[House Report 106-802]
[From the U.S. Government Publishing Office]
Union Calendar No. 463
106th Congress, 2d Session - - - - - - - - - - - - House Report 106-802
_______________________________________________________________________
MAKING THE FEDERAL GOVERNMENT ACCOUNTABLE: ENFORCING THE MANDATE FOR
EFFECTIVE FINANCIAL MANAGEMENT
__________
FIFTH REPORT
by the
COMMITTEE ON GOVERNMENT REFORM
together with
MINORITY VIEWS
Available via the World Wide Web: http://www.gpo.gov/congress/house
http://www.house.gov/reform
July 27, 2000.--Committed to the Committee of the Whole House on the
State of the Union and ordered to be printed
__________
U.S. GOVERNMENT PRINTING OFFICE
65-301 CC WASHINGTON : 2000
COMMITTEE ON GOVERNMENT REFORM
DAN BURTON, Indiana, Chairman
BENJAMIN A. GILMAN, New York HENRY A. WAXMAN, California
CONSTANCE A. MORELLA, Maryland TOM LANTOS, California
CHRISTOPHER SHAYS, Connecticut ROBERT E. WISE, Jr., West Virginia
ILEANA ROS-LEHTINEN, Florida MAJOR R. OWENS, New York
JOHN M. McHUGH, New York EDOLPHUS TOWNS, New York
STEPHEN HORN, California PAUL E. KANJORSKI, Pennsylvania
JOHN L. MICA, Florida PATSY T. MINK, Hawaii
THOMAS M. DAVIS III, Virginia CAROLYN B. MALONEY, New York
DAVID M. McINTOSH, Indiana ELEANOR HOLMES NORTON, District of
MARK E. SOUDER, Indiana Columbia
JOE SCARBOROUGH, Florida CHAKA FATTAH, Pennsylvania
STEVEN C. LaTOURETTE, Ohio ELIJAH E. CUMMINGS, Maryland
MARSHALL ``MARK'' SANFORD, South DENNIS J. KUCINICH, Ohio
Carolina ROD R. BLAGOJEVICH, Illinois
BOB BARR, Georgia DANNY K. DAVIS, Illinois
DAN MILLER, Florida JOHN F. TIERNEY, Massachusetts
ASA HUTCHINSON, Arkansas JIM TURNER, Texas
LEE TERRY, Nebraska THOMAS H. ALLEN, Maine
JUDY BIGGERT, Illinois HAROLD E. FORD, Jr., Tennessee
GREG WALDEN, Oregon JANICE D. SCHAKOWSKY, Illinois
DOUG OSE, California ------
PAUL RYAN, Wisconsin BERNARD SANDERS, Vermont
HELEN CHENOWETH-HAGE, Idaho (Independent)
DAVID VITTER, Louisiana
Kevin Binger, Staff Director
Daniel R. Moll, Deputy Staff Director
David A. Kass, Deputy Counsel and Parliamentarian
Robert A. Briggs, Deputy Chief Clerk
Phil Schiliro, Minority Staff Director
Subcommittee on Government Management, Information, and Technology
STEPHEN HORN, California, Chairman
JUDY BIGGERT, Illinois JIM TURNER, Texas
THOMAS M. DAVIS III, Virginia PAUL E. KANJORSKI, Pennsylvania
GREG WALDEN, Oregon MAJOR R. OWENS, New York
DOUG OSE, California PATSY T. MINK, Hawaii
PAUL RYAN, Wisconsin CAROLYN B. MALONEY, New York
Ex Officio
DAN BURTON, Indiana HENRY A. WAXMAN, California
J. Russell George, Staff Director and Chief Counsel
Bonnie Heald, Director of Communications/Professional Staff Member
Louise DiBenedetto, Professional Staff Member
Bryan Sisk, Clerk
Trey Henderson, Minority Counsel
?
LETTER OF TRANSMITTAL
House of Representatives,
Washington, DC, July 27, 2000.
Hon. J. Dennis Hastert,
Speaker of the House of Representatives,
Washington, DC.
Dear Mr. Speaker: By direction of the Committee on
Government Reform, I submit herewith the committee's fifth
report to the 106th Congress. The committee's report is based
on a study conducted by its Subcommittee on Government
Management, Information, and Technology.
Dan Burton,
Chairman.
(iii)
?
C O N T E N T S
_________________________________________________________________
Page
I. Summary of oversight findings and recommendations................1
A. Introduction.......................................... 1
B. Findings.............................................. 3
1. Agencies continue to miss statutory reporting 3
deadline for audited financial statements.
2. Progress is being made, but obtaining ``clean'' 3
audit opinions is not the end game.
3. Material deficiencies in Federal Government's 4
financial information continue.
4. Inconsistent reporting of certain Social 4
Security and Medicare (Part A) projections.
5. Material Control Weaknesses Continue to Exist... 5
6. Noncompliance with laws and regulations continue 5
to exist.
C. Recommendations....................................... 6
1. Continuation of regular congressional and 6
Presidential oversight.
2. Require top management attention to agencies' 6
financial management systems remediation plans.
3. Provide incentives for implementing effective 7
financial management.
4. Ensuring that the Federal Government's financial 7
report contains current information related to
Social Security and Medicare (Part A) trust
funds.
5. Strengthen the ability of Inspectors General to 7
carry out their financial management oversight
responsibilities.
6. Strengthen the President's role as Chief 8
Executive Officer of the executive branch by
establishing an Office of Management.
II. Report on the committee's oversight review.......................8
A. Background............................................ 8
1. The need for effective Federal financial 9
management.
2. Federal financial management legislation........ 9
3. The importance of effective internal control.... 10
B. Results of the fiscal year 1999 governmentwide 11
financial statements audit and related agency audits.
1. Oversight hearings held by the subcommittee..... 11
2. Federal department and agency financial 18
management grades.
III. Conclusions.....................................................21
APPENDIXES
Appendix A.--Major Federal financial management legislation...... 23
Appendix B.--Federal accounting concepts and standards........... 28
Appendix C.--Basis for agency financial management grades........ 29
Appendix D.--Public Law 104-208, Title VIII Federal Financial 31
Management Improvement Act.
Appendix E.--List of witnesses................................... 37
VIEWS
Minority views of Hon. Henry A. Waxman, Hon. Jim Turner, Hon. Tom 40
Lantos, Hon. Major R. Owens, Hon. Edolphus Towns, Hon. Paul E.
Kanjorski, Hon. Patsy T. Mink, Hon. Carolyn B. Maloney, Hon.
Eleanor Holmes Norton, Hon. Elijah E. Cummings, Hon. Dennis J.
Kucinich, Hon. Rod R. Blagojevich, Hon. Danny K. Davis, Hon.
John F. Tierney, Hon. Thomas H. Allen, Hon. Harold E. Ford,
Jr., and Hon. Janice D. Schakowsky.
(v)
ABBREVIATIONS
__________
CFO Chief Financial Officer
DOD Department of Defense
FASAB Federal Accounting Standards
Advisory Board
FFMIA Federal Financial Management
Improvement Act of 1996
FMFIA Federal Managers' Financial
Integrity Act of 1982
GAGAS Generally Accepted Government
Auditing Standards
GAO General Accounting Office
GMRA Government Management Reform Act of
1994
GPRA Government Performance and Results
Act of 1993
HCFA Health Care Financing Administration
HHS Department of Health and Human
Services
HUD Department of Housing and Urban
Development
IG Inspector General
IRS Internal Revenue Service
OMB Office of Management and Budget
USDA Department of Agriculture
(vii)
Union Calendar No. 463
106th Congress Report
HOUSE OF REPRESENTATIVES
2d Session 106-802
======================================================================
MAKING THE FEDERAL GOVERNMENT ACCOUNTABLE: ENFORCING THE MANDATE FOR
EFFECTIVE FINANCIAL MANAGEMENT
_______
July 27, 2000.--Committed to the Committee of the Whole House on the
State of the Union and ordered to be printed
_______
Mr. Burton, from the Committee on Government Reform submitted the
following
FIFTH REPORT
On June 29, 2000, the Committee on Government Reform
approved and adopted a report entitled, ``Making the Federal
Government Accountable: Enforcing the Mandate for Effective
Financial Management.'' The chairman was directed to transmit a
copy to the Speaker of the House.
I. Summary of Oversight Findings and Recommendations
A. Introduction
The Committee on Government Reform (the ``committee'') has
primary legislative and oversight jurisdiction with respect to
``Government management and accounting measures generally,'' as
well as ``overall economy, efficiency, and management of
Government operations and activities, including Federal
procurement.'' \1\ The committee also has the responsibility:
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\1\ Clause 1(h) (4) and (6) rule X of the Rules of the House of
Repesentatives, 106th Congress.
[T]o determine whether laws and programs addressing
subjects within the jurisdiction of [the] committee are
being implemented and carried out in accordance with
the intent of Congress and whether they should be
continued, curtailed, or eliminated, each standing
committee (other than the Committee on Appropriations)
shall review and study on a continuing basis the
application, administration, execution, and
effectiveness of laws and programs addressing subjects
within its jurisdiction. [The committee shall review
and study] any conditions or circumstances that may
indicate the necessity or desirability of enacting new
or additional legislation addressing subjects within
its jurisdiction.\2\
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\2\ Ibid., Clause 2(b)(1) (A) and (C).
Pursuant to this authority, the Committee on Government
Reform's Subcommittee on Government Management, Information,
and Technology (the ``subcommittee'') convened eight oversight
hearings to explore:
the implementation of laws related to Federal
financial management in executive departments and
agencies and, in particular, the third year of full
implementation of the Chief Financial Officers Act of
1990 [CFO Act], as expanded by the Government
Management Reform Act of 1994 [GMRA] and as amended by
the Federal Financial Management Improvement Act of
1996 [FFMIA];
the extent to which Federal executive
departments and agencies have successfully complied
with the requirements of these laws;
the need for congressional action to improve
financial management in the Federal Government; and
options for congressional actions that would
effectively bring about such improvement.
Billions of taxpayer-provided dollars are being lost each
year to fraud, waste, misuse, and mismanagement in hundreds of
programs within the Federal Government. Audits continue to show
that most agencies have significant weaknesses in controls and
systems. As a result of these weaknesses, Federal
decisionmakers do not have reliable and timely performance and
financial information to ensure adequate accountability, manage
for results, and make timely and well-informed decisions.
In the late 1980's, Congress recognized that one of the
root causes of this loss was the Federal Government's disarray
of financial management policies, systems, and practices and
lack of leadership. Financial systems and practices were
obsolete and ineffective. They failed to provide complete,
consistent, reliable, and timely information to congressional
decisionmakers or agency management.
In response, Congress passed a series of laws designed to
improve financial management practices and to ensure that tax
dollars would be spent for the purposes that Congress intended.
These laws included the Chief Financial Officers Act of 1990,
Public Law 101-576, the Government Management Reform Act of
1994, Public Law 103-356, and the Federal Financial Management
Improvement Act of 1996, Public Law 104-208. Each executive
agency covered by the Chief Financial Officers Act--or
specified by the Office of Management and Budget [OMB]--is
required to prepare and have audited a financial statement
covering all accounts and associated activities of each office,
bureau, and activity within the agency.\3\ Furthermore,
consolidated governmentwide financial statements must be
prepared and audited annually. In addition, Federal agencies
are required to conform to promulgated Federal Government
accounting and systems standards, and to use the Federal
standard general ledger.
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\3\ The 24 Federal agencies covered by the requirements of the CFO
Act are the following 14 Cabinet Departments: Agriculture, Commerce,
Defense, Education, Energy, Health and Human Services, Housing and
Urban Development, Interior, Justice, Labor, State, Transportation,
Treasury, and Veterans Affairs; and the following 10 independent
agencies: Environmental Protection, National Aeronautics and Space,
International Development, Federal Emergency Management, General
Services, National Science, Nuclear Regulatory Commission, Personnel
Management, Small Business, and Social Security.
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Implementation of the financial management reforms
established by these laws is still underway. It is imperative
that these reforms are successfully achieved. Agencies must
produce reliable, useful and timely financial information. This
information is essential for financial management purposes as
well as measuring program performance under the Government
Performance and Results Act of 1993 [GPRA], Public Law 103-62.
Thus at a minimum, strong congressional oversight is needed to
achieve the primary goal of all these laws: a Federal
Government that is accountable to the American taxpayers.
