[House Hearing, 108 Congress]
[From the U.S. Government Publishing Office]
FIXING THE FINANCIALS: FEATURING USDA AND EDUCATION
=======================================================================
HEARING
before the
SUBCOMMITTEE ON GOVERNMENT EFFICIENCY
AND FINANCIAL MANAGEMENT
of the
COMMITTEE ON
GOVERNMENT REFORM
HOUSE OF REPRESENTATIVES
ONE HUNDRED EIGHTH CONGRESS
FIRST SESSION
__________
JUNE 10, 2003
__________
Serial No. 108-58
__________
Printed for the use of the Committee on Government Reform
Available via the World Wide Web: http://www.gpo.gov/congress/house
http://www.house.gov/reform
______
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WASHINGTON : 2003
____________________________________________________________________________
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COMMITTEE ON GOVERNMENT REFORM
TOM DAVIS, Virginia, Chairman
DAN BURTON, Indiana HENRY A. WAXMAN, California
CHRISTOPHER SHAYS, Connecticut TOM LANTOS, California
ILEANA ROS-LEHTINEN, Florida MAJOR R. OWENS, New York
JOHN M. McHUGH, New York EDOLPHUS TOWNS, New York
JOHN L. MICA, Florida PAUL E. KANJORSKI, Pennsylvania
MARK E. SOUDER, Indiana CAROLYN B. MALONEY, New York
STEVEN C. LaTOURETTE, Ohio ELIJAH E. CUMMINGS, Maryland
DOUG OSE, California DENNIS J. KUCINICH, Ohio
RON LEWIS, Kentucky DANNY K. DAVIS, Illinois
JO ANN DAVIS, Virginia JOHN F. TIERNEY, Massachusetts
TODD RUSSELL PLATTS, Pennsylvania WM. LACY CLAY, Missouri
CHRIS CANNON, Utah DIANE E. WATSON, California
ADAM H. PUTNAM, Florida STEPHEN F. LYNCH, Massachusetts
EDWARD L. SCHROCK, Virginia CHRIS VAN HOLLEN, Maryland
JOHN J. DUNCAN, Jr., Tennessee LINDA T. SANCHEZ, California
JOHN SULLIVAN, Oklahoma C.A. ``DUTCH'' RUPPERSBERGER,
NATHAN DEAL, Georgia Maryland
CANDICE S. MILLER, Michigan ELEANOR HOLMES NORTON, District of
TIM MURPHY, Pennsylvania Columbia
MICHAEL R. TURNER, Ohio JIM COOPER, Tennessee
JOHN R. CARTER, Texas CHRIS BELL, Texas
WILLIAM J. JANKLOW, South Dakota ------
MARSHA BLACKBURN, Tennessee BERNARD SANDERS, Vermont
(Independent)
Peter Sirh, Staff Director
Melissa Wojciak, Deputy Staff Director
Rob Borden, Parliamentarian
Teresa Austin, Chief Clerk
Philip M. Schiliro, Minority Staff Director
Subcommittee on Government Efficiency and Financial Management
TODD RUSSELL PLATTS, Pennsylvania, Chairman
MARSHA BLACKBURN, Tennessee EDOLPHUS TOWNS, New York
STEVEN C. LaTOURETTE, Ohio PAUL E. KANJORSKI, Pennsylvania
JOHN SULLIVAN, Oklahoma MAJOR R. OWENS, New York
CANDICE S. MILLER, Michigan CAROLYN B. MALONEY, New York
MICHAEL R. TURNER, Ohio
Ex Officio
TOM DAVIS, Virginia HENRY A. WAXMAN, California
Mike Hettinger, Staff Director
Larry Brady, Professional Staff Member
Amy Laudeman, Clerk
Mark Stephenson, Minority Professional Staff Member
C O N T E N T S
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Page
Hearing held on June 10, 2003.................................... 1
Statement of:
McPherson, Edward, Chief Financial Officer, Department of
Agriculture; Jack Martin, Chief Financial Officer,
Department of Education; McCoy Williams, Director of
Financial Management and Assurance, U.S. General Accounting
Office; and Linda Calbom, Director of Financial Management
and Assurance, U.S. General Accounting Office.............. 6
Letters, statements, etc., submitted for the record by:
Calbom, Linda, Director of Financial Management and
Assurance, U.S. General Accounting Office, prepared
statement of............................................... 39
Martin, Jack, Chief Financial Officer, Department of
Education:
Followup questions and responses......................... 64
Prepared statement of.................................... 16
McPherson, Edward, Chief Financial Officer, Department of
Agriculture:
Followup questions and responses......................... 66
Prepared statement of.................................... 8
Platts, Hon. Todd Russell, a Representative in Congress from
the State of Pennsylvania, prepared statement of........... 3
Williams, McCoy, Director of Financial Management and
Assurance, U.S. General Accounting Office, prepared
statement of............................................... 25
FIXING THE FINANCIALS: FEATURING USDA AND EDUCATION
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TUESDAY, JUNE 10, 2003
House of Representatives,
Subcommittee on Government Efficiency and Financial
Management,
Committee on Government Reform,
Washington, DC.
The subcommittee met, pursuant to notice, at 2:05 p.m., in
room 2154, Rayburn House Office Building, Hon. Todd Russell
Platts (chairman of the subcommittee) presiding.
Present: Representatives Platts, Blackburn, and Towns.
Staff present: Mike Hettinger, staff director; Dan Daly,
counsel; Larry Brady, Kara Galles, and Tabetha Mueller,
professional staff members; Amy Laudeman, clerk; Mark
Stephenson, minority professional staff member; Jean Gosa,
minority assistant clerk; and Cecelia Morton, minority office
manager.
Mr. Platts. Good afternoon. A quorum being present this
hearing of the Subcommittee on Government Efficiency and
Financial Management will come to order. Today the subcommittee
brings before it two executive departments, the Department of
Agriculture and the Department of Education who have
demonstrated significant progress on improving their overall
financial management. I would like to thank the chief financial
officers of those departments who are before us today as well
as the leadership at the departments for their efforts.
You are to be congratulated on achieving clean audit
opinions on your financial statements for fiscal year 2002.
While clean audit opinions are certainly a goal that each of
the Chief Financial Officer Act agencies shares, there are many
of us who believe that a clean financial audit tells only a
small part of the story. All too often we hear stories of
agencies that achieve clean opinions only through last minute
heroic efforts or recreating their books at the end of the
year. This is not what Congress intended under the CFO Act.
Obtaining a clean audit opinion should be a by-product of good
year round financial management and not just a test that
agencies try to pass at the end of the fiscal year.
USDA and Education have implemented real changes designed
to improve the overall management of their agencies, and as a
consequence, were able to obtain clean audits. USDA achieved a
clean opinion by focusing on improving internal controls and
accountability. They have retooled business and accounting
processes and placed greater emphasis on data integrity,
internal controls and getting results from their programs.
While USDA has made enormous strides in improving financial
management, the Forest Service a component of the USDA remains
on the GAO's high risk list.
Department of Education has also made great improvement on
managing its finances. Education learned from suggestions that
were made on the previous financial audits and implemented
solutions that addressed those suggestions. They now produce
financial statements on a quarterly basis and utilize strategic
planning. In addition, the Department installed and updated a
financial accounting system and coordinated a management and
improvement team who seeks areas of opportunities to improve
financial processes and data integrity. However, there are
still internal control concerns, especially in the area of
student loan programs, which also need to be addressed. Today,
we look forward to hearing about the improvements that have
been made at the USDA and the Department of Education, the
lessons that can be learned from the successes at these two
departments, and the plans each of these departments has to
overcome their remaining financial management challenges.
