[House Hearing, 106 Congress]
[From the U.S. Government Publishing Office]



   OVERSIGHT OF FINANCIAL MANAGEMENT PRACTICES AT THE DEPARTMENT OF 
            JUSTICE AND THE FEDERAL AVIATION ADMINISTRATION

=======================================================================

                                HEARING

                               before the

                 SUBCOMMITTEE ON GOVERNMENT MANAGEMENT,
                      INFORMATION, AND TECHNOLOGY

                                 of the

                              COMMITTEE ON
                           GOVERNMENT REFORM

                        HOUSE OF REPRESENTATIVES

                       ONE HUNDRED SIXTH CONGRESS

                             FIRST SESSION

                               __________

                             MARCH 18, 1999

                               __________

                           Serial No. 106-68

                               __________

       Printed for the use of the Committee on Government Reform


     Available via the World Wide Web: http://www.house.gov/reform

                                 ______

                   U.S. GOVERNMENT PRINTING OFFICE
61-686                     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, Virginia            CAROLYN B. MALONEY, New York
DAVID M. McINTOSH, Indiana           ELEANOR HOLMES NORTON, Washington, 
MARK E. SOUDER, Indiana                  DC
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 
JOHN T. DOOLITTLE, California            (Independent)
HELEN CHENOWETH, Idaho


                      Kevin Binger, Staff Director
                 Daniel R. Moll, Deputy Staff Director
           David A. Kass, Deputy Counsel and Parliamentarian
                      Carla J. Martin, 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, 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
                          Mason Alinger, Clerk
                     Faith Weiss, Minority Counsel


                            C O N T E N T S

                              ----------                              
                                                                   Page
Hearing held on March 18, 1999...................................     1
Statement of:
    Bromwich, Michael, Inspector General, Department of Justice, 
      accompanied by Marilyn Kessinger, Director, Financial 
      Statement Audit Office; and Stephen Colgate, Assistant 
      Attorney General for Administration, Department of Justice.     3
    Calbom, Linda, Director, RCED Accounting and Financial 
      Management, General Accounting Office; John Meche, Deputy 
      Assistant Inspector General, Financial, Economic, and 
      Information Technology, Department of Transportation; David 
      Kleinberg, Deputy Chief Financial Officer, Department of 
      Transportation; and Carl Schellenberg, Chief Financial 
      Officer, Federal Aviation Administration...................   117
Letters, statements, etc., submitted for the record by:
    Bromwich, Michael, Inspector General, Department of Justice, 
      prepared statement of......................................     7
    Calbom, Linda, Director, RCED Accounting and Financial 
      Management, General Accounting Office, prepared statement 
      of.........................................................   119
    Colgate, Stephen, Assistant Attorney General for 
      Administration, Department of Justice:
        Information concerning buget 2000........................   115
        Information concerning referrals.........................    43
        Prepared statement of....................................    20
        Response to followup questions...........................    38
    Kleinberg, David, Deputy Chief Financial Officer, Department 
      of Transportation, prepared statement of...................   169
    Meche, John, Deputy Assistant Inspector General, Financial, 
      Economic, and Information Technology, Department of 
      Transportation:
        Information concerning environmental liabilities.........   195
        Prepared statement of....................................   138
    Schellenberg, Carl, Chief Financial Officer, Federal Aviation 
      Administration:
        Information concerning environmental liabilities.........   193
        Information concerning inventory items...................   189
        Prepared statement of....................................   176

 
   OVERSIGHT OF FINANCIAL MANAGEMENT PRACTICES AT THE DEPARTMENT OF 
            JUSTICE AND THE FEDERAL AVIATION ADMINISTRATION