B. FINDINGS
The fiscal year 1999 annual audit reports for the 24
Federal departments and agencies (``agencies''), required under
the CFO Act as expanded by GMRA, were due to be filed with the
Office of Management and Budget on March 1, 2000. On March 31,
2000, the U.S. General Accounting Office [GAO] issued its third
annual audit report on the financial statements of the Federal
Government. Based on the investigation and oversight hearings
conducted by the subcommittee, and the results of agency and
governmentwide fiscal year 1999 financial statements audits,
the committee finds as follows:
1. Agencies continue to miss the statutory reporting deadline for
audited financial statements
The Government Management Reform Act of 1994 required that
the head of each of the 24 CFO Act agencies submit audited
financial statements to the Director of the OMB by March 1st of
each year. The OMB reported that the timeliness of financial
reports improved this year, increasing from 6 agencies that met
the statutory deadline in 1997 to 19 agencies in 2000. Of the
five agencies that failed to meet this deadline, the Department
of the Interior failed to file its report until May--nearly 8
months after the end of the fiscal year. The Department of
State had not produced its audited financial statements by the
time of this report's publication. Failure to meet a statutory
deadline is of serious concern to the committee. The Congress
mandates deadlines with the intent that such deadlines will be
met.
2. Progress is being made, but obtaining ``clean'' audit opinions is
not the ``end game''
The OMB reported that the quality of agency financial
statements has improved and that agencies continue to make
steady progress in this area. For fiscal year 1996, only 6, or
25 percent, of the agencies received unqualified or ``clean''
audit opinions on their fiscal year 1996 financial statements
compared to 14, or 58 percent, for fiscal year 1999, according
to the OMB. The GAO also noted that the number of agencies
receiving ``clean'' audit opinions has steadily increased.
``Clean'' audit opinions are an important milestone.
However, the Comptroller General again emphasized that
obtaining a ``clean'' audit opinion is not the ``end game.''
Such an opinion does not guarantee that agencies have systems
in place that produce reliable, useful, and timely financial
information to support ongoing management and accountability.
The Comptroller General further noted that some agencies had
obtained ``clean'' audit opinions only through ``heroic
efforts,'' which included using consultants, statistical
sampling, and other ad hoc procedures to obtain reliable
numbers for one particular date--the end of the fiscal year.
Also emphasizing the need for greater focus on improving
day-to-day financial management practices, the Inspector
General for the Department of Housing and Urban Development
stated, ``Virtually any entity, given enough time and
resources, can get an unqualified opinion on its financial
statements.''
3. Material deficiencies in the Federal Government's financial
information continue
Similar to the previous 2 years, the GAO was unable to
render an opinion on the reliability of the fiscal year 1999
financial statements of the Federal Government. The GAO report
\4\ identified the broad array of financial management problems
faced by the Federal Government, which impair its ability to
adequately safeguard assets, properly record transactions, and
comply with selected provisions of laws and regulations related
to financial reporting. According to the GAO, these problems
affect the reliability of the financial statements of the U.S.
Government as well as the related underlying financial
information. More important, GAO noted that these problems ``.
. . also affect the Government's ability to accurately measure
the full cost and financial performance of certain programs and
effectively manage related operations.''
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\4\ ``Financial Audit: 1999 Financial Report of the United States
Government,'' GAO AIMD-00-131, Mar. 31, 2000.
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4. Inconsistent reporting of certain Social Security and Medicare (Part
A) projections
For the second year, the Comptroller General reported that
certain information concerning the Social Security and Medicare
(Part A) trust funds reported in the Federal Government's
financial report was immediately outdated and, therefore,
inconsistent with the information reported by the Social
Security and Medicare Boards of Trustees. This information
included projected contributions and expenditures, dates when
expenditures were expected to exceed contributions, and dates
when such funds were expected to be exhausted.
The Comptroller General stated that the Social Security and
Medicare Boards of Trustees issue their annual report on the
status of the Social Security and Medicare Programs, which
includes updated information on these Federal programs, one day
after the Government issues its financial report. As a result,
the two documents, issued within one day of each other, have
reported significantly different projections for the last 2
years, and may cause confusion for Congress and the public.
The Comptroller General stated that given the importance of
this information, ``steps should be taken in future years to
assure that the Government's financial report contains up-to-
date information as of no earlier than the end of the most
recent fiscal year in these important Federal programs.'' The
Comptroller General noted that while the Social Security and
Medicare Boards of Trustees have a statutory responsibility to
report by April 1st, theoretically they could provide this
information earlier so that it could be included in the
Government's financial report. Further, he suggested that
serious consideration should be given to auditing this
information.
5. Material control weaknesses continue to exist
Auditors continued to identify material weaknesses in
internal controls throughout the CFO Act agencies. As of the
date of publication, only 5 of the 23 CFO Act agencies that
filed audit reports for fiscal year 1999 were found to have no
material weaknesses.\5\ Material weaknesses contribute to an
agency's inability to ensure that (1) transactions are properly
recorded, processed, and summarized to permit the preparation
of financial statements in accordance with generally accepted
accounting principles; (2) assets are safeguarded against loss
from unauthorized acquisition, use, or disposition; and (3)
transactions are executed in accordance with the laws governing
the use of budget authority and with other laws and regulations
that could have a direct and material affect on the financial
statements.
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\5\ A material weakness, as defined by the American Institute of
Certified Public Accountants in its Statements of Auditing Standards
and in the Comptroller General's Government Auditing Standards, is a
condition in which the design or operation of one or more of the
internal control components does not reduce to a relatively low level
the risk that errors or irregularities in amounts that would be
material to the financial statements may occur and not be detected
promptly by employees in the normal course of performing their duties.
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In addition, the GAO noted that deficiencies related to the
major problems affecting the reliability of the Federal
Government's financial statements identified above, also
constitute material weaknesses in internal controls. Other
related problems reported as a result of inadequate internal
controls, include the Federal Government's inability to develop
strategies to reduce billions of dollars in improper payments
and to efficiently and effectively collect and account for tax
revenues. Of additional alarm, virtually every agency was
reported as having computer security weaknesses. As a result,
the Federal Government's financial and other sensitive
information is susceptible to inappropriate disclosure,
destruction, modification, and fraud.
6. Noncompliance with laws and regulations continue to exist
Noncompliance with selected provisions of laws and
regulations related to financial reporting continues to be a
pervasive problem among the 24 CFO Act agencies. Based on the
fiscal year 1999 audit reports of 23 agencies that had filed
reports as of publication of this report, only 3 were reported
as having no instances of material noncompliance. Specifically,
20 of the agencies were not compliant with the requirements of
the Federal Financial Management Improvement Act of 1996--a key
financial management law enacted to ensure that agencies'
financial management systems produce timely and accurate
financial information.
The GAO stated, ``. . . continuing widespread noncompliance
with FFMIA is indicative of the overall long-standing poor
condition of agency financial systems.'' And for many agencies,
``. . . the preparation of financial statements requires
considerable reliance on ad hoc programming and analysis of
data produced by inadequate financial systems that are not
integrated, reconciled, and often require significant
adjustments.'' \6\
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\6\ ``Auditing the Nation's Finances: Fiscal Year 1999 Results
Continue to Highlight Major Issues Needing Resolution.'' GAO/T-AIMD-00-
137, Mar. 31, 2000.
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C. RECOMMENDATIONS
Based on the foregoing findings, the committee recommends
the following:
1. Continuation of regular congressional and Presidential oversight
Strong oversight is one of Congress's most effective tools
in the effort to ensure that executive departments and agencies
implement necessary reforms. To build upon this, Congress needs
to mandate formal oversight hearings to review the status of
agencies' progress toward financial accountability, including
planned actions to resolve related problems.
Each department and agency should provide a detailed,
annual status report on its financial management operations.
When appropriate, each department or agency should be regularly
reviewed by its relevant oversight, authorization, and
appropriations subcommittees regarding its progress in
reforming its financial management systems and processes. These
hearings should be held annually, semiannually, or quarterly,
depending on the severity of the financial problems within the
department or agency. This would assist Congress in effectively
monitoring agency actions and taking corrective actions as
necessary.
2. Require top management attention to agencies' financial management
systems remediation plans
The year 2000 computing problem was successful due to
various factors, including the priority placed on the issue by
Congress, the administration, and top management at each of the
agencies. Such attention facilitated ongoing progress and
monitoring performance. The establishment of governmentwide and
agency-level plans, with milestones for addressing major
weaknesses, was a significant factor in achieving success.
As previously recommended, agency financial management
systems remediation plans must provide a detailed description
of planned actions with clear and reasonable milestones,
including the names of staff members responsible for resolving
particular issues. To ensure top management attention, the plan
should be approved by the agency head and relevant agency
officials, such as the Chief Financial Officer, Chief
Information Officer, and Inspector General. A draft of the
approved plan should be sent to the Comptroller General who
would coordinate the agency's actions and related milestones in
the remediation effort. These parties must meet regularly to
monitor the agency's progress in meeting the objectives of the
plan.
A draft of the plan should also be available to relevant
congressional committees. In addition, the congressional
oversight hearings recommended above should include a
discussion of the agency's plan and the progress being made
toward resolving outstanding financial management systems
issues. This would assist Congress in effectively monitoring
agency actions and taking corrective actions as necessary.
3. Provide incentives for implementing effective financial management
It is clear that congressional oversight alone cannot
effect the necessary change in financial management practices
at all departments and agencies. The committee again notes that
incentives are needed to prompt agencies to resolve their
outstanding financial management problems. If an agency is
unable or unwilling to effect these crucial changes, Congress
has the authority to provide incentives for change. These
incentives include: (1) redirecting a percentage of the
agency's appropriated program or administrative funding toward
correcting financial management problems; (2) restricting a
percentage of the agency's appropriated funds until the
problems are corrected; or (3) reducing various amounts of
appropriated funds until the agency has completed its
correction efforts. Further, reducing appropriated funds should
be considered for all agencies failing to comply with the March
1st statutory reporting deadline.
These actions are intended to encourage an agency to
resolve its financial management problems expeditiously while
meeting the March 1st statutory deadline.
4. Ensuring that the Federal Government's financial report contains
current information related to Social Security and Medicare
(Part A) trust funds
In light of the importance of future funding projections
related to Social Security and Medicare (Part A) trust funds
and the Comptroller General's recommendation that steps be
taken to ensure that the Government's annual financial report
contains up-to-date information, the subcommittee should
request the GAO to conduct a study on the feasibility of the
Social Security and Medicare Boards of Trustees releasing
updated projections in a timeframe that will allow them to be
included in the Government's annual financial report. Such a
study should consider whether the Social Security and Medicare
Boards of Trustees' statutory reporting deadline of April 1st
should be changed to coordinate with the Government's financial
report. Further, Congress should consider the need for
requiring that such information be independently verified. If
determined to be necessary, such a requirement should be
legislatively mandated.
5. Strengthen the ability of Inspectors General to carry out their
financial management oversight responsibilities
Inspectors General are responsible for conducting audits of
agency and department programs and operations. Their audit
function in the executive branch is crucial. Agency audits
provide information to executive branch managers and Congress
that is necessary to uncover and resolve problems that impede
effective financial management. To ensure that Inspectors
General can provide quality audit services, it is imperative
that Congress takes steps to ensure that Inspectors General are
highly qualified and have the necessary resources to oversee
agency financial management.
The Office of the Inspector General must ensure that all
candidates for Inspector General positions are qualified to
perform financial statement audits or specific segments of
audits requiring specific expertise. These qualifications
should be determined through a review by an external party and
may be incorporated into the peer-review process.
As the committee suggested last year, when appointments for
the Inspector General office are being considered, a board,
which includes representatives of the President's Council on
Integrity and Efficiency, should review the qualifications of
the Inspector General candidate before the nomination is
forwarded to the Senate for confirmation.
6. Strengthen the President's role as Chief Executive Officer of the
executive branch by establishing an Office of Management
Management of the executive branch of the Federal
Government should be a Presidential priority. Among the
President's many roles is the responsibility to serve as Chief
Executive Officer of the Federal Government. Many broad
objectives--including effectively managing Federal Government
finances--are intended to make the Federal Government work
better, but they depend on the commitment of the President and
his staff in the Executive Office of the President. By
approaching the Federal Government almost exclusively from a
budgetary or policy perspective, Presidents limit their
capacity to reform management within the Federal Government.