[The prepared statement of Hon. Todd Russell Platts
follows:]
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Mr. Platts. Joining us here today are Ted McPherson, Chief
Financial Officer at the Department of Agriculture. And as I
was pleased to disclose, first time you are before us, native
of the 19th Congressional District, and glad to have you with
us again. Followed by Jack Martin, Chief Financial Officer at
the Department of Education, and Mr. McCoy Williams and Linda
Calbom, Directors of Financial Management and Assurance at the
General Accounting Office, who will testify about the financial
management issues at the Department of Agriculture and
Education, respectively. Nice to have both of you with us again
as well. Appreciate all of you for coming and we look forward
to your testimonies. Now yield to the ranking member, the
gentleman from New York, Mr. Towns, for the purpose of making
an opening statement.
Mr. Towns. Thank you very much Mr. Chairman. Let me thank
you, Mr. Chairman, for holding this hearing today. In April, we
began this series of hearings with the look at the consolidated
financial statement of the United States. Today we will hear
testimony regarding the Department of Agriculture and
Education. Both agencies received clean audit opinions on their
fiscal year 2002 financial statements for the first time in
many years. And I want to congratulate Mr. Martin and Mr.
McPherson for their efforts and also their staff. You have
achieved an important milestone.
However, as I am sure all of our witnesses would agree,
much work still remains to be done. Internal controls and
financial management system weaknesses remain at the Department
of Education that impede the agency's ability to produce timely
and accurate financial information. Education also continues to
make billions of dollars of adjustments to previous years
financial statements for which auditors cannot identify a
definite cause. Despite significant improvements, student
financial aid at the Department of Education, which makes more
than $50 billion a year in grants and loans, continue to be
rated a high risk area by the General Accounting Office.
USDA faces problems with--similar to Education with
internal controls and financial management systems, which have
led some to question whether achievement of receiving a clean
audit opinion can be repeated. With resources this year of 123
billion in assets and a budget of 72 billion, resolving the
problem is critical. The Department of Agriculture and several
of its bureaus and agencies have had longstanding and very
complex financial management problems. While there is still
clearly much more to be done, the Department has made some
significant improvements and progress seems to be continuing.
Perhaps most important, the Department's transition from
its outdated inadequate accounting system to the new foundation
financial information system is complete and should go a long
way toward addressing some of the Department's problems. Of
particular concern at USDA is the Forest Service, which has
been designated as high risk by GAO since 1999. I look forward
to hearing from our witnesses about the progress that has been
made and what steps we need to take to overcome the remaining
barriers to sound financial management at USDA and Education.
Thank you, Mr. Chairman. And again, let me thank you for
holding this hearing. I think it's very timely. I yield back.
Mr. Platts. Thank you, Mr. Towns, we will now proceed to
our witnesses and would ask that each witness and anyone who
might be advising them during their testimonies to stand and
raise their right hands and take the oath together, and then we
will proceed to your testimony.
[Witnesses sworn.]
Mr. Platts. The clerk will note that all witnesses affirmed
the oath and we will proceed directly to the testimony.
Mr. McPherson, starting with you, followed by Mr. Martin,
Mr. Williams and Ms. Calbom. We appreciate the testimonies you
presented to us ahead of time in writing. And we use 5 minutes
as a rough gauge. With a more intimate setting here with the
ranking member and myself, we're not going to stick to that 5
minutes, but if we can use that as a guideline that would be
great.
Mr. McPherson if you would like to begin.
STATEMENTS OF EDWARD McPHERSON, CHIEF FINANCIAL OFFICER,
DEPARTMENT OF AGRICULTURE; JACK MARTIN, CHIEF FINANCIAL
OFFICER, DEPARTMENT OF EDUCATION; McCOY WILLIAMS, DIRECTOR OF
FINANCIAL MANAGEMENT AND ASSURANCE, U.S. GENERAL ACCOUNTING
OFFICE; AND LINDA CALBOM, DIRECTOR OF FINANCIAL MANAGEMENT AND
ASSURANCE, U.S. GENERAL ACCOUNTING OFFICE
Mr. McPherson. Mr. Chairman and members of the
subcommittee, thank you for the opportunity to continue to work
together on improving financial management in the Federal
Government. My written testimony details the valuable results
we have produced in implementing sufficient internal control
and data integrity to achieve the first clean audit opinion at
the Department of Agriculture during fiscal year 2002.
Rehabilitation of this environment is a continuing process of
massive change, not an event. You have asked me to describe
today the management changes we made that, in turn, resulted in
USDA's first unqualified opinion on its financial statements.
George Bernard Shaw, the British playwright, believed great
innovation starts with an unreasonable person. Four principles
guide our unreasonableness in leading valuable change at USDA.
First, we focus on real results by setting clear goals and
achieving tangible value. For example, while improving internal
controls leading to the first clean audit at USDA, we increased
the referral rate on $364 million of loans eligible for
Treasury cross-servicing to 96 percent from 14 percent the
prior year. That one change alone results in as much as $300
million more each year of cash collections returned to the U.S.
Treasury each year for the foreseeable future.
Second, we behave as owners in taking full responsibility
to complete any task. Laser-like clarity of individual
accountability or ownership is key to unlocking the natural
strengths of bureaucracies. By substituting the behavior of
owners in USDA's culture, we have created a bias to action for
producing results, resourcefully using existing levels of
funding and career civil servant staffing. Third, we operate at
a constructively aggressive pace. Speed is important and
usually contributes to better outcomes. To cut the time
required to execute, I immediately inserted three hand-picked
individuals with controller skills and one person with an
outstanding background in information technology as catalysts.
Each of these people understands internal control, data
integrity, business processes and application of information
technology. Perhaps most important, each of these individuals
is interpersonally astute and knows how to make change by
substituting successes for rhetoric.
Simultaneously, I injected a team of a dozen carefully
selected practitioners, not consultants, in an intense
assignment to perform deferred work that had accumulated over
several previous years, such as clearing 6 million unreconciled
cash items totaling several billion dollars and accounting for
$10 billion of real and personal property. Fourth, we value
leadership and talent individual excellence and collective
success are attributes of most successful teams and talent will
outperform methodology in many turn-around situations.
Specifically, leadership and talent achieved 17 accounting
systems conversions on time and within budget for all USDA
agencies.
Leaders in challenging settings such as this are simply
purveyors of hope, and hope becomes realty measured by how many
other associates in an enterprise are recognized for
significant achievements. This week, 18 career civil service
leaders from my Office of the Chief Financial Officer and USDA
agency Chief Financial Officers, are receiving the Secretary of
Agriculture's Plow Award, as in many people are glad to
harvest, few are willing to plow, the top recognition for
employees of USDA.
Recently I had the pleasure of recognizing 600 associates
throughout USDA and at the National Financial Center each
individually for their valuable work in regard to financial
management. One of our associates, Jesse King, is receiving the
National Achievement of the Year Award from the Association of
Government Accountants for the value he has added in
controllership and accounting operations. So people are the
only source of a sustainable competitive advantage and I
believe in people, especially unreasonable people.
Thank you for the opportunity to work together. I look
forward to listening carefully to what is important to each of
you and participating in our discussion today.
Mr. Platts. Thank you, Mr. McPherson.
[The prepared statement of Mr. McPherson follows:]
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Mr. Platts. Mr. Martin.
Mr. Martin. Mr. Chairman and members of the subcommittee
good afternoon. I would like to thank you for the opportunity
to discuss the Department's improvements in financial
management which resulted in the Department's first unqualified
audit opinion of its financial statements in many years. When
Secretary Paige arrived at the Department of Education back in
January 2001, he discovered that there were serious management
problems. The Department had not received a clean audit opinion
in years and there was not any expectation of one in the near
future. The Department of Education, Inspector General's Office
and the General Accounting Office, had identified hundreds of
problems that needed immediate attention before the Department
could receive a clean audit. Secretary Paige promised that one
of his top priorities would be to identify and correct all of
the management problems that were preventing the Department
from operating at its peak performance. I am proud to say the
Department is keeping the Secretary's promise.
Most importantly, the Department has received its first
unqualified or clean independent audit opinion since 1997 and
only the second in its history. This is a critical milestone in
our effort to address concerns surrounding the Department's
financial reporting, reconciliation of financial records and
control over our information systems. Earlier this year, Deputy
Secretary Bill Hansen testified before the Subcommittee on
Select Education, Committee on Education in the Workforce to
discuss the Department's significant progress toward overcoming
our management challenges.