                              ----------                              


                        THURSDAY, MARCH 18, 1999

                  House of Representatives,
Subcommittee on Government Management, Information, 
                                    and Technology,
                            Committee on Government Reform,
                                                    Washington, DC.
    The subcommittee met, pursuant to notice, at 1:59 p.m., in 
room 2154, Rayburn House Office Building, Hon. Stephen Horn 
(chairman of the subcommittee) presiding.
    Present: Representatives Horn, Biggert, Ose, Turner, and 
Maloney.
    Staff present: J. Russell George, staff director and chief 
counsel; Bonnie Heald, director of communications/professional 
staff member; Mason Alinger, clerk; Kacey Baker, intern; Faith 
Weiss, minority counsel; and Ellen Rayner, minority chief 
clerk.
    Mr. Horn. A quorum being present, the Subcommittee on 
Government Management, Information, and Technology, will come 
to order. Today's hearing is the second in a series of hearings 
to examine the results of financial statement audits at 
selected Federal agencies.
    In the late 1980's, Congress recognized that one of the 
root causes of waste in the Federal Government was that 
financial management leadership, policies, systems, and 
practices were in a state of disarray. Financial systems and 
practices were obsolete and ineffective. They failed to provide 
complete, consistent, reliable, and timely information to 
congressional decisionmakers or to agency management. In 
response, Congress passed a series of laws designed to improve 
financial management practices and to ensure that tax dollars 
are spent for the purposes that Congress intends.
    The Chief Financial Officers Act, enacted in 1990, 
represented the most comprehensive financial reform legislation 
of the last four decades. It established a leadership structure 
for Federal financial management, including the appointment of 
Chief Financial Officers in the 24 largest Federal departments 
and independent agencies. In 1994, the Chief Financial Officers 
Act was amended to require agency-wide audited financial 
statements covering all agency accounts and associated 
activities. In addition, the CFO Act, as amended, enables the 
Office of Management and Budget to require the submission of 
financial statements by component entities within the agencies. 
The Federal Aviation Administration within the Department of 
Transportation is one of those agencies.
    Today, we will hear testimony focusing on financial 
management within the Federal Aviation Administration and 
within the Department of Justice. After many attempts, neither 
of these agencies has successfully prepared reliable financial 
statements. This year, financial audits of these two agencies 
reveal numerous weaknesses in financial control and in some 
cases a failure to comply with Federal laws and regulations.
    In its fifth attempt to receive a clean opinion on its 
financial statements, the FAA has failed. Earlier this month, 
the Department of Transportation's Inspector General reported 
that FAA cannot keep track of its more than $11 billion worth 
of property and equipment. The agency failed to produce support 
documentation for tax revenues that are collected by the 
Internal Revenue Service and deposited in the Airport and 
Airways Trust Fund, and it failed to report accurately on the 
costs of its programs. This includes the extensive 
modernization of the Nation's air traffic control system which 
will ultimately cost more than $42 billion.
    The General Accounting Office, which is the fiscal and 
program auditing arm of the Congress, recently added the FAA's 
poor financial management to its list of problem areas that 
place Federal agencies at high risk of being vulnerable to 
waste, fraud, and abuse of the taxpayers' money. The GAO 
reported that these weaknesses could result in the agency being 
unable to locate mission-critical equipment, such as radar 
units and other air traffic control equipment, which could 
exacerbate an emergency.
    The GAO also reported that the FAA lack of cost accounting 
information limits its managers' ability to make effective 
decisions on the agency's resource needs. It also inhibits 
managers from maintaining adequate control over major projects, 
such as the $42 billion air traffic control and modernization 
system.
    As for the Department of Justice, it also failed to receive 
a clean opinion on its 1998 financial statement. After three 
attempts, the Department of Justice's Inspector General has 
again found that significant weaknesses persist in all of the 
Department's component agencies, including the Immigration and 
Naturalization Service, the U.S. Marshal's Service, the Drug 
Enforcement Administration, and the Asset Forfeiture Fund, to 
mention but a few.
    The Inspector General's audit found that the Department of 
Justice's computer systems were vulnerable to improper access 
and that the Department was unable to account properly for 
seized and forfeited assets. Furthermore, the Department failed 
to comply with four laws governing financial management within 
the Federal Government. In an especially troubling situation, 
one regional office of the Immigration and Naturalization 
Service illegally earmarked money for unspecified purposes at 
the end of fiscal year 1998.
    Several of the Department's agencies could not reconcile 
their accounting records within the Department of the Treasury, 
the Government's bank. The Immigration and Naturalization 
Service, which I have mentioned, was out of balance by $76 
million. The Drug Enforcement Agency was off by $38 million, 
and the Department's Working Capital Fund missed by $44 
million. This issue is not simply an exercise in bean counting. 
Accurate financial statements are the keystones to effective 
financial management in the Federal Government.
    The information reported in the financial statements of the 
Federal Aviation Administration and the Department of Justice 
plainly do not provide reliable sources of information for 
decisionmaking by Congress or by the agency itself. In 
addition, these significant weaknesses in financial control 
undermine the agency's ability to manage their own operations 
leaving them vulnerable to fraud, waste, and the abuse of the 
taxpayers' money.
    We will explore these issues in greater detail today. We 
want to know what the Federal Aviation Administration and the 
Department of Justice are doing to resolve these deficiencies. 
We welcome our witnesses, and we look forward to their 
testimony.
    On panel one, the Honorable Michael Bromwich, the Inspector 
General of the Department of Justice, is accompanied by Ms. 
Marilyn Kessinger, Director of Financial Statement Audits, 
Office of the Inspector General, Department of Justice, and Mr. 
Stephen Colgate, Assistant Attorney General for Administration 
of the Department of Justice.
    If you would rise as we swear in all witnesses, and raise 
your right hands.
    [Witnesses sworn.]
    Mr. Horn. We will note for the record that all three have 
affirmed the oath, and we will begin with the very 
distinguished Inspector General as the beginning testimony. Mr. 
Bromwich.