If the financial management function is to be strengthened,
the President needs management experts. That is also true of
various other management functions. In the past, the
Subcommittee on Government Management, Information, and
Technology has recommended legislation that would form an
Office of Management, separate and distinct from the Office of
the Budget. It continues to recommend such an office. This
office could help the President and his Cabinet to focus on the
critical management challenges facing the Federal Government.
Cabinet officers are not always nominated for their
managerial skills. They need assistance. Congress has provided
some of that assistance by mandating the roles of Chief
Financial Officer and Chief Information Officer. However, in a
number of departments and agencies, these dual roles have been
assigned to one person. That is not what Congress intended. The
financial and information management functions are so complex
that each position requires the full-time attention of a senior
management official.
II. Report on the Committee's Oversight Review
A. BACKGROUND
I think it an object of great importance . . . to
simplify our system of finance, and bring it within the
comprehension of every member of Congress . . . the
whole system [has been] involved in an impenetrable
fog. There is a point . . . on which I should wish to
keep my eye . . . a simplification of the form of
accounts . . . so as to bring everything to a single
centre[;] we might hope to see the finances of the
Union as clear and intelligible as a merchant's books,
so that every member of Congress, and every man of any
mind in the Union, should be able to comprehend them to
investigate abuses, and consequently to control
them.\7\ --Thomas Jefferson, April 1, 1802.
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\7\ Thomas Jefferson, in a letter to Secretary of the Treasury
Albert Gallatin, Apr. 1, 1802, The Writings of Thomas Jefferson, edited
by Andrew A. Lipscomb (Washington, DC, 1905) vol. 10, pps. 306-309.
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1. The need for effective Federal financial management
Nearly 200 years ago, President Thomas Jefferson recognized
the need for effective financial management in the Federal
Government. President Jefferson's insight on this subject is
equally relevant today.
Federal financial management continues in a state of
disarray. Billions of taxpayers' dollars are being lost each
year to fraud, waste, abuse, and mismanagement in hundreds of
Federal programs. Financial systems and practices are obsolete
and ineffective, and do not provide complete, consistent,
reliable, and timely information to congressional
decisionmakers and agency management. The source of these
losses could be identified and significantly reduced by
improved financial management practices.
2. Federal financial management legislation
In response to this problem, Congress passed a series of
laws designed to ensure that agency management problems would
be fixed. The Chief Financial Officers Act, as expanded by the
Government Management Reform Act of 1994 and amended by the
Federal Financial Management Improvement Act of 1996,
represents the most comprehensive financial management reform
legislation in the last 40 years. Other significant legislation
affecting Federal financial management includes: the Budget and
Accounting Procedures Act of 1950; the Inspector General Act of
1978, as amended by the Inspector General Act Amendments of
1988; the Federal Managers' Financial Integrity Act of 1982;
the Debt Collection Act of 1982, as amended, and the Debt
Collection Improvement Act of 1996. The key financial
management provisions of each of these laws are described in
detail in Appendix A of this report.
Audited financial statements
The Chief Financial Officers Act as amended by the
Government Management Reform Act, is intended to provide a more
effective, efficient, and responsive Government. To that end,
it specifically requires that each executive department and
agency prepare and have audited a financial statement covering
all accounts and associated activities of each office, bureau,
and activity within the agency. These audited statements are to
be sent to the Director of the OMB no later than March 1st of
the year following the fiscal year for which the statements are
prepared. In addition, GMRA also required that a set of
consolidated governmentwide financial statements be prepared by
the Secretary of the Treasury in coordination with the Director
of the OMB. These financial statements of the Federal
Government are to be audited by the Comptroller General of the
United States and forwarded to Congress by March 31st of each
year.
Federal accounting standards
The passage of the CFO Act in 1990 and its requirement for
audited financial statements focused attention on the
accounting standards to which Federal agencies were to be held.
The Comptroller General of the United States, along with the
Director of the Office of Management and Budget and the
Secretary of the Treasury, agreed to establish an independent
board that would recommend accounting principles. This board,
known as the Federal Accounting Standards Advisory Board, was
established in October 1990 as a deliberative body to consider
and recommend accounting standards and principles, referred to
as Statements of Federal Financial Accounting Standards for the
Federal Government.
The approved standards, as adopted by the board's
principals, are then issued by the Comptroller General and the
Director of OMB as Statements of Federal Financial Accounting
Standards. These statements comprise the body of standards that
constitutes generally accepted accounting principles for the
Federal Government. In October 1999, the American Institute of
Certified Public Accountants recognized Federal accounting
standards as a generally accepted basis of accounting. This
recognition was deemed a major milestone in improving public
confidence in the reliability and credibility of Federal
financial information. Appendix B lists the Statements of
Federal Financial Accounting Standards and the Statements of
Federal Financial Accounting Concepts issued to date.
The Director of the Office of Management and Budget is
responsible for setting the form and content of the financial
statements against which the auditor must measure an agency's
financial statements. The guidance provided by the OMB
incorporates the standards recommended by the Federal
Accounting Standards Advisory Board.
3. The importance of effective internal control
Federal financial management legislation--the Federal
Managers' Financial Integrity and Federal Financial Management
Improvement Acts, in particular--placed great emphasis on the
importance of effective internal controls. Their importance
cannot be overstated, especially in the large, complex
operating environment of the executive branch of the Federal
Government. Effective internal controls are the first line of
defense against fraud, waste, misuse, and mismanagement of
agency budgets, and help ensure that an entity's mission is
achieved in the most effective and efficient manner. The
subject of internal controls generally surfaces--as has been
the case in subcommittee hearings--after improprieties or
inefficiencies are found. However, good managers continually
seek new ways to improve their operations through effective
internal controls.
Internal controls can be simply defined as the methods by
which an organization governs its activities to accomplish its
mission effectively and efficiently. More specifically,
internal controls are concerned with stewardship and
accountability for the resources consumed in the process of
accomplishing an entity's mission with effective results.
Internal controls should not be looked upon as separate,
specialized systems within an agency. Rather, they should be
recognized as an integral part of each system that management
uses to regulate and guide its operations. Internal controls
are synonymous with management controls in that their broad
objectives cover all aspects of agency operations. Although
ultimate responsibility for good internal controls rests with
management, all employees have a role in the effective
operation of internal controls set by management.
The committee again stresses that it is important to
recognize that internal controls can be designed to provide
reasonable, not absolute, assurance that an organization's
activities are being accomplished in accordance with its
objectives. The full cost of fraud, waste, misuse, and
mismanagement cannot always be known or measured. If improper
activities are allowed to continue, public confidence is eroded
in the Government's ability to manage its programs effectively
or honestly. Such erosion cannot be measured in terms of
dollars. The trust of the citizenry in its Government is a
priceless relationship.
B. RESULTS OF THE FISCAL YEAR 1999 GOVERNMENTWIDE FINANCIAL STATEMENTS
AUDIT AND RELATED AGENCY AUDITS
1. Oversight hearings held by the subcommittee
U.S. Governmentwide audit
At the subcommittee's hearing on March 31, 2000, the
Comptroller General of the United States released the results
of the fiscal year 1999 audit of the financial statements of
the Federal Government. For the third consecutive year, the
Comptroller General reported that ``. . . because of serious
deficiencies in the Government's systems, record-keeping,
documentation, financial reporting, and controls, amounts
reported in the U.S. Government's financial statements and
related notes may not provide a reliable source of information
for decisionmaking by the Government or the public.'' \8\
---------------------------------------------------------------------------
\8\ ``Auditing the Nation's Finances: Fiscal Year 1999 Results
Continue to Highlight Major Issues Needing Resolution,'' GAO/T-AIMD-00-
137, Mar. 31, 2000.
---------------------------------------------------------------------------
Specifically, the GAO was unable to form an opinion on the
reliability of the governmentwide financial statements because
of the Federal Government's inability to:
properly account for and report on billions of
dollars worth of property, equipment, materials,
supplies and certain stewardship assets, primarily at
the Department of Defense;
properly estimate the cost of certain major
Federal credit programs and related loans receivable,
and loan guarantee liabilities, primarily at the
Department of Agriculture;
estimate and reliably report material amounts
of environmental and disposal liabilities, and their
related costs, primarily at the Department of Defense;
determine the proper amount of various
reported liabilities, including post-retirement health
benefits for military employees, and accounts payable
and other liabilities for certain agencies;
accurately report major portions of the net
costs of Government operations;
ensure that all disbursements are properly
recorded; and
properly prepare the Federal Government's
financial statements, including balancing statements,
accounting for substantial amounts of transactions
between governmental entities, properly and
consistently compiling the information in the financial
statements, and reconciling the results of operations
to budget results.
The Comptroller General further noted that as of March 31,
2000, 19 of 22 major agencies' financial systems did not comply
with the requirements of the Federal Financial Management
Improvement Act of 1996 \9\ and that agency financial systems
overall are in poor condition and cannot provide reliable
financial information necessary for managing day-to-day
Government operations.
---------------------------------------------------------------------------
\9\ The Department of the Interior and the Department of State had
not yet issued audited financial statements.
---------------------------------------------------------------------------
The Office of Management and Budget recognized that
necessary financial management improvements are difficult and
require a great effort. That modernizing financial management
and reporting throughout the Federal Government is a long-term
process that will take years not months to correct. However,
the OMB reported that steady progress is being made--that the
timeliness of financial reports has improved and the number of
agencies receiving ``clean'' audit opinions has risen.
Nonetheless, the Comptroller General cautioned that although
clean audit opinions are essential to providing an annual
public scorecard, the audits do not guarantee that agencies
have the financial systems needed to produce reliable financial
information. Modern financial management systems and good
controls are essential to reaching the goal of providing
reliable financial information necessary for managing
Government operations on a day-to-day basis.
For the second year, the Comptroller General brought to the
subcommittee's attention the fact that certain information in
the Federal Government's financial report concerning the Social
Security and Medicare (Part A) trust funds is outdated. This
information includes projected contributions and expenditures,
dates when expenditures are expected to exceed contributions,
and dates when such funds are expected to be exhausted.
The Comptroller General noted that the day after the
Federal Government's financial report is issued, the Social
Security and Medicare Boards of Trustees report more current
information. ``The Government's issuance of dated information
in this financial report at about the same time that it issues
more current information may cause confusion to the Congress
and the public. . . . This can serve to reduce confidence in
and the credibility of the Government's annual financial
report.'' The Comptroller General further said, ``I think,
frankly, it makes Government look foolish.'' Given the
importance and magnitude of these numbers, he said that serious
consideration should be given to whether the information
published by the Boards of Trustees should be audited.
Internal Revenue Service [IRS]
The subcommittee held two hearings on the IRS. The first
hearing on February 29, 2000, focused on the financial
management challenges facing the IRS. This hearing highlighted
the need for continued involvement and commitment by IRS senior
management to ensure that the IRS successfully addresses its
serious financial management problems.
The IRS is responsible for collecting taxes, processing tax
returns, pursuing collection of amounts owed, and enforcing tax
laws. In fiscal year 1999, the IRS collected $1.9 trillion in
Federal tax revenues, disbursed $185 billion in tax refunds,
and reported $21 billion in net taxes owed to the Federal
Government.
The IRS prepares financial statements on its custodial
operations--revenues collected, refunds paid, and related taxes
receivable and payable--and its administrative activities
associated with over $8 billion of appropriated funds. During
the fiscal year 1999 audit, the GAO found that ``the agency
continues to experience pervasive material weaknesses in the
design and operation of its automated financial management and
related operational systems, accounting procedures,
documentation, record-keeping, and internal controls, including
computer security controls.'' \10\
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\10\ ``Internal Revenue Service: Results of Fiscal Year 1999
Financial Statement Audit,'' GAO/T-AIMD-00-104, Feb. 29, 2000.
---------------------------------------------------------------------------
Such problems prevented the IRS from reliably reporting on
the results of its fiscal year 1999 administrative activities.
However, for the third consecutive year, the IRS was able to
reliably report on its financial activity covering the
collection and refunds of taxes for fiscal year 1999. As in
previous years, this achievement was accomplished through
extensive, costly, and time-consuming ad hoc procedures needed
to overcome pervasive internal control and systems weaknesses.
Major problems identified during the hearing included
deficiencies in controls over unpaid tax assessments and tax
refunds. Such a lack of controls could result in both an
increased burden on taxpayers and the potential loss of
billions of dollars in revenue and improper refunds.