While many challenges remain, we are proud of the progress
we have made. From a financial management perspective, the
Department of Education is a complex Federal agency. We have a
high number of separate appropriations, over 200 to manage,
consolidate and account for. We maintain the smallest number of
FTE's while managing the third largest discretionary budget of
cabinet level agencies. We must also manage multiple program
types, such as Federal Family Education Loans and William D.
Ford Direct Student Loans, revolving funds, grants and trust
funds. Pell and direct loans have very complex accounting
mandates under the Federal Credit Reform Act of 1990.
One of the most significant audit issues the Department
addresses each year involves FFEL and Direct Loan program cost
estimates. The Department's financial statements include cost
estimates of total loans outstanding for these programs and
anticipated losses stemming from loan defaults, discharges and
other costs. Taken together, these programs involve a $280
billion portfolio and 22 million borrowers, making the
Department one of the largest lenders and guarantors in the
world.
Consistent with the Federal Credit Reform Act, cost
estimates for these programs reflect the net present value of
Federal cost associated with all projected future cash-flows,
disbursements, repayments, interest, defaults, subsidy payments
to loan holders and others for loans originated in each given
fiscal year. We base program cost estimates on a complex set of
econometric assumptions regarding interest rates and borrower
behavior, given the size and complexity of these estimates as
well as periodic fluctuations in the underlying variables, the
Department's auditors devoted a significant portion of time
reviewing the estimates and estimation process. I worked with
auditors and the Department received its first clean opinion
since 1997.
We also improved our financial management by setting out to
accomplish three short-term and six long-term goals set by
Secretary Paige shortly after he took office. Short-term goals
were to install new leadership in the financial and management
areas of the Department, assemble a task force of career
department leaders to identify and address as many short-term
management improvement recommendations as possible and develop
a blueprint to address longer term and structural issues and
solicit the counsel and advice of external advisors. Long-term
goals were to obtain a clean audit opinion. Establish effective
internal controls that addressed credit card abuses and
duplicate payments and protect the Department's assets from
waste, fraud and abuse. Create a culture of accountability.
Create a structure for measuring progress. Modernize student
aid delivery. And remove the student financial assistance
programs from GAO's high risk list.
Specific steps the Department took to reach the Secretary's
objectives were: first, we updated our organization structure.
My appointment as Chief Financial Officer gave the Department
its first CFO in 3 years. We more clearly defined the roles and
responsibilities of CFO management. And we made a concerted
effort to recruit and retain talented accountants and financial
management personnel. We also worked more cooperatively with
the Office of Federal Student Aid CFO, who temporarily reported
directly to the Department CFO, and the Department's Budget
Service. Leadership from all three organizations ensured that
the Department achieved its financial reporting objectives. We
improved management of the audit process.
The Department has improved its audit and management
process through implementation of several initiatives. A key
initiative which significantly enhanced quality control was the
creation of a single point of contact to manage the audit
process. We replaced our financial systems. Last year the
Department replaced its financial accounting system with the
Oracle Federal financials. This new system enhances financial
integrity by providing more timely, accurate and reliable
financial information for managing the Department's programs.
Education is the first Cabinet level agency to successfully
implement Oracle Federal Financials department-wide. Under the
new system, the Department produced financial statements
directly from the accounting system for the first time and now
continues to produce these financial statements on a monthly
basis.
We strengthened reconciliation efforts. The Department
performed reconciliations on a regular basis with regard to
fund balances with Treasury; feeder systems to the general
ledger; budgetary to proprietary accounts, accounts payable and
related disbursements in transit; suspense accounts; and
accounts receivable/guaranty agency reserves. The Department
benefited from having additional reviews of these
reconciliations to improve the accuracy, completeness, and
timeliness of the reconciliations. We improved monitoring and
tracking of confirmed grant and guaranty agency data. The
Department benefited from independent confirmations of
financial data from grant recipients at the award level such as
available funds, obligations and cash drawdowns, and FFEL loan
receivable balances at the guaranty agency level. The
Department completed GA loan portfolio reconciliations for the
first time in a number of years. These two confirmation efforts
helped ensure that the Department's and our partner's records
were in balance. We performed ongoing reviews of the core
financial aid eligibility system we call the National Student
Loan Data System. The Department continued its ongoing efforts
to review the accuracy of data in the National Student Loan
Data System. NSLDS is a data base that includes loan level data
for all student loans, 22 million.
The No. 1 priority of the Department of Education is to
help educate children and close the achievement gaps so no
child is left behind. Maintaining our financial management and
integrity will help us create the culture of accountability
necessary to ensure this priority is met. I believe you will
find that our efforts over the last 2 years demonstrate our
commitment to making the Department of Education a model agency
of financial management excellence and to maintaining the level
of effort it took to achieve our first unqualified opinion
since 1997.
One of the objectives in our strategic plan is to earn the
President's Quality Award. I hope to be able to tell you a year
from now that we have accomplished this goal as well. I would
be happy to answer any questions you may have. Thank you for
your attention.
Mr. Platts. Thank you, Mr. Martin.
[The prepared statement of Mr. Martin follows:]
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Mr. Platts. Mr. Williams.
Mr. Williams. Mr. Chairman and members of the subcommittee,
I am pleased to be here today to discuss the major financial
management challenges faced by the U.S. Department of
Agriculture, its progress in addressing them and challenges
that remain. As you know, in January we issued our performance
and accountability series on management challenges and program
risks at major agencies, including USDA. The report for USDA
focused on a number of major management challenges including
enhancing financial management and continued the high risk
designation for Forest Service financial management. For many
years, USDA struggled to improve its financial management
activities, but inadequate accounting systems and related
procedures and controls hampered its ability to get a clean
opinion on its financial statements. After 8 consecutive years
of not being able to render an opinion, USDA's Office of
Inspector General issued an unqualified, or clean opinion, on
USDA's fiscal year 2002 financial statements reporting that
significant progress had been made in improving overall
financial management. To achieve this unqualified opinion, USDA
made progress in its financial accounting and reporting in
areas such as estimating its food stamp program receivables and
improving its implementation of the Federal Credit Reform Act
of 1990. Also, the Forest Service received its first-ever
unqualified opinion on its fiscal year 2002 financial
statements, which represents noteworthy progress from prior
years when the OIG was unable to express an opinion.
To achieve this unqualified opinion, the Forest Service's
top management dedicated considerable resources and focused
staff efforts to address accounting and reporting deficiencies
that had prevented a favorable opinion in the past. For
example, during fiscal year 2002, the Forest Service formed a
reconciliation strike team to resolve longstanding real and
personal property accounting deficiencies. While we considered
obtaining a clean opinion, a positive step, USDA and the Forest
Service need to continue their efforts to address material
internal control weaknesses that still exist. For example, USDA
and the Forest Service need to continue to address the problems
with their legacy systems to improve integration of the
financial management architecture, make timely reconciliation
of their property systems with the general ledger, and correct
inconsistencies in their accounting processes.
As provided in the President's management agenda and by the
Joint Financial Management Improvement Program principles,
obtaining financial accountability goes far beyond an
unqualified opinion on financial statements and includes
measures such as financial management systems that routinely
provide timely, reliable and useful financial information and
no material internal control weaknesses or material
noncompliance with laws and regulations and Federal financial
management improvement act of 1996 requirements.
In closing, Mr. Chairman, I want to emphasize that USDA has
made significant progress in addressing this major challenge
relating to financial management and continues to do so. At the
same time, before USDA is able to achieve and sustain financial
accountability and produce relevant, reliable and timely
information to effectively manage the Department, it and its
component agencies, particularly the Forest Service, must
resolve some very difficult issues. This concludes my statement
and I would be happy to answer any questions that you or
members of the committee may have.
Mr. Platts. Thank you, Mr. Williams.
[The prepared statement of Mr. Williams follows:]
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Mr. Platts. Ms. Calbom.
