In fiscal year 2004, much of our work examined the effectiveness of the federal government’s day-to-day operations, such as administering benefits to the elderly and other needy populations, providing grants and loans to college students, and collecting taxes from businesses and individuals. Yet, we remained alert to emerging problems that demanded the attention of lawmakers and the public. For example, we continued to closely monitor developments affecting the Iraq war, defense transformation, homeland security, social security, health care, the U.S. Postal Service, civil service reform, and the nation’s private pension system. We also informed policymakers about long-term challenges facing the nation, such as the federal government’s financial condition and fiscal outlook, new security threats in the post-cold war world, the aging of America and its impact on our health care and retirement systems, changing economic conditions, and the increasing demands on our infrastructure—from highways to water systems. We provided congressional committees, members, and staff with up-to-date information in the form of reports, recommendations, testimonies, briefings, and expert comments on bills, laws, and other legal matters affecting the federal government. We performed this work in accordance with the GAO Strategic Plan for serving the Congress, consistent with our professional standards, and guided by our core values. See appendix I for our Strategic Plan Framework for serving the Congress and the nation. In fiscal year 2004, our work generated $44 billion in financial benefits, primarily from recommendations we made to agencies and the Congress (see fig. 1). Of this amount, about $27 billion resulted from changes to laws or regulations, $11 billion resulted from agency actions based on our recommendations to improve services to the public, and $6 billion resulted from improvements to core business processes, both governmentwide and at specific agencies, resulting from our work (see fig. 2). Our findings and recommendations produce measurable financial benefits for the federal government when the Congress or agencies act on them. The funds that are saved can then be made available to reduce government expenditures or be reallocated to other areas. The monetary effect realized can be the result of changes in business operations and activities; the structure of federal programs; or entitlements, taxes, or user fees. For example, financial benefits could result if the Congress were able to reduce its annual cost of operating a federal program or lessen the cost of a multiyear program or entitlement. Financial benefits could also result from increases in federal revenues—due to changes in laws, user fees, or sales—that our work helped to produce. Financial benefits included in our performance measures are net benefits—that is, estimates of financial benefits that have been reduced by the costs associated with taking the action that we recommended. Figure 3 lists several of our major financial benefits for fiscal year 2004 and briefly describes some of our work contributing to financial benefits. Many of the benefits that result from our work cannot be measured in dollar terms. During fiscal year 2004, we recorded a total of 1,197 other benefits (see fig. 4). We documented 74 instances where information we provided to the Congress resulted in statutory or regulatory changes, 570 instances where federal agencies improved services to the public, and 553 instances where agencies improved core business processes or governmentwide reforms were advanced (see fig. 5). These actions spanned the full spectrum of national issues, from ensuring the safety of commercial airline passengers to identifying abusive tax shelters. See figure 6 for examples of other benefits we claimed as accomplishments in fiscal year 2004. At the end of fiscal year 2004, 83 percent of the recommendations we made in fiscal year 2000 had been implemented (see fig. 7), primarily by executive branch agencies. Putting these recommendations into practice is generating tangible benefits for the American people. As figure 8 indicates, agencies need time to act on our recommendations. Therefore, we assess recommendations implemented after 4 years, the point at which experience has shown that, if a recommendation has not been implemented, it is not likely to be. During fiscal year 2004, experts from our staff testified at 217 congressional hearings (see fig. 9) covering a wide range of complex issues. For example, our senior executives testified on the financial condition of the Pension Benefit Guaranty Corporation’s single-employer program, the effects of various proposals to reform Social Security’s benefit distributions, and enhancing federal accountability through inspectors general. Nearly half of our testimonies were related to high-risk areas and programs. See figure 10 for a summary of issues we testified on, by strategic goal, in fiscal year 2004. Issued to coincide with the start of each new Congress, our high-risk update lists government programs and functions in need of special attention or transformation to ensure that the federal government functions in the most economical, efficient, and effective manner possible. Our latest report, released in January 2005, presents the status of high-risk areas identified in 2003 and lists new high-risk areas warranting attention by the Congress and the administration. In January 2003, we identified 25 high-risk areas; in July 2003, a twenty- sixth high-risk area was added to the list (see table 