The second hearing held on April 10, 2000, focused on the
progress and challenges the IRS faces in re-engineering its
business practices and technology to meet the requirements of
the IRS Restructuring and Reform Act of 1998. As noted by the
GAO, the ``IRS has taken important steps over the last year;
however, some of its most important and difficult work lies
ahead.'' \11\
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\11\ ``IRS Modernization: Business Practice, Performance
Management, and Information Technology Challenges,'' GAO/T-GGD/AIMD-00-
144, Apr. 10, 2000.
---------------------------------------------------------------------------
The IRS has been the subject of many studies and much
criticism. The studies have identified a long list of problems,
including inadequate technology and the failure of technology
modernization programs, poor service to taxpayers, and
violations of taxpayer rights. On July 22, 1998, the IRS
Restructuring and Reform Act of 1998 was signed into law.\12\
---------------------------------------------------------------------------
\12\ Public Law 105-206, July 22, 1998.
---------------------------------------------------------------------------
This law included many provisions to enhance taxpayer
rights and to deal with specific organizational aspects of the
IRS. The Commissioner of the IRS noted that as a result of the
act, ``the IRS continues to plan and implement the most
significant changes to its organization, technology, and the
way it serves taxpayers in almost a half-century.'' \13\
According to the Commissioner, progress is being made on both
the agency's short- and long-term goals and mandates set forth
by the Restructuring and Reform Act. And with Congress's
continued support, the IRS will be able to make the changes the
American taxpayers expect and deserve.
---------------------------------------------------------------------------
\13\ Testimony of Commissioner of Internal Revenue Charles O.
Rossotti before the House Committee on Government Reform's Subcommittee
on Government Management, Information, and Technology hearing on ``IRS
Filing Season, IRS Restructuring Act and Budget,'' Apr. 10, 2000.
---------------------------------------------------------------------------
The GAO warned, however, ``. . . the magnitude of this
modernization effort makes it a high-risk venture that will
take years to fully implement.'' \14\
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\14\ ``IRS Modernization: Business Practice, Performance
Management, and Information Technology Challenges,'' GAO/T-GGD/AIMD-00-
144, Apr. 10, 2000.
---------------------------------------------------------------------------
At both IRS hearings, witnesses testified that the ability
of the IRS to collect taxes in an effective and efficient
manner continues to be hindered by significant long-standing
financial management and operational problems. These problems
will take years to correct and will require continuous
commitment from senior management.
Health Care Financing Administration [HCFA]
The Health Care Financing Administration accounts for
nearly 18 percent of all Federal outlays and pays for one-third
of the health care costs throughout the United States. It is
the largest single purchaser of health care in the world.
The subcommittee's hearing on March 15, 2000, focused on
actions HCFA is taking to resolve its financial management
problems as well as the financial management challenges
associated with administering the Medicare program. The
Inspector General reported that she was ``. . . encouraged by
HCFA's sustained success in reducing Medicare payment errors
and by the important progress made in resolving prior years'
financial reporting problems.'' However, the Inspector General
said, ``We remain concerned . . . that inadequate internal
controls over accounts receivable leave the Medicare program
vulnerable to potential loss or misstatement. As HCFA begins a
lengthy process to integrate its accounting system with the
Medicare contractor systems, internal controls must be
strengthened to ensure that debt is accurately recorded, an
adequate debt-collection process is in place, and information
is properly reflected on the financial statements.'' \15\ The
GAO further noted that ``shortcomings in HCFA's financial
operations mean that it could not adequately ensure the
reliability of data that the agency and Congress use to track
the cost of the Medicare program and to help make informed
decisions about future funding.'' \16\
---------------------------------------------------------------------------
\15\ HCFA: Fiscal Year 1999 Financial Statement Audit, testimony of
June Gibbs Brown, Inspector General, U.S. Department of Health and
Human Services before the House Committee on Government Reform's
Subcommittee on Government Management, Information, and Technology,
Mar. 15, 2000.
\16\ ``Medicare Financial Management: Further Improvements Needed
to Establish Adequate Financial Control and Accountability,'' GAO/T-
AIMD-00-118, Mar. 15, 2000.
---------------------------------------------------------------------------
In fiscal year 1999, $200 billion in Medicare benefit
claims were administered by more than 50 Medicare contractors,
and $110 billion in Medicaid benefit payments were administered
by 57 States and territories. HCFA finances more than 860
million Medicare benefits claims annually to nearly 40 million
seniors and disabled Americans and provides States with
matching funds for Medicaid health care services for
approximately 33 million low-income individuals.
For fiscal year 1999, the Department of Health and Human
Services Inspector General issued the first unqualified audit
opinion on HCFA's financial statements. However, HCFA continues
to have internal control weaknesses that hamper its ability to
safeguard the fiscal integrity of the Medicare and Medicaid
programs. As of September 30, 1999, HCFA estimated that its
improper payments in Medicare fee-for-service claims totaled
approximately $13.5 billion, or 8 percent, of the $169.5
billion fee-for-service program. Auditors reported that no
methodology exists for estimating the range of improper
Medicaid payments on a national level and that since Medicaid
is a grant program, any estimating methodology would need to be
done in conjunction with the States.
HCFA is currently working with the States to apply a common
methodology of calculating error rates in the Medicaid program.
HCFA reported that several initiatives are underway to
bring the Medicare claims payment error rate down, and that it
is aggressively addressing financial management issues. Top
management's continued support of these initiatives and
sustained actions will be key to HCFA's success in resolving
its financial management problems.
Department of Agriculture [USDA]
The Department of Agriculture's mission has evolved beyond
agricultural programs to include programs in such diverse areas
as economic development; food assistance; food safety;
international trade and marketing; and land management. Today
the Department of Agriculture is responsible for major programs
that boost farm production and exports; promote small community
and rural development; ensure a safe food supply for the
Nation; manage natural resources; and improve the nutrition of
families and individuals with low incomes. Its vast resources
include more than $118 billion in assets.
At the subcommittee's hearing on March 21, 2000, the
Inspector General reported that ``Financial information in USDA
is, on the whole, not reliable.'' And because of serious
internal control weaknesses, ``. . . managers of the programs
and operations may be relying on highly questionable
information.''\17\ USDA's Chief Financial Officer acknowledged
the problems facing the department, its progress made to date,
and the various initiatives underway to resolve them. However,
the GAO concluded that many of the department's problems are
deeply rooted and will take time, substantial resources, and
sustained commitment from top management to correct.
---------------------------------------------------------------------------
\17\ Testimony of Roger C. Viadero, Inspector General, U.S.
Department of Agriculture, Mar. 21, 2000.
---------------------------------------------------------------------------
Since fiscal year 1992, the department's financial
statements have been unauditable, and the department continues
to have serious financial management problems. One of the more
significant problems preventing the department from reporting
reliable information is its inability to reasonably estimate
its cost of extending or guaranteeing $93 billion of credit. As
the largest direct lender in the Federal Government, the
department's inability to account properly for the costs of its
loan programs continues to impact the reliability of the U.S.
Government's financial statements. In addition, this lack of
reliable cost estimates prevents Congress from making decisions
about whether to scale back or increase the loan programs.
Department of Housing and Urban Development [HUD]
The Department of Housing and Urban Development was
established to promote adequate and affordable housing,
economic opportunity, and a suitable living environment, free
from discrimination. Its major functions include insuring
mortgages for single-family and multifamily dwellings;
channeling funds from investors into the mortgage industry;
making direct loans for construction or rehabilitation of
housing projects for the elderly and handicapped; providing
Federal housing subsidies for low- and moderate-income
families; providing grants to States and communities for
community development activities; and promoting and enforcing
fair housing and equal housing opportunity.
At the subcommittee's hearing on March 22, 2000, HUD's
Inspector General noted that the same material weaknesses and
reportable conditions that have been reported in previous years
were essentially unchanged. However, the Inspector General
stated that the department ``has recognized its areas of
systemic weakness to a degree that it never did before, and
that in each of these areas it has plans in place and
activities underway to address the problems.''
For fiscal year 1999, the Inspector General was unable to
express an opinion on HUD's financial statements in time to
meet the statutory deadline of March 1, 2000, because of
problems related to HUD's conversion to a new accounting
system. The Inspector General's report stated ``. . . material
internal control weaknesses with HUD's core financial
management system and the U.S. Government Standard General
Ledger adversely affected HUD's ability to prepare auditable
financial statements and related disclosures in a timely
manner.'' \18\
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\18\ OIG Report, ``U.S. Department of Housing and Urban Development
Attempt to Audit the Fiscal Year 1999 Financial Statements,'' 00-FO-
177-0003, Mar. 1, 2000.
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In addressing its financial management problems, the Deputy
Secretary stated that HUD has ``. . . dedicated resources to
address each and every material weakness and reportable
condition cited in the audit.'' \19\ He further stated that
HUD's goal is to obtain unqualified opinions year after year
and that with the final implementation of HUD's 2020 Management
Reform Plan, each remaining material concern will be addressed.
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\19\ Testimony of Deputy Secretary Saul N. Ramirez, Jr., ``HUD's
Financial Management Systems,'' Mar. 22, 2000.
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Although achieving an unqualified opinion is important, the
department must continue to strive to achieve the goal of the
financial management legislation passed by Congress: to ensure
that agencies maintain financial systems that allow them to
produce accurate, reliable financial information on a day-to-
day basis.
Department of Defense [DOD]
The subcommittee's hearing on May 9, 2000, focused on the
status of financial management at the Department of Defense and
the importance of reliable financial information to the Army,
Air Force, and Navy's logistical operations.
The Department of Defense is the largest of the 14 Cabinet-
level departments. Fiscal year 1999 represented the fourth year
that the Department of Defense had prepared audited, agencywide
financial statements. For fiscal year 1999, the department
reported total assets of $599 billion and total net cost of
operations of $378 billion.
Once again, the Department of Defense Inspector General
disclaimed an opinion on the department's financial statements,
citing ongoing internal control weaknesses, compilation
problems, and financial management system deficiencies. The
audit report noted that the department's internal controls did
not ensure that accounting entries impacting financial data
were fully supported and that assets, liabilities, costs, and
budget resources were properly accounted for and reported. The
report also identified noncompliance issues related to the
Federal Financial Management Improvement Act of 1996, the Chief
Financial Officers Act of 1990, and the Government Performance
and Results Act of 1993.
According to the Assistant Inspector General for Auditing,
``Despite commendable progress, the DOD remains far from CFO
Act compliance and aggressive measures will be needed over the
next few years to achieve success. . . . Sustained involvement
by senior managers and the Congress are vital ingredients for
progress.'' \20\
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\20\ Statement by Robert J. Lieberman, Assistant Inspector General
for Auditing, Department of Defense before the Subcommittee on
Government Management, Information, and Technology, House Committee on
Government Reform on ``Department of Defense Financial Management,''
May 9, 2000.
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The GAO also stated, ``DOD continues to make incremental
improvements to its financial management systems and
operations. At the same time, the department has a long way to
go to address the remaining problems. Overhauling DOD's
financial systems, processes, and controls and ensuring that
personnel throughout the department share the common goal of
improving DOD financial management, will require sustained
commitment from the highest levels of DOD leadership--a
commitment that must extend to the next administration.'' \21\
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\21\ ``Department of Defense: Progress in Financial Management
Reform,'' GAO/T-AIMD/NSIAD-00-163, May 9, 2000.
---------------------------------------------------------------------------
One panel of witnesses at this hearing discussed how the
department's financial management affects military logistics.
Representing the U.S. Air Force, Army, and Navy, two generals
and one vice admiral stressed the importance of having reliable
financial information to assist them in making accurate and
timely decisions to ensure the military readiness of our
Nation.
Federal Financial Management Improvement Act of 1996
[FFMIA]
Historically, Federal agencies have struggled with
reporting complete, reliable, and useful financial information.
The lack of such information has hindered managers from
efficiently handling their operations on a day-to-day basis. It
has also prevented Congress from making fully informed
decisions in allocating limited resources. Recognizing the
important role that financial management systems play in
providing timely and reliable financial information, Congress
passed the Federal Financial Management Improvement Act of 1996
(Public Law 104-208).