Ms. Calbom. Thank you, Mr. Chairman, Mr. Towns. As Mr.
Williams just mentioned this January GAO issued our performance
and accountability series which included the Department of
Education as well as Agriculture and others. The report for
Education focused on a number of management challenges, and as
you were mentioning, continued the high risk designation for
student aid programs. You asked me to focus my testimony today
on two areas in that report. These are first Education's
efforts to reduce fraud, waste, abuse and mismanagement in its
student aid programs; and second, to improve its financial
management to help build a high-performing agency.
As Mr. Martin outlined, Education has spent significant
time and effort in addressing these challenges and has been
very successful in making real management improvements across
the agency. However while Education has made significant
progress similar to Agriculture, internal control and system
weaknesses remain in both the student aid program and with
financial management overall that will require continued
commitment and vigilance on the part of Education's management
to resolve.
In the student aid program, education has faced challenges
in four areas. The first continuing challenge relates to
systems integration issues. 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.
However, the Department still needs to complete development of
an institutional blueprint for how it will carry out these
activities. And this is commonly called an enterprise
architecture. This is really key to ensuring that you have
consistent system design and compatibility across the
organization. The second challenge has been reducing fraud and
error in student aid application and disbursement processes.
In a major effort to address this issue, the Department has
instituted pilot programs with the IRS to match income reported
on student aid applications with Federal tax returns and
continues to work to achieve legislation needed to implement
these efforts on a broader scale. The third continuing
challenge is minimizing and collecting defaulted student loans.
Education has made great strides in this area but needs to
communicate its progress by issuing timely and complete
performance reports to the Congress. And finally like other
Federal agencies, education must address serious human capital
issues. In 2002, the Department issued a comprehensive 5-year
capital human plan that outlines steps and timeframes for
improving human capital management. It will be an important
that education focus continuously on implementation of the plan
to achieve results.
I would now like to turn more specifically to financial
management challenges. Weaknesses in Education's financial
management and information systems have limited its ability to
achieve one of its key goals, which is improving financial
management to help build a high performing agency. Significant
progress toward this goal was recently made when Education
received an unqualified opinion on its financial statements.
And as many of us have already discussed today while this
is an important milestone for the Department, significant
internal control and system weaknesses remain that must be
addressed for Education to meet the end goal of timely,
relevant, reliable information to manage the agency on a day to
day basis. Education has taken many actions over the last
several years to improve its financial management and address
the weaknesses identified in previous financial statement
audits. Education's auditors recently reported that they have
put in place several new processes during fiscal year 2002 to
improve financial management and that a new general ledger
system was installed. These are key steps in achieving the
ultimate end goal.
However the auditors reported that inadequate internal
controls continued to impair the Department's ability to
accumulate, analyze and present reliable financial information.
While improvements were noted in the latter part of the fiscal
year, the auditor reported that the Department needs to place
additional focus on reconciliation procedures, account analysis
and the overall financial reporting process. This will be
especially critical when beginning with fiscal year 2004,
Education and other major agencies will be required to produce
their audited financial statements within 45 days after the
fiscal year compared to the 120 days currently.
In closing, Mr. Chairman, I would like to commend Education
management for their dedication and persistence in addressing
major challenges relating to the student aid programs and
financial management. I would also like to encourage them to
remain steadfast in their efforts to reach their end goal of
producing timely, relevant, reliable information to efficiently
and effectively manage the agency and provide full
accountability to stakeholders. That concludes my statement,
Mr. Chairman.
[The prepared statement of Ms. Calbom follows:]
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Mr. Platts. Thank each of you for your testimonies and we
will proceed to questions. Again, we'll use 5 minutes as a
rough framework for the three of us who are here today. I guess
Mr. McPherson and Mr. Martin, in reading your testimony, Mr.
McPherson, yours was focused more on the personnel and kind of
empowering the personnel to take the lead and I quote, ``the
unreasonable individual or person to get the job done.'' Mr.
Martin, your testimony was on the personnel, but also more on
the structural changes, internal changes. And we are certainly
grateful for all of our public servants who are doing their
best to serve the public. Given that the clean audit was the
first in your 140-year history at the Department of
Agriculture, and just the second for the Department of
Education and the first clean audit in 5 years, what is your
comfort level that the changes you have made will result in,
say, 3 years from now if not all different personnel, but
different personnel are there that the structural changes,
internal controls, data integrity that we will have a
continuation of a clean audit history and not be talking about
once again, the first one in another 3 years or another one in
5 years, your comfort level that your changes are going to
result in truly clean audits?
Mr. McPherson. There are several factors that give me
comfort in that regard. One, all except one of my direct
reports are career civil servants so that leadership operating
with the principles that we have implemented will sustain
itself. Second, we have made progress in depth, meaning it is
not a mile wide and an inch deep. We have changed business
processes. We have changed to a common computing system by
converting 17 agencies. We have reorganized the National
Financial Center into lines of business with one separate line
of business called the Controller Operations Divisions
dedicated for the first time solely to performing work for the
USDA agencies. So I think those rudimentary but fundamental
changes are of a sustaining nature. We have not just gone for
quick hits, but where we have made changes, we have done it so
the process sustains itself.
Mr. Martin. We at the Department are currently producing
very accurate monthly financial statements from our Oracle
system. We push a button and we generate statements monthly. I
think this system will permit us to continue as far as we can
see into the future to be able to produce accurate financial
statements. We also have revised and improved our
reconciliation and account analysis procedures. We have
numerous working groups in place that address specific account
groups. So we think we have the structures in place for us to
continue improving our reconciliation processes going into the
future. And we have a very strong and committed staff of career
civil servants. I believe that they are as serious about all of
our changes and improvements as the political employees are.
So I am very confident that the Department of Education
will be able to obtain clean opinions this year on an
accelerated basis, and going forward in future years.
Mr. Platts. I hope we are accurate in those statements and
I do commend you on the tremendous improvements you have made
and your personal commitments to continuing that effort, and
that it's not just for this year or next year, but a long-term
change in the mentality that we don't go another 140 years
without a clean audit. The OMB issued some new guidelines in
May regarding a number of the issues under the President's
Management Agenda, including financial management guidelines.
And if both of you could comment on these new guidelines and
how you think they'll impact you and what you are doing or
perhaps not because you are already on track to fulfill these
new guidelines?
Mr. Martin. I support the initiative. It gives us a
deadline on which to focus the numerous actions on which we're
already working; the accelerated November 15 deadline for
audited statements; resolution of auditor identified integrity
act; material weaknesses and internal control, particularly the
material weakness related to IT security. We believe many
actions will be successfully completed prior to the July 1,
2004 target date, for example, the foreign school
recertification material weakness and the material data quality
weakness and we are making a lot of strides in IT security.
Mr. McPherson. I support the standards that have been set.
We had already set a goal of reducing material weaknesses by 50
percent this year and eliminating them by 2004. We have adopted
1 year early the November 14 date for our Performance and
Accountability Report. We have turned in quarterly statements
in fiscal year 2003 in accordance with the OMB guidelines, in
fact, a week or two early. So we seem to be on track for
meeting the standards, all of which are very valuable and
legitimate standards.
Mr. Platts. I now yield to the ranking member, Mr. Towns
for the purpose of questions.
Mr. Towns. Thank you, Mr. Chairman. To you, Mr. McPherson,
the Forest Service is an agency which was singled out by the
GAO as needing significant improvements. In fact, it has been
on GAO's high risk for the last 4 years. What are the root
causes of the problems that the Forest Service has? Does senior
management at these agencies give financial management a great
enough priority or are the accounting systems inherently worse?
Do they face structural or programmatic problems. What is
really going on over there?
Mr. McPherson. Congressman, my observations since coming on
board, the root causes are the following: One, a lot of
deferred work, meaning work that simply had not been performed
in previous years, manifesting itself in a number of
unreconciled cash items or not having performed current
physical inventories on the property. That work was performed
in 2002 to get current. The other things you mentioned, we have
had excellent support from the leadership of the Forest Service
starting with Under Secretary Mark Ray and the Chief of the
Forest Service, Dale Bosworth, as my business partners in
addressing these issues forthrightly and realistically.
