DOD’s past and current efforts to reform its acquisition system, wasteful practices still add billions of dollars to defense weapon systems acquisition costs, which are about $79 billion annually. DOD continues to (1) generate and support acquisition of new weapon systems that will not satisfy the most critical weapon requirements at minimal cost and (2) commit more procurement funds to programs than can reasonably be expected to be available in future defense budgets. Many new weapon systems cost more and do less than anticipated, and schedules are often delayed. Moreover, the need for some of these costly weapons, particularly since the collapse of the Soviet Union, is questionable. Finally, DOD started the CIM initiative in 1989 with the expectation of saving billions of dollars by streamlining operations and implementing standard information systems supporting such important business areas as supply distribution, material management, personnel, finance, and transportation. However, 8 years after beginning CIM, and after spending a reported $20 billion, DOD’s savings goal has not been met because the Department has not yet implemented sound management practices. Not surprising, the results of DOD’s major technology investments have been meager and some investments are likely to result in a negative return on investment. The Department estimates that it will spend more than an additional $11 billion on system modernization projects between now and the year 2000. As part of its Clinger-Cohen Act implementation efforts, the Department is establishing a framework to use its planning, programming, and budgeting system to better manage this investment. While this framework is a step in the right direction, these corrective actions are just the beginning. At the Internal Revenue Service (IRS) we have monitored four high-risk areas that affect IRS’ ability to ensure that all revenues are collected and accounted for: financial management, accounts receivable, filing fraud, and tax systems modernization (TSM). In 1995, IRS reported collecting $1.4 trillion from taxpayers, disbursing $122 billion in tax refunds, and managing an estimated accounts receivable inventory of $113 billion in delinquent taxes. The reliability of IRS’ financial information is critical to effectively manage the collection of revenue to fund the government’s operations. However, our audits of IRS’ financial statements have identified many significant weaknesses in accurately accounting for revenue and accounts receivable, as well as for funds provided to carry out IRS’ operations. IRS has made progress in improving payroll processing and accounting for administrative operations and is working on solutions to revenue and accounts receivable accounting problems. However, much remains to be done, and effective management follow-through is essential to achieving fully the goals of the CFO Act. In addition, IRS is hampered in efficiently and effectively managing its huge inventory of accounts receivable due to inadequate management information. The root cause here is IRS’ antiquated information systems and outdated business processes, which handle over a billion tax returns and related documents annually. IRS has undertaken many initiatives to deal with its accounts receivable problems, including correcting errors in its tax receivable masterfile and attempting to speed up aspects of the collection process. Efforts such as these appear to have had some impact on collections and the tax debt inventory, but many of the efforts are long-term in nature and demonstrable results may not be available for several years. Further, IRS’ efforts to reduce filing fraud have resulted in some success, especially through more rigid screening in the electronic filing program, but this continues to be a high-risk area. IRS’ goal is to increase electronic filings, which would strengthen its fraud detection capabilities. But to achieve its electronic filing goal, IRS must (1) identify those groups of taxpayers who offer the greatest opportunity for filing electronically and (2) develop strategies focused on eliminating or alleviating impediments that have inhibited those groups from participating in the program. In attempting to overhaul its timeworn, paper-intensive approach to tax return processing, IRS has spent or obligated over $3 billion on its TSM efforts. This program has encountered severe difficulties. Currently, funding for the initiative has been curtailed, and IRS and the Department of the Treasury are taking several steps to address modernization problems and implement our recommendations. However, much more progress is needed to fully resolve serious underlying management and technical weaknesses. Also, Medicare—the nation’s second largest social program—is inherently vulnerable to and a perpetually attractive target for exploitation. The Congress and the President have been seeking to introduce changes to Medicare to help control program costs, which were $197 billion in fiscal year 1996. At the same time, they are concerned that the Medicare program loses significant amounts due to persistent fraudulent and wasteful claims and abusive billings. The Congress has passed the Health Insurance Portability and Accountability Act of 1996 to protect Medicare from exploitation by adding funding to bolster program safeguard efforts and making the penalties for Medicare fraud more severe. Effective implementation of this legislation and other agency actions is key to mitigating many of Medicare’s vulnerabilities to fraud and abuse. Also, the Health Care Financing Administration (HCFA), which runs the Medicare program, has begun to acquire a new claims processing system, the Medicare Transaction System (MTS), to provide, among other things, better protection from fraud and abuse. In the past, we have reported on risks associated with this project, including HCFA’s plan to implement the system in a single stage rather than incrementally, difficulty in defining requirements, inadequate investment analysis, and significant schedule problems. HCFA has responded to these concerns by (1) changing its single-stage approach to one under which the system will be implemented incrementally and (2) working to resolve other reported problems.