On June 6, 2000, the subcommittee held its first oversight
hearing on the status of the 24 CFO Act agencies in
implementing the FFMIA. The hearing focused on the progress
agencies have made in complying with the law as well as the
significant challenges that are preventing many agencies from
having management systems that provide reliable financial
information on a day-to-day basis.
Hearing witnesses from both the OMB and the GAO noted that
many agencies continue to struggle with complying with FFMIA
because of the overall, long-standing poor condition of agency
financial systems. These systems were designed to track cash
outlays under budget appropriations law, not accrual-based
financial accounting. Specifically, the GAO noted five primary
reasons that agencies are not complying with the law. (1)
Agency financial management systems are not integrated; (2)
agencies have inadequate reconciliation procedures; (3) agency
financial systems are not compliant with the Federal Government
Standard General Ledger; (4) agencies do not adhere to Federal
accounting standards, and (5) agencies have weak security over
their information systems.
The GAO noted one especially significant fact. Even though
more agencies received unqualified or ``clean'' audit opinions,
their ongoing noncompliance with FFMIA's requirements prevent
these same agencies from meeting the intent of the financial
management reform legislation: to report complete, reliable,
and useful financial information. As of publication of this
report, 20 of 23 CFO Act agencies did not have financial
management systems that comply with FFMIA, even though 14 of
the 23 agencies received ``clean'' audit opinions. According to
the GAO, these ``clean'' audit opinions are attained only by
using costly, heroic efforts that go outside of the agencies'
financial systems.
Meeting the requirements of FFMIA presents long-standing
significant challenges that will be attained only through time,
investment, and sustained emphasis. The subcommittee learned at
this hearing that, similar to the Government's year 2000
conversion efforts, success in complying with FFMIA is
dependent on strong commitment from top agency management. As
noted by the GAO, ``consistent and persistent top management
attention is essential to solving any intractable problem.''
\22\ That type of management commitment must be clearly
demonstrated if the goals of FFMIA are to be met.
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\22\ ``Financial Management: Agencies Face Many Challenges in
Meeting the Goals of the Federal Financial Management Improvement
Act,'' GAO/T-AIMD-00-178, June 6, 2000.
---------------------------------------------------------------------------
2. Federal department and agency financial management grades
On March 31, 2000, the subcommittee released its third
annual report card measuring the effectiveness of financial
management in the 24 CFO Act agencies required to produce
audited financial statements. The grades were based on the
results of the audit reports prepared by the agencies'
Inspectors General, independent public accountants, and the
U.S. General Accounting Office.
The report card is a gauge for Congress to see where
attention is needed to prod agencies toward getting their
financial affairs in order. Again, this year, the grades are
dominated by ``D's'' and ``F's.'' This year, for the first
time, the subcommittee determined that the Federal Government
as a whole earned a ``D plus.''
The report card that follows is updated to reflect audit
reports received as of June 29, 2000.
The National Aeronautics and Space Administration and the
National Science Foundation again demonstrated they could
effectively manage their finances. Both agencies received
``A's.''
The Social Security Administration, General Services
Administration, Department of Labor, and the Department of
Energy all earned commendable ``B's.''
Six agencies--the Agency for International Development, the
Department of Agriculture, the Department of Defense,
Department of Housing and Urban Development, Department of
State, and the Office of Personnel Management--could not pass
muster. Each earned a failing grade of ``F.'' At publication of
this report, the Department of State had not yet issued its
audit report.
Although 14 agencies received ``clean'' audit opinions,
significant financial management problems continue to prevent
these agencies from achieving the ultimate goal of maintaining
financial systems that allow them to produce accurate, reliable
financial information on a day-to-day basis.
Five of the 24 agencies failed to meet the March 1st
deadline for filing their financial statements. Two agencies,
the Department of the Interior and the Department of State,
still had not filed their reports when the subcommittee held
its March 31st hearing--1 month after the statutory deadline
and 6 months after the close of the Government's fiscal year.
The Department of the Interior submitted its financial
statements in May 2000--8 months after the end of the fiscal
year. At publication of this report, the Department of State
had not submitted its audited financial statements.
III. Conclusions
Poor financial management has been a long-recognized
problem within the Federal Government. Congress has developed a
strong legislative framework that if properly implemented,
would significantly improve the Government's financial
management. This, in turn, would lead to more efficient and
effective Government operations, and more informed
decisionmaking. Despite these efforts, however, many executive
branch departments and agencies continue to struggle with
improving long-standing financial management problems.
Although steady progress continues to be made in financial
accountability and meeting related legislative objectives, much
remains to be done. Most Federal agencies still cannot account
for billions of dollars in Federal spending in an accurate and
timely manner.
Subcommittee hearings held over the last 5 months and the
fiscal year 1999 financial statements audit reports continue to
raise serious questions about the soundness of the Government's
financial information. To make informed decisions, Congress,
the President, and the President's Cabinet must have reliable
data on a timely basis. Without such information, both the
quality of Government services and the fiscal health of this
Nation are at risk.
The Federal Government must continue to work at getting its
financial house in order. To ensure that this occurs, the
President needs the appropriate staff to focus on management
problems within the executive branch of the Government. An
Office of Management whose Director reports to the President
would enable the President, his Cabinet officers, and agency
administrators to focus on improved financial management, as
well as improved general management and information management.
Without such a governmentwide management structure,
departments and agencies will not learn from past management
failures, such as the computer debacles of the early 1990's.
The Federal Aviation Administration's $4 billion was matched by
a similar failure when the Internal Revenue Service sought to
improve its information systems. Together, these programs cost
taxpayers nearly $8 billion before they were stopped.
Congress and the President must ensure that Federal
departments and agencies place adequate attention to their
financial management. The framework is in place for these
Federal departments and agencies to step up to their
fundamental responsibility: to be financially accountable to
the American taxpayer.
APPENDIX A--Major Federal Financial Management Legislation
------
----------------------------------------------------------------------------------------------------------------
Public Law Key Financial Management Provisions \1\
----------------------------------------------------------------------------------------------------------------
Budget and Accounting Procedures
Act of 1950
The Budget and Accounting Procedures Act of 1950 provided that the
(Chapter 946, 64 Stat. 832) maintenance of accounting systems and producing of financial reports with
respect to the operations of executive agencies be the responsibility of
the executive branch and that the auditing for the Government be conducted
by the Comptroller General to determine the extent to which accounting and
related financial reporting fulfill the purposes specified, financial
transactions have been consummated in accordance with laws, regulations, or
other requirements, and adequate internal financial control over operations
is exercised.
The Comptroller General was given the responsibility of prescribing
accounting and auditing principles and standards to be followed in the
preparation of financial reports by executive agencies and by the GAO in
the audit of the financial transactions of each executive, legislative, and
judicial agency.
----------------------------------------------------------------------------------------------------------------
Inspector General Act of 1978, as
amended by the Inspector General
Act Amendments of 1988
The Inspector General Act (IG Act) requires that Inspectors General
(Public Laws 95-452 and 100-504) perform audits in accordance with generally accepted government auditing
standards.
The Chief Financial Officers Act of 1990, as expanded by the
Government Management Reform Act, and amended by the Federal Financial
Management Improvement Act, has demanded shifts in the focus of the
Inspectors' General work.
----------------------------------------------------------------------------------------------------------------
Federal Managers' Financial
Integrity Act of 1982
The Federal Managers' Financial Integrity Act of 1982 [FMFIA]
(Public Law 97-255) required that internal accounting and administrative controls of each
executive agency be established in accordance with standards prescribed by
the Comptroller General, and shall provide reasonable assurance that:
obligations and costs are in compliance with applicable law; assets are
safeguarded from waste, loss, unauthorized use, or misappropriation; and
revenues and expenditures applicable to agency operations are properly
recorded and accounted for.
The head of each agency is required to report to the President and
Congress whether the agency's systems of internal accounting and
administrative control fully comply with the Comptroller General's
requirements. For all material weaknesses, the agency head must describe in
the report the plan and schedule for correcting any such weaknesses.
----------------------------------------------------------------------------------------------------------------
Debt Collection Act of 1982, as
amended, and Debt Collection
Improvement Act of 1996
The Debt Collection Act, as amended, provides greater powers to
(Public Laws 97-365 and 104-134, Federal agencies in collecting debts owed to the Federal Government
sec. 31001) including: reporting a delinquent debtor to a consumer reporting agency;
offsetting the salary of Federal employees who are delinquent in the
payment of debts; disclosing to a Federal lending agency that an applicant
has a tax delinquency and deny such individual credit; disclosing a
taxpayer's address to an agency to use for purposes of collecting
delinquent debt; administratively offsetting all Federal payments,
including tax refunds; garnishing wages; and charging of interest and
penalties on any debt.
Agencies are required to report to the Director of the Office of
Management and Budget and the Secretary of the Treasury at least once a
year information regarding its debt collection activities. Further, the
Secretary of the Treasury must report that information to Congress annually
and provide a one-time report, not later than April 1999, to Congress on
the collection services provided by it and other entities collecting on
behalf of Federal agencies.
----------------------------------------------------------------------------------------------------------------
Agencies are required to make Federal payments to individuals by
electronic fund transfer, except for tax refunds.
Agencies, except for the IRS, can contract with a collection
service to pursue outstanding debts of the agency or to sell debt over 90
days delinquent.
Agencies are required to collect the taxpayer identification number
of any individual or entity doing business with the Government.
----------------------------------------------------------------------------------------------------------------
Chief Financial Officers Act of
1990
The Chief Financial Officers Act of 1990 (CFO Act) creates a new
(Public Law 101-576) leadership structure for Federal financial management, including the
creation of a Deputy Director of Management, a Controller who advises the
Deputy Director, and an Office of Federal Financial Management within the
Office of Management and Budget. The Deputy Director is responsible for
providing financial management leadership including the establishment and
oversight of Federal financial policies and practices.
The Office of Management and Budget is required by the CFO Act to
prepare and submit to Congress a governmentwide 5-year financial management
plan. The plan describes the planned activities of OMB and agency's CFO
over the next 5 years to improve financial management.
The CFO Act also requires that 24 agencies have Chief Financial
Officers and Deputy Chief Financial Officers and lays out their authorities
and functions. It also stipulates the qualifications and responsibilities
for each of the positions.
----------------------------------------------------------------------------------------------------------------
Government Management Reform Act
of 1994
The Government Management Reform Act of 1994 [GMRA] expands
(Public Law 103-356) \2\ requirements for executive branch agencies contained in section 303(a) of
the CFO Act.
GMRA requires all 24 agencies covered under the CFO Act to have
agencywide audited financial statements, beginning with fiscal year 1996.
Those statements, due March 1, 1997, and each year thereafter, must cover
all accounts and associated activities.
----------------------------------------------------------------------------------------------------------------
GMRA provides that, for each audited financial statement required
from the agency, the auditor (the Inspector General, independent public
accountant, or the GAO) must submit a report on the audit to the head of
the agency. This report is to be prepared in accordance with generally
accepted Government auditing standards.
GMRA requires that a consolidated financial statement for all
accounts and associated activities of the executive branch be prepared by
the Secretary of the Treasury, in coordination with the Director of the
Office of Management and Budget, for fiscal year 1997 and each year
thereafter. Such statements are to be audited by the Comptroller General.
The audited financial statements must be submitted to the President and
Congress by March 31, 1998.
----------------------------------------------------------------------------------------------------------------
Federal Financial Management
Improvement Act of 1996
The Federal Financial Management Improvement Act of 1996 [FFMIA]
(Title VIII of Public Law 104-208) requires that agencies conform to promulgated Federal Government accounting
and systems standards, and use the U.S. Government Standard General Ledger.
FFMIA requires auditors performing financial audits to report
whether agencies' financial management systems comply substantially with
Federal accounting standards, financial systems requirements, and the
Government's Standard General Ledger at the transaction level.
For agencies that are not in material compliance with the standards
described above, the head of the agency, in consultation with the Director
of the Office of Management and Budget, must prepare a remediation plan
that addresses the problems. This plan shall include resources, remedies,
and intermediate target dates necessary to bring the agency's financial
management systems into substantial compliance. The remediation plan shall
bring the agency's financial management systems into substantial compliance
within 3 years after the date a determination is made by the auditors that
the agency is not in compliance.
----------------------------------------------------------------------------------------------------------------
The Director of the Office of Management and Budget is required to
report to Congress, not later than March 31 of each year, regarding
implementation of FFMIA.