You mentioned systems and systems are a root cause. Forest
Service had converted to this standard general accounting
system a few years ago. The remaining work relates to feeder
systems and feeder systems involving the management of
property, for example. So that is a remaining area of
attention, the subsystems or the feeder systems that support
accounting operations. Finally in the area of financial
management, because the Forest Service is a decentralized
organization with 32,000 employees in some 600 units in the
field, we are looking for ways to concentrate knowledge, skill
and process to take the excitement out of some of the
accounting for Forest Service to make it simpler and to reduce
some of the complexity.
I'll give you a specific. When I came aboard, Forest
Service had 620 million account records, and I assure you there
is no enterprise in the United States that has that many
accounting records. Half of those are in a data warehouse, half
of them are in the general accounting system. And it has to do
with cost allocation and tracking of costs, and it is just an
inordinate amount of complexity that does not bring with it
additional value and accountability. So we have worked with the
Forest Service to take out some of the unnecessary complexity.
So those are some of the items.
Mr. Towns. You know I am trying to figure out and don't
think I am not happy about it. I want you to know that I'm
happy that you are able to accomplish this, but I am not sure
as to how you did it. Did you use consultants or hire some new
folks? Did they wake up--I mean the people that were there? I
am trying to figure out how did you get to this point. I want
you to know that I am happy you are there.
Mr. McPherson. I appreciate both your happiness and your
support. I started with helping people to believe it was
possible. The first Forest Service meeting I had was with their
leadership group in October 2001 shortly after I came aboard
just prior to September 11 at the Shoreham Hotel over here. And
I set the goal of sufficient internal and data integrity to get
a clean audit in Forest Service for the year 2002.
The technical work really was taking their business
processes that related to their financials, that is how do they
reconcile cash, how do they maintain the accounting on property
and reengineered those processes and perform work that had not
been performed previously to bring them current. Along the way
we reinforced that with the proper organizational structure and
the proper staffing particularly at home office here in
Washington, the central headquarters. There is work that needs
to be done in the field in that regard. So, it really was being
effective and being bold in the changes because what was there
was not working properly and so we had to change it.
Mr. Towns. My time has expired. Thank you.
Mr. Platts. I would like to recognize the vice chair of the
subcommittee, the gentlelady from Tennessee, Mrs. Blackburn.
Mrs. Blackburn. Thank you all for being here. I know Mr.
Williams and Ms. Calbom have been with us before, and we
appreciate that you come back and that you take the time to
come before us. I have a series of questions that I want to
ask, and Mr. McPherson and Mr. Martin, I am going to start with
you and if we could kind of move these back and forth I would
appreciate it.
First of all looking at FFMIA, does it really matter and do
you see it as a help or a hindrance when you are choosing
Federal management systems. And Mr. McPherson and Mr. Martin,
if each of you would answer that.
Mr. McPherson. I think it's helpful. I am not sure any
document or one set of standards is a driver. I think the
experience of people who have worked with accounting processes
and chosen systems and implemented systems is as important. But
I think it's helpful in setting common expectations but it by
itself does not cause change.
Mr. Martin. I believe that FFMIA does indeed matter. It
serves as a driver for agencies to become compliant with the
U.S. Standard General Ledger and Federal accounting standards.
It also sets high standards for systems security and
integration. The Joint Financial Management Improvement Program
testing establishes a floor for financial systems operability.
However a JFMIP certificate does not convey compliance with
FFMIA. It does however mean that the system has the ability, if
configured and integrated correctly, to become FFMIA compliant.
For example, the standard general ledger chart of accounts,
an agency's specific pro forma accounting entries, must be
established in a new system by an agency. The collating
structure established in the system must also enable staff to
perform reconciliations of agencies specific feeder systems.
The system must be able to handle data transformations and
other types of summarizations. Reporting should be keyed off
the general ledger and be produced with the push of a button.
This often requires an agency to design complex report mappings
that tie appropriations to statement line items. And this is
especially true for the statement of net costs, which is tied
to strategic initiatives that are agency specific.
Mrs. Blackburn. Thank you. Mr. Williams and Ms. Calbom,
what immediate steps should USDA and Education take to be in
compliance with FFMIA. What, in your opinion, are the immediate
steps that they need to take? Mr. Williams.
Mr. Williams. I think Ted has hit on that point about the
systems, subsystems, the feeder systems that the agency is in
the process of reengineering, replacing, upgrading, etc. I
think once the agency gets control or gets a handle on that
particular control weakness then it will be headed in the right
direction to address some of the weaknesses and noncompliance
issues that the IGs reported in the past as far as the Act of
1996.
Ms. Calbom. Education put in a new financial management
system in 2002, the Oracle system, and it is designed to be
compliant with FFMIA. The problem for fiscal year 2002 that was
reported by the auditors really had a lot to do with some of
the system's implementation issues and those kind of cascaded
into other things, into reconciliations and some other
problems. So hopefully, if the system is up and running, as it
is supposed to be now, then we should see an improvement in
that area once we go through the next financial statement audit
for 2003.
Mrs. Blackburn. Now how extensive do you think the needed
management reforms are? Do they need to go through all the
field offices with this or is everything pretty much
headquartered here and then what do you think the compliance
will end up costing?
Ms. Calbom. I would have no idea of the cost of the
compliance. I think you are still talking about just FFMIA
compliance? I think we are talking about really getting over
some of the glitches that were experienced in implementing a
new system. So the system is already in place, it is up and
running, so hopefully if the glitches are cleaned up then you
know they will be in compliance. But time will tell and the
next audit will tell.
Mrs. Blackburn. Mr. Williams, same for you.
Mr. Williams. It's going to be a process in which, as
stated earlier, if they get these systems in place, the agency
did not get in this position overnight. It's going to take some
time. I think USDA has got a strategic plan which lays out over
the years what it intends to do to address the problems. And
once it is implemented and those systems are modified,
upgraded, etc., they should be able to be in compliance. Now
what that will cost and whether the current timeframe that the
agency's laid out is reasonable, only time will tell. I think
the office has put procedures in place where they can go back
and revisit the plan to make sure we are on track and people
are being held accountable for various steps along the way. And
as they go through that process, time will tell the success and
getting compliant.
Mrs. Blackburn. And you do not have an estimation of what
you think the time on the cost would be.
Mr. Williams. There's a plan that the office has put
together, a remediation plan that calls for being in compliance
by the year 2006. That is the current document. But what it
will cost, I could not say at the current time.
Mrs. Blackburn. Thank you, sir. May I continue? Thank you,
Mr. Chairman? The other thing, Mr. Williams and Ms. Calbom, I
will come back to you on this, if the timeline and the
benchmarks are not met, do you think it proper be appropriate
to have a penalty in place, some type of penalty format for
these--for the accountabilities, the stated accountabilities
not being met or either with the dollars budgeted to bring this
into compliance, if it is overbudgeted, there should be some
penalties that are enacted there.
Ms. Calbom. We haven't really assessed that issue and I
wouldn't want to comment on that since we really haven't done
any kind of a study to determine what the potential benefit of
that type of a procedure would be.
Mrs. Blackburn. Mr. Williams.
Mr. Williams. I would like to focus more on the phrase of
the word ``accountability.'' I think we need to hold people
accountable for what they are supposed to be doing in their
jobs. But as Ms. Calbom said, as far as the penalty, we have
not done an assessment to determine if there should be certain
penalties for not meeting certain dates but there should
definitely be some accountability.
Mrs. Blackburn. Mr. Chairman, just as I thought through
this process as we go through this, I think that you know we
hear repeatedly of--and I commend the departments and all
involved for having time lines and for having stated goals, but
I think it may be worth our efforts to look at possibly what
would be a method for some penalties for not meeting
accountability standards or time lines or projects that run on
and continue to go over budget year after year and see if there
is something that in so doing, if we can help these departments
and these individuals who are managing through these situations
to meet those time lines, and some way to incentivize that
process.