1). Since then, progress has been made in all areas, although the nature and significance of progress varies by area. Federal departments and agencies, as well as the Congress, have shown a continuing commitment to addressing these high- risk challenges and have taken various steps to help correct several of their root causes. GAO has determined that sufficient progress has been made to remove the high-risk designation from the following three areas: student financial aid programs, FAA financial management, and Forest Service financial management. Also, four areas related to IRS have been consolidated into two areas. This year, we designated four new high-risk areas. The first new area is establishing appropriate and effective information-sharing mechanisms to improve homeland security. Federal policy creates specific requirements for information-sharing efforts, including the development of processes and procedures for collaboration between federal, state, and local governments and the private sector. This area has received increased attention, but the federal government still faces formidable challenges sharing information among stakeholders in an appropriate and timely manner to minimize risk. The second and third new high-risk areas are, respectively, DOD’s approach to business transformation and its personnel security clearance program. GAO has reported on inefficiencies and inadequate transparency and accountability across DOD’s major business areas, resulting in billions of dollars of wasted resources. Senior leaders have shown commitment to business transformation through individual initiatives in acquisition reform, business modernization, and financial management, among others, but little tangible evidence of actual improvement has been seen to date in DOD’s business operations. DOD needs to take stronger steps to achieve and sustain business reform on a departmentwide basis. Further, delays by DOD in completing background investigations and adjudications can affect the entire government because DOD performs this function for hundreds of thousands of industry personnel from 22 federal agencies, as well as its own service members, federal civilian employees, and industry personnel. The Office of Personnel Management (OPM) is to assume DOD’s personnel security investigative function, but this change alone will not reduce the shortages of investigative personnel. The fourth high-risk area is management of interagency contracting. Interagency contracts can leverage the government’s buying power and provide a simplified and expedited method of procurement. But several factors can pose risks, including the rapid growth of dollars involved combined with the limited expertise of some agencies in using these contracts as well as recent problems related to their management. Various improvement efforts have been initiated to address interagency contracting, but improved policies and processes, and their effective implementation, are needed to ensure that interagency contracting achieves its full potential in the most effective and efficient manner. Lasting solutions to high-risk problems offer the potential to save billions of dollars, dramatically improve service to the American public, strengthen public confidence and trust in the performance and accountability of our national government, and ensure the ability of government to deliver on its promises. In fiscal year 2004, we issued 218 reports and delivered 96 testimonies related to our high-risk areas and programs, and our work involving these areas resulted in financial benefits totaling over $20 billion. This work, for example, included 13 reports and 10 testimonies examining problems with DOD’s financial management practices, such as weak internal controls over travel cards, inadequate management of payments to the Navy’s telecommunications vendors, and abuses of the federal tax system by DOD contractors, resulting in $2.7 billion in financial benefits. In addition, we documented $700 million in financial benefits based on previous work and produced 7 reports and 4 testimonies focusing on, for example, improving Social Security Administration and Department of Energy processes that result in inconsistent disability decisions and inconsistent benefit outcomes. Shortly after I was appointed in November 1998, I determined that GAO should undertake a major transformation effort to better enable it to “lead by example” and better support the Congress in the 21st century. This effort is consistent with the House Report 108-577 on the fiscal year 2005 legislative branch appropriation that focuses on improving the efficiency and effectiveness of operations at legislative branch agencies. H.Rpt. 108-577 directed GAO to work closely with the head of each legislative branch agency to identify opportunities for streamlining, cross- servicing and outsourcing, leveraging existing technology, and applying management principles identified as “best practices” in comparable public and private sector enterprises. H.R. 108-577 also directed the legislative branch agencies to be prepared to discuss recommended changes during the fiscal year 2006 appropriations hearing cycle. Our agency transformation effort has enabled GAO to become more results-oriented, partnerial, client-focused, and externally aware, and less hierarchical, process-oriented, “siloed,” and internally focused. The transformation resulted in reduced organizational layers, fewer field offices, the elimination of duplication in several areas, and improved our overall resource allocation.