The Comptroller General is required to report to Congress, no later
than October 1 of each year, concerning compliance with the requirements of
FFMIA and the adequacy of applicable accounting standards of the Federal
Government.
----------------------------------------------------------------------------------------------------------------
\1\ These laws, except FFMIA, are compiled in Laws Related to Federal Financial Management, House Report 104-
745. FFMIA is included in Appendix D to this report.
\2\ The section of GMRA that deals with financial management is also referred to as the ``Federal Financial
Management Act of 1994.''
APPENDIX B--Federal Accounting Concepts and Standards
APPENDIX C--Basis for Agency Financial Management Grades
The grades for each of the 24 departments and agencies are
based on the results of the financial statement audits. These
audits were performed by the agency's Inspector General,
independent public accounting firms, and the General Accounting
Office. All auditors were required to follow generally accepted
Government auditing standards. These standards incorporate the
American Institute of Certified Public Accountant's Statements
on Auditing Standards, the same standards required for audits
of private sector entities. However, Generally Accepted
Government Auditing Standards [GAGAS] adds certain requirements
beyond the Statements on Auditing Standards. Most notably,
GAGAS has additional reporting requirements beyond an opinion
on the financial statements.
Three reports are required at the completion of each audit
of Government entities under GAGAS and as incorporated in OMB
Bulletin 98-08, Audit Requirements for Federal Financial
Statements. These reports are an opinion of the financial
statements, a report on internal controls, and a report on
compliance with laws and regulations.
The opinion provides the auditor's assessment of the
reliability of the information contained in the financial
statements. There are four types of opinions that the auditor
can render--Unqualified, Qualified, Adverse, or Disclaimer. An
unqualified opinion signifies that the information in the
financial statements was reliable in all material respects. A
qualified opinion signifies that, except for specified
information in the financial statements, the information is
reliable. An adverse opinion means the statements are not
reliable. Last, a disclaimer of opinion signifies that the
auditor was unable to determine if material information in the
statements was reliable.
The report on internal control provides an assessment by
the auditors of the effectiveness of internal controls. The
report is required to identify any instances of material
weaknesses or reportable conditions in internal controls that
surfaced during the course of the audit. The American Institute
of Certified Public Accountants defines a material weakness in
internal controls as ``. . . a condition in which the design or
operation of one or more of the internal control components
does not reduce to a relatively low level the risk that errors
or irregularities in amounts that would be material in relation
to the financial statements being audited may occur and not be
detected within a timely period by employees in the normal
course of performing assigned functions.'' \23\
---------------------------------------------------------------------------
\23\ Codification of Statements on Auditing Standards (Including
Statements on Standards for Attestation Engagements). No.s 1 to 82,
American Institute of Certified Public Accountants, as of Jan. 1, 1997;
AU sec. 325.15.
---------------------------------------------------------------------------
The report on compliance with the laws and regulations
provides the auditor's assessment of instances in which the
agency did not follow or conform materially to requirements of
the laws and regulations deemed material to the financial
operations of that agency. The Office of Management and Budget
also provides guidance to the auditors in OMB Bulletin 98-08
regarding which general laws and regulations need to be
considered during the audit.
Starting with fiscal year 1997, an agency's adherence to
FFMIA must be assessed in the report on compliance with laws
and regulations, in accordance with OMB guidance. FFMIA
specifically requires that agencies conform to promulgated
Federal Government accounting and systems standards, and use
the Government standard general ledger. Many agencies did not
materially conform to the requirements of FFMIA.
The subcommittee reviewed each financial report on an
absolute scale and assessed grades on a 4 point scale with
``A'' = 4, ``B'' = 3, ``C'' = 2, ``D'' = 1, and ``F'' = 0. In
the financial information category, when an unqualified opinion
was rendered by the auditor, an ``A'' (4 points) was given; a
qualified opinion received a ``C'' (2 points) and a disclaimer
received an ``F'' (0 points). There were no adverse opinions
rendered in fiscal years 1996, 1997, 1998, or 1999, however, an
adverse opinion would have also received an ``F.''
If no material weaknesses in internal controls were
reported, the agency received an ``A'' (4 points). Conversely,
if material weaknesses were reported, the agency received an
``F'' (0 points) in this category.
Similarly, if the auditor reported that the agency had no
known instances of non-compliance with laws and regulations an
``A'' (4 points) was awarded. If material non-compliances were
reported, an ``F'' (0 points) was given.
These grades were then averaged (with equal weight) to
determine the overall grade for the agency.
If no report was completed or provided prior to March 31,
2000, the agency was given an ``F.'' When reports became
available, the agency's grade was reassessed, as stated above.
The grades included in this report are based on audit reports
issued as of the publication of this report.
APPENDIX D--Public Law 104-208, Title VIII--Federal Financial
Management Improvement Act
------
TITLE VIII--FEDERAL FINANCIAL MANAGEMENT IMPROVEMENT
SEC. 801. SHORT TITLE.
This title may be cited as the ``Federal Financial
Management Improvement Act of 1996.''
SEC. 802. FINDINGS AND PURPOSES.
(a) Findings.--The Congress finds the following:
(1) Much effort has been devoted to strengthening
Federal internal accounting controls in the past.
Although progress has been made in recent years,
Federal accounting standards have not been uniformly
implemented in financial management systems for
agencies.
(2) Federal financial management continues to be
seriously deficient, and Federal financial management
and fiscal practices have failed to--
(A) identify costs fully;
(B) reflect the total liabilities of
congressional actions; and
(C) accurately report the financial
condition of the Federal Government.
(3) Current Federal accounting practices do not
accurately report financial results of the Federal
Government or the full costs of programs and
activities. The continued use of these practices
undermines the Government's ability to provide credible
and reliable financial data and encourages already
widespread Government waste, and will not assist in
achieving a balanced budget.
(4) Waste and inefficiency in the Federal
Government undermine the confidence of the American
people in the government and reduce the federal
Government's ability to address vital public needs
adequately.
(5) To rebuild the accountability and credibility
of the Federal Government, and restore public
confidence in the Federal Government, agencies must
incorporate accounting standards and reporting
objectives established for the Federal Government into
their financial management systems so that all the
assets and liabilities, revenues, and expenditures or
expenses, and the full costs of programs and activities
of the Federal Government can be consistently and
accurately recorded, monitored, and uniformly reported
throughout the Federal Government.
(6) Since its establishment in October 1990, the
Federal Accounting Standards Advisory Board
(hereinafter referred to as the ``FASAB'') has made
substantial progress toward developing and recommending
a comprehensive set of accounting concepts and
standards for the Federal Government. When the
accounting concepts and standards developed by FASB are
incorporated into Federal financial management systems,
agencies will be able to provide cost and financial
information that will assist the Congress and financial
managers to evaluate the cost and performance of
Federal programs and activities, and will therefore
provide important information that has been lacking,
but is needed for improved decision making by financial
managers and the Congress.
(7) The development of financial management systems
with the capacity to support these standards and
concepts will, over the long term, improve Federal
financial management.
(b) Purpose.--The purposes of this Act are to--
(1) provide for consistency of accounting by an
agency from one fiscal year to the next, and uniform
accounting standards throughout the Federal Government;
(2) require Federal financial management systems to
support full disclosure of Federal financial data,
including the full costs of Federal programs and
activities, to the citizens, the Congress, the
President, and agency management, so that programs and
activities can be considered based on their full costs
and merits;
(3) increase the accountability and credibility of
federal financial management;
(4) improve performance, productivity and
efficiency of Federal Government financial management;
(5) establish financial management systems to
support controlling the cost of Federal Government;
(6) build upon and complement the Chief Financial
Officers Act of 1990 (Public Law 101-576; 104 Stat.
2838), the Government Performance and Results Act of
1993 (Public Law 103-62; 107 Stat. 285) and the
Government Management Reform Act of 1994 (Public Law
103-356; 108 Stat. 3410); and
(7) increase the capability of agencies to monitor
execution of the budget by more readily permitting
reports that compare spending of resources to results
of activities.
SEC. 803 IMPLEMENTATION OF FEDERAL FINANCIAL MANAGEMENT IMPROVEMENTS.
(a) In General.--Each agency shall implement and maintain
financial management systems that comply substantially with
Federal financial management systems requirements, applicable
Federal accounting standards, and the United States Government
Standard General Ledger at the transaction level.
(b) Audit Compliance Finding.--
(1) In general.--Each audit required by section
3521(e) of title 31, United States Code, shall report
whether the agency financial management systems comply
with the requirements of subsection (a).
(2) Content of Reports.--When the person performing
the audit required by section 3521(e) of title 31,
United States Code, reports that the agency financial
management systems do not comply with the requirements
of subsection (a), the person performing the audit
shall include in the report on the audit--
(A) the entity or organization responsible
for the financial management systems that have
been found not to comply with the requirements
of subsection (a);
(B) all facts pertaining to the failure to
comply with the requirements of subsection (a),
including--
(i) the nature and extent of the
noncompliance including areas in which
there is substantial but not full
compliance;
(ii) the primary reason or cause of
the noncompliance;
(iii) the entity or organization
responsible for the non-compliance; and
(iv) any relevant comments from any
responsible officer or employee; and
(C) a statement with respect to the
recommended remedial actions and the time
frames to implement such actions.
(c) Compliance Implementation.--
(1) Determination.--No later than the date
described under paragraph (2), the Head of an agency
shall determine whether the financial management
systems of the agency comply with the requirements of
subsection (a). Such determination shall be based on--
(A) a review of the report on the
applicable agency-wide audited financial
statement;
(B) any other information the Head of the
agency considers relevant and appropriate.
(2) Date of determination.--The determination under
paragraph (1) shall be made no later than 120 days
after the earlier of--
(A) the date of the receipt of an agency-
wide audited financial statement; or
(B) the last day of the fiscal year
following the year covered by such statement.
(3) Remediation plan.--
(A) If the Head of an agency determines
that the agency's financial management systems
do not comply with the requirements of
subsection (a), the head of the agency, in
consultation with the Director, shall establish
a remediation plan that shall include
resources, remedies, and intermediate target
dates necessary to bring the agency's financial
management systems into substantial compliance.
(B) If the determination of the head of the
agency differs from the audit compliance
findings required in subsection (b), the
Director shall review such determinations and
provide a report on the findings to the
appropriate committees of the Congress.
(4) Time period for compliance.--A remediation plan
shall bring the agency's financial management systems
into substantial compliance no later than 3 years after
the date a determination is made under paragraph (1),
unless the agency, with concurrence of the Director--
(A) determines that the agency's financial
management systems cannot comply with the
requirements of subsection (a) within 3 years;
(B) specifies the most feasible date for
bringing the agency's financial management
systems into compliance with the requirements
of subsection (a); and
(C) designates an official of the agency
who shall be responsible for bringing the
agency's financial management systems into
compliance with the requirements of subsection
(a) by the date specified under subparagraph
(B).
SEC. 804. REPORTING REQUIREMENTS.
(a) Reports by the Director.--No later than March 31 of
each year, the Director shall submit a report to the Congress
regarding implementation of this Act. The Director may include
the report in the financial management status report and the 5-
year financial management plan submitted under section
3512(a)(1) of title 31, United States Code.
(b) Reports by the Inspector General.--Each Inspector
General who prepares a report under section 5(a) of the
Inspector General Act of 1978 (5 U.S.C. App.) shall report to
Congress instances and reasons when an agency has not met the
intermediate target dates established in the remediation plan
required under section 3(c). Specifically the report shall
include--
(1) the entity or organization responsible for the
non-compliance;
(2) the facts pertaining to the failure to comply
with the requirements of subsection (a), including the
nature and extent of the non-compliance, the primary
reason or cause for the failure to comply, and any
extenuating circumstances; and
(3) a statement of the remedial actions needed to
comply.
(c) Reports by the Comptroller General.--No later than
October 1, 1997, and October 1, of each year thereafter, the
Comptroller General of the United States shall report to the
appropriate committees of the Congress concerning--
(1) compliance with the requirements of section
3(a) of this Act, including whether the financial
statements of the Federal Government have been prepared
in accordance with applicable accounting standards; and
(2) the adequacy of applicable accounting standards
for the Federal Government.
SEC. 805. CONFORMING AMENDMENTS.
(a) Audits by Agencies.--Section 3521(f)(1) of title 31,
United States Code, is amended in the first sentence by
inserting ``and the Controller of the Office of Federal
Financial Management'' before the period.