Mr. Platts. I think what we're all after is that at the end
of the day is having accountability, and how best to achieve
it. I think within the administration, there certainly is that
focus in how they are establishing their annual budget request
and accountability and what they are requesting. And that
certainly, at the end of the day, hits each of the departments.
If you are not meeting timeframes and goals set that may be
reflected in what the White House sends over and asks for your
departments and how much faith you want to continue to have in
putting additional dollars in the programs if you are not
meeting what you have established as your ultimate goals.
Certainly, Ms. Blackburn, it is something that we are glad
to continue to look at as a subcommittee and with your staff.
Coming back when I asked earlier about where we are today and
the focus with both departments and the structural changes and
the employees being invigorated to achieve the clean audits, I
would be curious in asking Mr. McPherson and Mr. Martin's their
opinions that 3, 4 years from now, we will still see clean
opinions based on changes we made for each of you and from
GAO's perspective.
Your comment, Mr. Williams, is time will tell. As we sit
here today, do you think the changes we have in place truly are
going to have long-term lasting results, or are we going to
continue to see the need for the heroic efforts?
Mr. Williams. Well, let me start with a concept that I like
to talk about, and that is in developing internal control
standards. We talk about setting the tone at the top and I
think that is what Mr. McPherson has done. He set the tone at
the top, that we will address these weaknesses, we will correct
these problems. And I believe that if you look at some of the
things that he has done and some of the things that he has
underway--I will give you an example when the effort first
started, USDA established having strike teams to address some
of the these reconciliation issues, etc.
And if you look at that particular process, one of the
things that we at GAO observed is that when the teams identify
a problem in a particular area, rather than just correcting
those specifically identified problems, the teams drilled down
and tried to identify what are the root causes for this
particular problem. And once you identify what the root causes
of the problems are, then you put corrective actions and you
correct those root causes, then you have set the stage for that
problem not to occur again in the future. So I think things
like that, if they continue with these types of projects and
exercises, then things will be set in place so that regardless
of who's at the top that the effort to achieve financial
accountability should continue.
Mr. Platts. Ms. Calbom.
Ms. Calbom. And I would agree with all those things. You
know, one of the real key things is the systems, and frankly,
the Federal Government, most agencies have been handicapped
over the years because they have outdated systems that don't
really do what they are expected to do, and that is to produce
financial statements.
So it was kind of like putting together a patchwork of
systems to try to prepare financial statements, and as I said
it was just a handicap to begin with. Now with new systems
being put in place that are designed to produce financial
statements and the type of financial information that really is
needed to manage, that is a tremendous hurdle that agencies
like Education now have gotten over. But it's not just systems,
though. You have to have processes and people too. You have to
have the reconciliation processes in place. You have to have
qualified people to do the work, and as Mr. Williams was
saying, you've got to have the people at the top. You've got to
have very, very senior management that is willing to put the
resources into doing these kinds of processes and procedures on
a consistent, systematic basis. Otherwise it can all fall apart
again very easily.
Mr. Platts. Thank you.
Mr. McPherson, in getting to a specific example of using
technology to have more accurate information and in this case
deal with improper payments in 2002, the Department met the
goal regarding the Food Stamps Program of now having 89 percent
of the electronic transfer occur. My understanding, that has a
huge benefit in the sense of eliminating wrongful payments.
My question actually was being at 89 percent, is there an
ultimate goal to get to 98, 99? If not, what is the greatest
hurdle to getting as close to 100 percent as possible so that
there is less chance of inappropriate payments being made?
Mr. McPherson. We expect the percentage to go up. The
reason it should go up is that there are four entities that
have not converted to electronic benefits, California being the
largest. California is in the process of rolling out that
system, implementing it. And then we also have Delaware and
Iowa and Guam to go. So the percentage ought to go up, and
you're absolutely correct, it is a major effective tool in
reducing erroneous payments.
Mr. Platts. Taking that history with the food stamps and
looking at the School Meals Program, my understanding is that
there have been pilot programs to use similar type approaches
with school meals. Could you give us some background in where
we stand on those pilots and what have we learned from them and
how we can maybe use that same knowledge from the Food Stamp
Program with the School Meals Program?
Mr. McPherson. There are some pilots going on in the school
meals electronic commodity ordering system, which is a Web-
based ordering--order control system, that I think over 50
agencies around the United States have--are piloting. So it is
going well. I think it's too early to say the full results of
all of that. But just a general statement. The more electronic
controls, the checks and balances are better on all these sorts
of delivery of cash. So it really has to do with the
productivity of cash in any of these programs. So we expect
that area to be fruitful as well. And as you may know, Under
Secretary Eric Bost has had some good experience in this regard
at the State level and has done a good job in regard to this
work through the Department of Agriculture.
Mr. Platts. Thank you, Mr. McPherson. I'm going to ask one
more question and then allow other committee members also. I
think we're going to have a vote in the next 5 to 10 minutes.
We'll try to get as many questions in before we need to break
to go over so that we don't keep you here after that if that
happens.
Mr. Martin, it's kind of a followup with the use of
technology. As we use technology to have more accurate payments
and keep better records and thus have a better understanding of
our financial position, one of the issues that was addressed in
previous audits for the Department of Education as well as by
the GAO was the security of the information in your systems,
and I wonder if you could update us on where you are and what
you've done to try to improve the confidentiality of
information in the Department's data systems.
Mr. Martin. We have a major IT security initiative taking
place now. Our office, the Office of the Chief Financial
Officer, working with the Chief Information Officer and Federal
Student Aid, we have a plan in place, and we are directing that
plan in addressing the IT security material weakness. We
believe that we will have most of the issues related to that IT
security material weakness resolved by the end of this year, a
good share of those resolved by the end of the fiscal year and
most all resolved by the end of the calendar year.
Mr. Platts. Is that something that you're sharing with or
coordinating with GAO as far as their past concerns they've
raised? Or I don't know if GAO has had a chance to look at that
yet, what's being done.
Ms. Calbom. We haven't been in to take a look at that
recently. We will be going in to followup on some of our
previous recommendations probably sometime this summer, which
will be just a quick look to see what kinds of things have been
done. You know, of course the IG has continued to report some
additional weaknesses in this area, but I do know that the
Department has some solid plans in place to address these
issues.
Mr. Martin. And we are working with the IG in resolving
these issues, Mr. Chairman.
Mr. Platts. Thank you.
Mr. Towns.
Mr. Towns. Thank you. Mr. McPherson, Federal credit
agencies have been required to estimate the cost of their loan
programs in accordance with the requirements of the Federal
Credit Reform Act of 1990. Since fiscal year 1992, USDA was
recently able to estimate their loan subsidy cost for its
credit programs, which totaled about $74 billion. Why did it
take so long to address this issue, and can we be assured that
USDA will continue to be able to make reliable estimates?
Mr. McPherson. I can't answer why it took so long because I
wasn't there. I know that we made a big effort in 2001 to
complete that work, and we were able to do it for the Rural
Development Agency, which has about in nominal terms $70
billion. We have about $100 billion in total, and as you
suggest, $74 billion on a present value basis.
So we made progress in Rural Development and got that
behind us in 2001. Last year we were able to complete the work
in the Farm Service Agency and the Commodity Credit Corp., so
that was key to completing the clean opinion in that agency.
And it is sustainable. I've looked at those models myself
in detail. I've looked at the people that operate them, and
while it was a complex task, once achieved it should well
sustain itself. In fact, we've been able to cut the time it
takes to prepare those calculations from what used to take
weeks to really a matter of days through automation. So I think
that one--that breakthrough is behind us.
Mr. Towns. Thank you.
Mr. Williams and Ms. Calbom, do you feel that a lot of the
problems is the fact that they have had improper technology or
not adequate technology to be able to answer the questions that
need to be answered in order to get information that was
required? Could you sort of just comment on that? I know you've
seen a lot of these and you've been there for quite some time,
and I'm just curious as to this fact.