(b) Financial Management Status Report.--Section
3512(a)(2) of title 31, United States Code, is amended by--
(1) in subparagraph (D) by striking ``and' after
the semicolon;
(2) by redesignating subparagraph (E) as
subparagraph (F); and
(3) by inserting after subparagraph (D) the
following:
``(E) a listing of agencies whose financial
management systems do not comply substantially
with the requirements of Section 3(a) the
Federal Financial Management Improvement Act of
1996, and a summary statement of the efforts
underway to remedy the noncompliance; and''
(c) Inspector General Act of 1978.--Section 5(a) of the
Inspector General Act of 1978 is amended--
(1) in paragraph (11) by striking ``and'' after the
semicolon;
(2) in paragraph (12) by striking the period and
inserting ``; and''; and
(3) by adding at the end the following new
paragraph:
``(13) the information described under section
05(b) of the Federal Financial Management Improvement
Act of 1996.''
SEC. 806. DEFINITIONS.
For purposes of this title:
(1) Agency.--The term ``agency'' means a department
or agency of the United States Government as defined in
section 901(b) of title 31, United States Code.
(2) Director.--The term ``Director'' means the
Director of the Office of Management and Budget.
(3) Federal Accounting Standards.--The term
``Federal accounting standards'' means applicable
accounting principles, standards, and requirements
consistent with section 902(a)(3)(A) of title 31,
United States Code.
(4) Financial management systems.--The term
``financial management systems'' includes the financial
systems and the financial portions of mixed systems
necessary to support financial management, including
automated and manual processes, procedures, controls,
data, hardware, software, and support personnel
dedicated to the operation and maintenance of system
functions.
(5) Financial system.--The term ``financial
system'' includes an information system, comprised of
one or more applications, that is used for--
(A) collecting, processing, maintaining,
transmitting, or reporting data about financial
events;
(B) supporting financial planning or
budgeting activities;
(C) accumulating and reporting costs
information; or
(D) supporting the preparation of financial
statements.
(6) Mixed system.--The term ``mixed
system'' means an information system that
supports both financial and nonfinancial
functions of the Federal Government or
components thereof.
SEC. 807. EFFECTIVE DATE.
This title shall take effect for the fiscal year ending
September 30, 1997.
SEC. 808. REVISION OF SHORT TITLES.
(a) Section 4001 of Public Law 104-106 (110 Stat. 642; 41
U.S.C. 251 note) is amended to read as follows:
``SEC. 4001. SHORT TITLE.
``This division and division E may be cited as the
`Clinger-Cohen Act of 1996'.''.
(b) Section 5001 of Public Law 104-106 (110 Stat. 679; 40
U.S.C. 1401 note) is amended to read as follows:
``SEC. 5001. SHORT TITLE.
``This division and division D may be cited as the
`Clinger-Cohen Act of 1996'.''
(c) Any reference in any law, regulation, document,
record, or other paper of the United States to the Federal
Acquisition Reform Act of 1996 or to the Information Technology
Management Reform Act of 1996 shall be considered to be a
reference to the Clinger-Cohen Act of 1996.
This Act may be cited as the ``Treasury, Postal Service,
and General Government Appropriations Act, 1997''.
APPENDIX E--INDEX OF WITNESSES
------
ALDERMAN, Karen C., Executive Director, Joint Financial
Management Improvement Program, June 6, 2000.
AMERAULT, Vice Admiral James F., Deputy Chief of Naval
Operations (Logistics), United States Navy, May 9, 2000.
APP, Steven O., Deputy Chief Financial Officer, Department
of Treasury, February 29, 2000.
BATEMAN, Victoria, Comptroller, Federal Housing
Administration, Department of Housing and Urban Development,
March 22, 2000.
BROWN, June Gibbs, Inspector General, Department of Health
and Human Services, March 15, 2000.
CALBOM, Linda M., Director, Resources, Community, and
Economic Development, Accounting and Financial Management
Issues, Accounting and Information Management Division, U.S.
General Accounting Office, March 21, 2000.
COBURN, General John C., Commanding General, U.S. Army
Materiel Command, United States Army, May 9, 2000.
DALRYMPLE, John M., Chief Operations Officer, Internal
Revenue Service, February 29, 2000.
GAFFNEY, Susan, Inspector General, Department of Housing
and Urban Development, March 22, 2000.
GOERL, Vincette, Deputy Chief, Office of Finance and Chief
Financial Officer, U.S. Forest Service, Department of
Agriculture, March 21, 2000.
GOTBAUM, Joshua, Executive Associate Director and
Controller, Office of Management and Budget, March 31, 2000,
and June 6, 2000.
HAMMOND, Donald V., Fiscal Assistant Secretary, Department
of Treasury, March 31, 2000.
HASH, Michael M., Deputy Administrator, Health Care
Financing Administration, Department of Health and Human
Services, March 15, 2000.
HEIST, James, Director of Financial Audits Division, Office
of the Inspector General, Department of Housing and Urban
Development, March 22, 2000.
HOLZ, Arnold G., Chief Financial Officer, National
Aeronautics and Space Administration, June 6, 2000.
HSIAO, Benjamin, Director of Information Systems Audits
Division, Office of the Inspector General, Department of
Housing and Urban Development, March 22, 2000.
JACOBSON, Lisa, Director of Defense Audits, Accounting and
Information Management Division, U.S. General Accounting
Office, May 9, 2000.
JARMON, Gloria L., Director, Health, Education and Human
Services Accounting and Financial Management Issues, Accounting
and Information Management Division, U.S. General Accounting
Office, March 15, 2000, and June 6, 2000.
KEATING, David L., Senior Counselor, National Taxpayers
Union, April 10, 2000.
KELLEY, Colleen M., National President, National Treasury
Employees Union, April 10, 2000.
KELLY, Keith, Administrator Farm Service Agency, Department
of Agriculture, March 21, 2000.
KUHL-INCLAN, Kathryn, Assistant Inspector General for
Audit, Department of Housing and Urban Development, March 22,
2000.
KUTZ, Gregory D., Associate Director, Governmentwide
Accounting and Financial Management, Accounting and Information
Management Division, U.S. General Accounting Office, February
29, 2000.
LIEBERMAN, Robert J., Assistant Inspector General for
Auditing, Department of Defense, May 9, 2000.
LYLES, General Lester L., Commander, Air Force Materiel
Command, United States Air Force, May 9, 2000.
LYNN, William J., Under Secretary of Defense (Comptroller),
Chief Financial Officer, Department of Defense, May 9, 2000.
NEWBY, James, Senior Policy Advisor for Rural Development,
Department of Agriculture, March 21, 2000.
OVESON, W. Val, National Taxpayer Advocate, Internal
Revenue Service, April 10, 2000.
RAMIREZ, Saul N., Deputy Secretary, Department of Housing
and Urban Development, March 22, 2000.
ROGERS, Lawrence W., Acting Chief Financial Officer,
Internal Revenue Service, February 29, 2000.
ROSSOTTI, Charles O., Commissioner, Internal Revenue
Service, April 10, 2000.
SEBASTIAN, Steven J., Assistant Director, Governmentwide
Accounting and Financial Management, Accounting and Information
Management Division, U.S. General Accounting Office, February
29, 2000.
SKELLY, Thomas P., Director, Budget Service and Acting
Chief Financial Officer, Department of Education, June 6, 2000.
STEINHOFF, Jeffrey C., Assistant Comptroller General,
Accounting and Information Management Division, U.S. General
Accounting Office, May 9, 2000, and June 6, 2000.
THOMPSON, Sally, Chief Financial Officer, Department of
Agriculture, March 21, 2000.
TOYE, Nelson E., Deputy Chief Financial Officer, Department
of Defense, May 9, 2000.
VENGRIN, Joseph E., Assistant Inspector General for Audit
Operations and Financial Statement Activities, Department of
Health and Human Services, March 15, 2000.
VIADERO, Roger C., Inspector General, Department of
Agriculture, March 21, 2000.
WALKER, David M., Comptroller General of the United States,
U.S. General Accounting Office, March 31, 2000.
WARREN, David R., Director Defense Management Issues,
National Security and International Affairs Division, U.S.
General Accounting Office, May 9, 2000.
WILLIAMS, McCoy, Assistant Director, Resources, Community,
and Economic Development, Accounting and Financial Management
Issues, Accounting and Information Management Division, U.S.
General Accounting Office, March 21, 2000.
WINTER, Kenneth J., Deputy Chief Financial Officer,
National Aeronautics and Space Administration, June 6, 2000.
WRIGHTSON, Margaret T., Associate Director, Tax Policy and
Administration Issues, U.S. General Accounting Office, April
10, 2000.
YOUNG, Robert W., Deputy Assistant Inspector General for
Audit, Department of Agriculture, March 21, 2000.
MINORITY VIEWS OF HON. HENRY A. WAXMAN, HON. JIM TURNER, HON. TOM
LANTOS, HON. MAJOR R. OWENS, HON. EDOLPHUS TOWNS, HON. PAUL E.
KANJORSKI, HON. PATSY T. MINK, HON. CAROLYN B. MALONEY, HON. ELEANOR
HOLMES NORTON, HON. ELIJAH E. CUMMINGS, HON. DENNIS J. KUCINICH, HON.
ROD R. BLAGOJEVICH, HON. DANNY K. DAVIS, HON. JOHN F. TIERNEY, HON.
THOMAS H. ALLEN, HON. HAROLD E. FORD, JR., AND HON. JANICE D.
SCHAKOWSKY
I. Introduction
A decade ago, financial management at most Federal agencies
meant little more than reporting how appropriations were spent.
This approach to Federal Government financial matters began to
change in 1990 when Congress passed the Chief Financial
Officers Act [CFO Act], which established a new framework for
financial accountability. Several other legislative initiatives
followed which were designed to significantly improve financial
management throughout the Federal Government. The current
system now provides the opportunity to identify and resolve the
most significant financial problems existing in the Federal
Government.
This report is the result of a series of Subcommittee on
Government Management, Information, and Technology oversight
hearings to examine the financial management practices of
Federal departments and agencies. This subcommittee reviewed
the financial management challenges and progress made at the
Internal Revenue Service, Health Care Financing Administration,
Department of Agriculture, Department of Defense, and
Department of Housing and Urban Development. In addition, the
Office of Management and Budget [OMB] and General Accounting
Office [GAO] reported on the challenges agencies face in their
attempts to report accurate financial information
governmentwide and comply with the requirements of the Federal
Financial Management Improvement Act of 1996 [FFMIA].
Unfortunately, we learned that many of the 24 CFO Act agencies
are still unable to produce reliable and timely financial
information on a regular basis and annual financial statement
audits continue to report significant weaknesses in agencies'
financial management controls and systems. The Federal
Government has much work to do before we achieve our goal of a
credible, accurate governmentwide financial system.
We commend the committee's efforts to highlight the
importance of effective financial management and note that many
of the report's findings and recommendations are valid.
However, we are concerned that the report lacks balance because
it does not adequately acknowledge the progress agencies have
made to date, the tremendous scope of the problem, and the
ongoing efforts to improve Federal financial management. We
therefore reluctantly oppose this financial management report.
Unfortunately, the majority report has turned financial
management into a partisan issue by grading agencies in a
manner that unfairly portrays the state of agencies' financial
affairs. The majority report assigns numerous D's and F's to
Federal agencies to convey the impression that the
administration is failing to take financial management
seriously. In fact, just the opposite is true.
II. Progress Is Being Made
This administration has done more than any other to improve
the financial accountability of the Federal Government.
According to GAO Comptroller General David Walker in his
testimony on March 31, 2000, ``the President has designated
financial management improvement as a priority management
objective and efforts are underway across the government to
address pervasive, generally long-standing financial management
problems.''
As a result of the administration's focus on this issue,
most agencies have significantly improved the accuracy and
timeliness of financial reporting each year. Consider the fact
that in 1994, only four Federal agencies produced reliable
financial information on their balance sheets. By 1998, 10
Federal agencies were able to produce reliable information on
their balance sheets. For fiscal year 1999, the majority of
agencies received unqualified or ``clean'' audit opinions.
Furthermore, timeliness of financial reports improved this
year, increasing from 6 agencies that met the statutory
deadline in 1997 to 19 agencies in 2000. The best example of
agency improvement is arguably the Social Security
Administration, which for 2 years running has managed to issue
annual reports in November--4 months before the March 1
statutory deadline--and has received clean audits as well.
The administration's financial management accomplishments
are even more extraordinary when you consider that 10 years
ago, almost no agencies prepared and issued audited financial
statements or had a set of governmentwide accounting standards.
At that time, the Federal Government as a whole could not
produce consolidated financial statements, let alone audited
statements. It was not until the creation of the Federal
Accounting Standards Advisory Board [FASAB] in 1990 that a
mechanism was put in place which would finally lead to the
development and issuance of a complete set of basic accounting
standards and concepts in 1996. In October 1999, as validation
of the administration's process and progress, the American
Institute of Certified Public Accountants [AICPA] recognized
FASAB standards as Generally Accepted Accounting Principles
[GAAP]. This independent acknowledgment by an internationally
recognized standard setting authority marks a significant
milestone in improving public confidence in Federal financial
management. Now, agencies issue financial statements annually,
and the Federal Government has just produced its third
governmentwide financial statement.
As shown by the experience of State governments,
modernizing financial management and reporting is a long-term
process, requiring years, not just months. With few exceptions,
individual State governments began issuing GAAP-based financial
statements backed by independent audits in the 1970's, well
before the Federal Government had such requirements. In 1980,
Standard & Poors, a rating agency, issued a policy statement
directing that all State bond issuers' financial reports should
be prepared in conformity with GAAP, audited by independent
auditors, and issued within 6 months of year end, lest their
ratings be affected. By 1990, 10 years later, 43 States issued
GAAP-based statements; of those, 25--or half of all State
governments--received an unqualified or ``clean'' opinion. In
1995, 15 years later, 49 out of 50 States issued GAAP
statements; however, only about three-quarters received clean
opinions. By comparison, more than half (54 percent) of the CFO
Act agencies were able to achieve clean opinions in just 4
years.
Aside from not properly acknowledging the administration's
successes, this report does not adequately address the key
factors that may impede an agency's ability to effect change
such as funding problems, outdated infrastructures, addressing
multiple FFMIA problems, and competing priorities, e.g., the
year 2000 crisis. We believe the report should take into
account the following:
At the beginning of this administration,
financial management systems, such as they were, did
not keep standard accounts, could not communicate with
each other, and could not provide accurate, timely, and
meaningful information. This administration has
developed standards and established a program of
comprehensive testing of financial management systems
to ensure compliance. Only those systems certified as
compliant may be purchased by government agencies.
Financial management systems improvements must
be achieved with an infrastructure dominated by older
legacy computer systems that were not designed to
support current requirements or technology. In an era
where budget resources are limited, infrastructure
modernization remains a challenging problem.
Agency efforts to improve their antiquated
infrastructures may complicate their ability to produce
timely financial audits. For example, this year, HUD's
inability to complete the audit by March 1 is primarily
the result of technical difficulties occasioned by the
transition to a new financial system. HUD was
consolidating several accounting systems to a new
general ledger system as part of its ongoing
modernization of its financial management systems--an
action recommended by both the Office of Inspector
General and GAO. While we regret that HUD missed its
deadline this time, we are pleased that HUD has been
able to correct system deficiencies and expect that in
the long term its financial systems will benefit.
The Federal financial systems environment
includes over 700 financial systems among the 24 CFO
Act agencies, most of which are custom designed for a
particular agency or bureau. These systems cost
approximately $2 billion annually to maintain and
operate, and almost 80 percent of the systems have
plans to be or are currently being upgraded or
replaced.
These financial management systems originally
were built to keep track of cash outlays under budget
appropriations law, not accrual-based financial
accounting or to comply with the requirements of the
Government Performance Results Act. These systems track
expenditures very carefully, but they were never
designed to develop the financial information needed to
produce GAAP statements. Now, for the first time, we
are asking these systems to do both.
Large agencies with multiple bureaus typically
operate systems that are not integrated. They cannot
share information automatically, even within the
agency.
III. Discrepancies
We would also like to address the following points in the
report:
The majority report states, ``similar to the
Government's year 2000 conversions efforts, success in
complying with FFMIA is dependent upon strong
commitment from top agency management.'' It should also
be noted that, unlike year 2000 efforts which addressed
a single technical problem that affected everyone in a
similar manner, FFMIA attempts to address multiple
problems affecting multiple systems. Furthermore, in
addition to management commitment and oversight,
significant resources are also needed.
The chart on page 26 of the report needs an
additional bullet to state that the head of the agency
is responsible for determining whether the agency
complies with FFMIA. The agency head considers all
relevant information, including the audited financial
statements, in making this determination.
The majority report states, ``Specifically, 20
of the agencies were not compliant with the
requirements of the Federal Financial Management
Improvement Act [FFMIA] of 1996.'' It should be noted
that compliance determination rests with the agency
head and not the auditor, as specified in the Public
Law 104-208, section 803(c)(1). Agency heads in six of
the CFO Act agencies reported their fiscal year 1999
financial statement audit reports that their agencies
were in substantial compliance with FFMIA. In three of
the six agencies (Social Security Administration, the
Office of Personnel Management, and the Federal
Emergency Management Agency), the auditors did not
agree with the agency heads' assessments. The majority
report, therefore, is reporting the auditors compliance
determinations, not the statutorily required
determinations by agency heads.
IV. Response to the Majority's Recommendations
Section 1 of the report's recommendations states that
``Each department and agency should provide a detailed, annual
status report on its financial management operations.'' While
we agree with this recommendation, we wanted to emphasize that
current financial management plans are required by OMB Circular
A-11 as part of the agency budget submission to OMB and are
reviewed by OMB.
We question section 2 of the committee's recommendation
that would require agency financial management systems
remediation plans to provide a detailed description of planned
actions with clear and reasonable milestones, including the
names of staff members responsible for resolving particular
issues. This is contrary to section 803(c)(3)(A) of FFMIA which
does not require the names of staff members responsible.
Ultimately, the agency head is responsible for ensuring agency
compliance.
Additionally, the report states, ``A draft of the approved
plan should be sent to the Comptroller General who would
coordinate the agency's actions and related milestones in the
remediation effort. These parties must meet regularly to
monitor the agency's progress in meeting the objectives of the
plan.'' This recommendation would remove the responsibility for
correcting deficiencies from the agency and place
responsibility with the Comptroller General. There is also a
question as to whether coordinating the agency's remediation
efforts, which is an operational authority of the executive
branch, is an appropriate role for the Comptroller General.
We are troubled with section 3 of the committee's
recommendations which would require that Federal agencies be
financially penalized if they fail to produce timely and
reliable financial information. Given the learning curve for
implementing effective financial management, the tremendous
challenges of improving financial systems, accommodating
geographical differences, and addressing issues beyond agency
control, punitive measures are inappropriate at this time.
Positive incentives for agencies to implement reforms in their
financial systems would be helpful. However, depriving agencies
of their needed funds may hinder substantial financial reforms.
Faced with a potential loss of appropriations, agencies may be
inclined to implement ``band-aid'' repairs to their financial
systems rather than making the appropriate long-term system
modifications.
While we agree with section 4 of the report's
recommendations that the Federal Government should avoid
inconsistent reporting of certain Social Security and Medicare
(Part A) projections, we want to emphasize that the Department
of the Treasury and other administration officials are already
working to better coordinate the release of these two reports
so that they will be able to present similar data. OMB staff is
currently researching the feasibility and desirability of
making any changes in regard to the audit coverage of social
insurance information in future Federal financial statements.
This will be done in the context of the FASAB's deliberations
on potential changes to the accounting standards relating to
required supplemental stewardship information.
Section 5 of the committee's recommendations states, ``The
Office of the Inspector General must ensure that all candidates
for Inspector General positions are qualified to perform
financial statement audits or specific segments of audits
requiring specific expertise. These qualifications should be
determined through a review by an external party and may be
incorporated into the peer review process.'' In light of the
qualification reviews that are already required by the OIG,
these two statements need clarification. OIG assigns GS-511
auditors to perform financial statement work and these
employees are already required by the Office of Personnel
Management to have successfully completed 24 semester hours of
accounting and related courses. (GS-510 accountants, usually
employed by the offices of the CFOs, are also required to have
the same education.) Many OIG employees involved in financial
statement work are Certified Public Accountants [CPAs], who
have an additional requirement to complete 80 hours of
continuing professional education every 2 years. In order to
ensure quality performance, each OIG is subject to a triennial
peer review by another OIG. The peer review includes an
examination of auditors' qualifications to perform the work
assigned. The committee should specify what additional
requirements are necessary if any are needed.
Additionally, we question the report's recommendation that
a board review the qualifications of Inspector General
candidates before the nomination is forwarded to the Senate for
consideration. We believe that it is the President's
prerogative to select candidates who possess the qualifications
required for Inspectors General under the Inspector General Act
of 1978 (Public Law 95-452). During the confirmation process,
the Senate has both the responsibility and the opportunity to
review those qualifications.
Finally, we also question whether there is a need for a
statutorily-mandated Office of Management within the executive
branch as called for in section 6 of the committee's
recommendations. OMB Director Jack Lew, in his April 7, 2000,
testimony, noted that ``In the real world, resource allocation
and management are fundamentally interdependent. Given the
complex systems that are necessary to address public problems,
we must operate with the consideration of management and budget
together, not apart. This reflects the realization that these
two sets of concerns are in fact intertwined in actual
operations.'' He further noted that OMB provides the President
with the management expertise through OMB's Resource Management
Offices [RMOs]. The Director stated that ``RMOs play a pivotal
role in . . . management guidance to Federal agencies. Staff
are experts in their program and policy areas and are
responsible for . . . implementation of governmentwide
management initiatives. While each unit has its own focus, OMB
. . . fulfills its responsibilities because of continuing
collaboration among its offices and divisions.''
The committee notes that a separate Office of Management
``could help the President and his Cabinet to focus on the
critical management challenges facing the Federal Government.''
OMB already has a mechanism in place to address these issues.
In order to improve government management, each year the
Director of OMB, after consulting with the President, the Vice
President, and others in the administration, designates a
series of Priority Management Objectives [PMOs]. Issues
designated as PMOs receive coordinated, sustained, and
intensive management attention. For example, in 1999 PMO No. 1
was the year 2000 challenge. This year, PMO No. 1 is to use
performance information to improve program management and make
better budget decisions; improving financial management
information is PMO No. 2. This effort includes not only
improved and timely financial reporting, backed by independent
audits, but also the achievement of the financial systems goals
of FFMIA.
It is unclear whether creating a new management agency
will improve government management or whether separating
management functions from budget functions will backfire and
result in less attention being placed on management reform at
Federal agencies. Presidents can create organizations within
the executive branch that focus on management reform. In
addition, a number of high-level interagency working groups
focused on improving government management have taken hold,
such as the Chief Financial Officers Council and the Chief
Information Officers Council. Alternative approaches to
improving management should be encouraged and explored. An
Office of Management is just one approach.
V. Conclusion
We believe that Congress has implemented a legislative
framework that will provide agencies the opportunity to
identify and resolve the most significant financial problems
existing in the Federal Government. It is a tremendous
challenge to improve financial systems to produce accurate,
reliable, consistent, and timely information for program and
financial managers. While significant progress has been made in
Federal financial accountability, we agree that much work
remains to be done. We emphasize that financial management
modernization is a long-term, complex process that cannot be
solved in a matter of months. The assignment of poor grades to
agencies merely politicizes the process and does not take into
account the different circumstances and successes the Federal
Government has made to date. By all accounts, agencies are
clearly headed in the correct direction and are taking great
strides toward achieving our goal of financial accountability.
We would like to recognize the agencies' CFOs and their finance
and accounting staff for the progress they have made in
financial management.
Hon. Henry A. Waxman.
Hon. Jim Turner.
Hon. Tom Lantos.
Hon. Major R. Owens.
Hon. Edolphus Towns.
Hon. Paul E. Kanjorski.
Hon. Patsy T. Mink.
Hon. Carolyn B. Maloney.
Hon. Eleanor Holmes Norton.
Hon. Elijah E. Cummings.
Hon. Dennis J. Kucinich.
Hon. Rod R. Blagojevich.
Hon. Danny K. Davis.
Hon. John F. Tierney.
Hon. Thomas H. Allen.
Hon. Harold E. Ford, Jr.
Hon. Janice D. Schakowsky.