Ms. Calbom. Are you speaking of the credit reform area or
just in general?
Mr. Towns. In general.
Ms. Calbom. In general?
Mr. Towns. Yes.
Ms. Calbom. I think it's a combination of things. You know,
like I said before, the systems that most of these agencies
were using were not meant to develop this type of financial
information. You know, in some cases we didn't have people in
the right positions that were trained to do the work that they
were being asked to do, and when you haven't asked anyone to be
accountable for years and years and years and then all of a
sudden we pass the CFO Act and then we're asking agencies to
issue audited financial statements. Then we're asking them to
be accountable, and you've got cultural issues there, systems
issues, people issues, all kinds of things going on. And I
think as everybody has mentioned, you know, when you're in a
real deep hole, it's hard to get out, and many of these
agencies were in a real deep hole. And many of them are
starting to get out of that hole and to have accountability.
I think I can speak particularly to Education. I believe
they've turned the corner on this. They're on the right track.
It's just a matter of a little more time, particularly to
demonstrate that this is sustainable and to clean up some of
these remaining weaknesses that were left over from the last
fiscal year.
Mr. Williams. For USDA I would agree with all of those
points. I think you have a scenario there in which financial
management was not a top priority in the past and you're
talking about an organization that is decentralized and you
would have people in the Northeast maybe accounting for
transactions one way, people in the Northwest accounting for
transactions another way, that decentralization not being a top
priority.
A lot of times that information was incorrect, and when you
bring all that information in together, you're basically not
going to be able to produce reliable financial statements.
And I would like to add as far as USDA is concerned, I
think it is also a top factor that a lot of their systems were,
and in some cases these feeder systems that we're talking about
are old and they need to be upgraded and in some cases just
totally replaced. And I think the agency is on track to address
this particular issue.
Mr. Towns. Right. Thank you very much. Let me ask, you
stressed it a lot, Mr. McPherson, and, Mr. Martin, you also
mentioned in your testimony, you praised the career civil
servants who worked hard to enable the Department achieve a
clean financial last year, and you point to these career
employees as the main reason for continuing optimism for
financial management improvements in the future.
Just how important are the career civil servants in
achieving progress, and what lesson can other agencies learn
from your experience?
Mr. McPherson. I would say they are very important, and the
lesson I learned is how underinvested we were, and are probably
other Federal agencies, in training for those career civil
servants. We just last week had 234 people come to Washington
for 2\1/2\ days in a series of modules of very specific
techniques, to include reconciliations, property, intercompany
eliminations, a whole suite of knowledge that they need to do
their jobs and to understand how all of that is integrated with
the systems and so forth, and we had two career civil servants
address those people as part of that curriculum. One was Don
Hammond from Treasury. One was Joe Kull from OMB, very
successful career civil servants. Joe Kull gave a very
effective presentation that I asked him to do as to what he
would look for if he were to hire anyone in that audience
today, and he reflected on what one needs to be equipped with
in terms of attributes and professional skills and so forth.
So that's a very valuable thing, just to invest in solid
training for the people.
Mr. Towns. Right.
Mr. Martin, could you comment on? That is my final
question.
Mr. Martin. Yes. When Secretary Paige took office, he
formed a management improvement team that was comprised
exclusively of senior level career employees. These employees
developed the Secretary's Blueprint for Management Excellence,
which laid the foundation for most of the improvements that
were--that occurred at the Department of Education. So the
career people were extremely important, and they continue to
play a major role.
Mr. Towns. Thank you very much. Thank all of you. I yield
back, Mr. Chairman.
Mr. Platts. Thank you, Mr. Towns.
Ms. Blackburn.
Ms. Blackburn. Thank you, Mr. Chairman. Ms. Calbom,
following up on what you said about stopping digging when
you're in a hole, coming out of Tennessee and the country music
industry being near and dear to us there, I'll just let you
know there is a great song by Randy Travis talking about stop
digging when you're in a hole. So if you need something as an
example, you can look that one up.
Let's see. And I'm sure if y'all gave me a chance, to our
ranking member down there and others, I could think of a lot of
other of our country songs out of Nashville or our blues songs
out of Memphis that we could tie back into a lot of what we're
talking about.
Mr. McPherson and Mr. Martin, Mr. Williams was speaking a
moment ago about centralizing some of your operations, and I've
heard you all talk about computer security and other different
things. As you've gone through this process of becoming more
technologically aware and having your systems be more of an
integrated system, obviously it sounds like what you're doing
from security to application, you are doing both a good bit of
front-end and back-end work.
Now, my question to each of you is are you doing--how are
you breaking this apart? Are you handling it in-house? Are you
contracting it out? If you're contracting it out, what is the
length of those contracts, and how much are you spending on an
annual basis for those contracts?
Mr. McPherson. Well, in our case, here's how we approach
it. The first job was to implement a standard accounting system
for discretionary spending, and we did 17 conversions to do
that. That's kind of a middle level.
We have also in our architecture implemented a data
warehouse and data marts that enable self service by our
program agencies where people can write their own queries and
manage their own information.
The remaining building block are these feeder systems that
are old legacy systems that include integrated----
Ms. Blackburn. Just a moment there. On those feeder
systems, are you--just for my understanding, when you build
those, your port of entry, is it a--would it be a front-end
Web-based system, or is it something they're logging--going
straight into the back end on that data management?
Mr. McPherson. Most of our interfaces are direct. We do not
have a lot of Web-based accounting systems. My choice when
coming was to finish what had been started. Our next migration
will be to more of a Web-based system.
So we have warehouse architecture, and the emphasis is on
feeder systems. And in our case feeder systems are large
integrated acquisition systems, procurement systems. They could
be property management for things like 22,000 buildings, 1,200
space assignments in 766 GSA buildings in over 400 cities and
towns. So these are massive accounting operations.
In performing the work, we own it internally. We own the
responsibility. I would not likely delegate that ownership
externally. What we do is have business partners that have
helped implement some of these systems, and we have project
teams for a suite of the feeder systems.
Ms. Blackburn. And when you bring those business partners
in line, is it a project until the completion of the project,
or how are you writing those contracts?
Mr. McPherson. Those contracts typically will be--could
range from development and implementation to maintenance, and
what we want to do is cut the time it takes to execute an
implementation, some sort of system change, and then migrate
aggressively to just an operating cost for maintaining it.
And my goal is to drive down the costs of this work,
because my sense is instinctively it's too high across
government, and it's too high in our case because of the labor-
intensive manual processes that were allowed to accumulate over
the years. So the replacement through technology has a cost
saving as well.
Ms. Blackburn. How many outsourced contractors or outside
contractors do you have--have you had working on those
projects?
Mr. McPherson. I would say for the core systems operated
for headquarters in the lines of business, I'm going to say no
more than a dozen, let's say, at the most as a guess. Now,
remember through the National Finance Center we service 120
other Federal agencies, so I'm excluding that as it relates to
payroll projects or the management of the recordkeeping for the
Thrift Investment Plan with $100 billion and 3 million
customers there. But just for the accounting operations, it's
not a lot, but it's very focused.
Ms. Blackburn. Mr. Martin.
Mr. Martin. We have an integrated platform called EDCAPS,
or Education Central Automated Processing System, and this
platform integrates all of our business processes, procurement,
travel, our Oracle financial management system, all of the
systems that we use on the--my side of the house. FSA, the
Federal Student Aid, they also have a separate Oracle system
and I think at least three contractors, Accenture I think being
the largest contractor. Accenture has several subcontractors
that they employ. We have one major contractor, IBM, now and I
think they subcontract a good share of their work.
The precise dollar amount I would have to get back to the
committee on.
Ms. Blackburn. If you could submit that for the record, I
think that would be great, the amount of the IBM contract, the
Accenture contract and then any of the others that have worked
on building your system, the separate systems that are in
there. I think that will be helpful to know.
May I ask one other question? Then I'll be through. OK. Mr.
Martin, when your auditor is giving your internal control
reports, would it be helpful to you all if they also issued to
you opinions on your internal controls?
Mr. Martin. I believe those internal controls as presented
satisfy all of the professional standards. So I don't see any
additional utility with any more information in those reports.
Ms. Blackburn. Mr. McPherson.
Mr. McPherson. I'd agree with that. I think there are
perhaps things such as audit committees or things beyond just
normal government practices that could be considered in
addition, but I agree with what Jack says about that particular
item.
Ms. Blackburn. Thank you, sir.
Mr. Platts. Thank you, Ms. Blackburn.
Mr. Martin, as one who about 2 weeks back made my last
student loan payment from law school--and I'm actually waiting
to get the statement back saying I'm completely paid off to
celebrate. But I'm grateful for the Direct Student Loan
Program, because my undergrad degree and my law school degree
would not have been achievable without that assistance. So the
integrity of those programs and all who participate who
actually fulfill their obligations, that is something that I
have a longstanding interest in. As I pay mine back, I want to
be sure everyone else is paying theirs back.
And my understanding is that in the Office of Federal
Student Aid, there has been some significant technology
investments to improve the tracking of--whether it be the Pell
grants or the Direct Loan Program. I wonder if you could update
us on where that stands and what you envision for the
improvements being made regarding the Office of Federal Student
Aid.
Mr. Martin. Well, I think in terms of what we need to
satisfy GAO, we've got material weaknesses that we need to
improve related to IT security and other FMFIA material
weaknesses.
Mr. Platts. And that relates to being on the at-risk list
with GAO to satisfy their requirements to get off that risk
list?
Mr. Martin. Right. Yes.
Mr. Platts. What's your timeframe you think as far as
trying to satisfy the----
Mr. Martin. I think that where we'll be--you'll be
reviewing probably in 2005, I guess?
Ms. Calbom. Yes. Probably during fiscal year 2004 we'll be
looking at what's been done in preparation for our high-risk
assessment that we will be issuing in January 2005.
Mr. Platts. That was my followup, is the Department, in
this case Department of Education, takes action to address
issues that I guess result in being on that list. It's my
understanding that the GAO--that your process has always been
just a 2-year update, that there are not interim updates?
Ms. Calbom. Yes. Our policy is to do it on a biennial
basis. You know, part of the reason for doing that is that
really allows time to demonstrate sustainability of the
improvements that have been made. For example, with the
Department of Education, they did get a clean opinion in 1997,
but then they weren't able to sustain that and they weren't
able to even repeat it until just recently. We've seen that
with some other agencies as well. Transportation had that issue
a few years back as well. So we want to give some time to make
sure that, as we've been talking here today, that these are
permanent type improvements.
The other thing is, GAO spends a lot of time and effort in
doing those high-risk and performance and accountability series
updates, and it is something that we think is a valuable thing
to do for the Congress. But because it is such a big
investment, we really want to limit that to a biennial-type
process and not make exceptions on an agency by agency basis,
because then we'd have everybody wanting to have an out of
cycle assessment. So our policy is to stick with the biennial
assessment.
Mr. Platts. But you will have ongoing interaction with the
Department that--as they work to address the shortcomings you
have identified, that they are on the right track as opposed to
just waiting till you get to that next 2 years and----
Ms. Calbom. Definitely. In fact, the Department has offered
to provide us with a series of briefings on the improvements
that have been made in the student aid programs and we
definitely are going to take them up on that, because we want
to be as up to date as we can be and offer advice as we go.
In addition, we have several ongoing jobs at the Department
that really we do in order to build toward the high-risk
update. As a matter of fact we're doing planning agency-wide at
GAO right now to make sure that we've got a body of work
planned for each of the areas that are currently on the high-
risk list so that we're in a position to properly assess those,
again, for the 2005 date.
Mr. Platts. OK. Thank you. Maybe a final area of specific
inquiry, Mr. McPherson, with the Department of Agriculture is
on the issue of debt, but I guess in a broad sense with your
Department having--my understanding is about a third of all
nontax debt or credit being issued by Agriculture. In the 2002
fiscal year you jumped from 14 percent to 96 percent in the
eligible debt that was referenced--or referred to the Treasury
cross-servicing program, I guess, that kind of resulted in such
a significant result--or increase in the referral and what you
see for the future in that type of action.
Mr. McPherson. It was a significant and invaluable
improvement. About $300 million more in cash collections going
to the Treasury than otherwise would have been the case. I
think the issue is for us--the management of this hundred
billion dollar loan portfolio in achieving the proper missions
of the programs through the productive use of cash, and to
manage those loans, I think there are four things that are
important in addition to things like being good at collecting
delinquent debts.
One is the transaction approval process, and so we've
emphasized taking a close look at how those transactions are
approved. Two is how those portfolios or cohorts are managed in
terms of concentration of risk, early warnings and so forth.
Three has to do with the systems, the use, the application of
computing to run a loan portfolio, to manage a loan portfolio,
and a lot of loan systems probably around the government need
to be renovated. We have some of that work to do.
And then the fourth area is debt collection, credit reform,
a whole other miscellaneous group of techniques and processes
that are brought to managing that portfolio. And I think it's
good to look at those aggregates where a lot of agencies have
particular agencies or programs dedicated to lending. Any bank,
private or public, is going to look at the whole portfolio and
how it's managed, and I think that's where we have gotten some
of our gains with more to come.
Mr. Platts. Is that work--the various stage at this point
is all internal, or do you use outside----
Mr. McPherson. It's principally internal, and my role is
sort of as a policy overseer. I'm not close to the customer. I
don't own those portfolios. So my role is to influence how
those are managed by Rural Development and the Farm Service
Agency who have agency heads and under secretaries that own
that work. But in tandem, in teaming, we all sort of speak the
same language and are focused on some of these things that we
think are most useful.
Mr. Platts. And actually your final statement there brings
me to a final question for Mr. Martin and Mr. McPherson.
Speaking the same language and one of the goals of this hearing
and of having you testify is to shed some more light on the
efforts you have made and the tremendous success you both have
had with your Departments and your fellow colleagues at your
Departments in having more financial accountability, is there a
regular interaction between the two of you and your--kind of
your colleagues in other Departments in the same positions that
you share notes on a regular basis as what's working in my
Department, what's not, and so that we aren't having to
reinvent the wheel, per se, in each of the CFO agencies?
Mr. Martin. We have the CFO Council where many of these
issues are discussed, and we have had I think two dinners of
CFOs where we talk about issues that are affecting our
respective Departments and where there are common interests.
And we have working groups on--I think there is a working group
that deals with issues related to implementation of the Oracle
system, you know, where they meet periodically. I think it's
either monthly or quarterly. So there is----
Mr. Platts. Not just at the CFO level but staff----
Mr. Martin. And below that, yes.
Mr. Platts. Great. Well, hopefully when you're meeting and
your fellow CFOs get together, they're listening well when the
two of you speak and taking good notes, and we will hope with
time that we can get DOD to embrace the improvements as well
given the size of that Department's challenges, but if no other
questions----
Mr. Towns. I would like to just thank the witnesses, Mr.
Chairman. Thank you very much.
Mr. Platts. Thank you, Mr. Towns, and we do appreciate all
four of you for your time and effort, not just here today but
in the preparation and material you shared and your willingness
to continue to be great resources for the members of this
subcommittee.
I'd also like to thank both the majority and minority staff
members for their efforts regarding this hearing. It's clear
that the agencies before us have put forth significant efforts
to fix various serious financial management problems, and I
commend each of you and your many, many staff persons who have
put forth that effort in achieving the successes you have in
both Departments. We look forward to hearing similar success
stories from your financial management colleagues throughout
the Federal Government as they learn from your examples and
seek to meet the challenges before their Departments.
The record will be kept open for 2 weeks for any additional
information to be submitted, and this hearing stands adjourned.
Thank you.
[Whereupon, at 3:30 p.m., the subcommittee was adjourned.]
[Additional information submitted for the hearing record
follows:]
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