 STATEMENTS OF MICHAEL BROMWICH, INSPECTOR GENERAL, DEPARTMENT 
    OF JUSTICE, ACCOMPANIED BY MARILYN KESSINGER, DIRECTOR, 
    FINANCIAL STATEMENT AUDIT OFFICE; AND STEPHEN COLGATE, 
 ASSISTANT ATTORNEY GENERAL FOR ADMINISTRATION, DEPARTMENT OF 
                            JUSTICE

    Mr. Bromwich. Thank you very much. Mr. Chairman and members 
of the subcommittee, I appreciate the opportunity to appear 
before this subcommittee to discuss the Department of Justice's 
consolidated financial statement audit for fiscal year 1998. 
Accompanying me today, as you noted, Mr. Chairman, is Marilyn 
Kessinger who is the Director of our Financial Statement Audit 
Office, and she is responsible, along with her staff, for 
coordinating the audits of the consolidated financial 
statement.
    This report represents the third year that the Office of 
the Inspector General has audited the Department's consolidated 
financial statement. Due to the Department's decentralized 
nature, separate audits of nine Department reporting components 
are first completed and then combined into the consolidated 
audit report.
    We noted improvements at the component level during fiscal 
year 1998, most notably, a 50 percent decrease in the number of 
material weaknesses compared to the preceding year; 26 in 
fiscal year 1997 versus 13 in fiscal year 1998. Other 
reportable conditions also decreased from 26 in fiscal year 
1997 to 18 in fiscal year 1998. No substantial new internal 
control weaknesses were identified this past fiscal year, and 
we noted progress in many of the areas that received 
unfavorable findings during the prior 2 years.
    However, this positive news must be tempered by the fact 
that for the third year in a row the Department received a 
disclaimer of opinion, in effect, no opinion on its 
consolidated financial statement, because of an inability to 
complete the audit due to serious deficiencies noted in the 
underlying audits.
    Four of the nine components--the Assets Forfeiture Funds/
Seized Asset Deposit Fund, the Immigration and Naturalization 
Service, the Office, Boards, and Divisions, and the U.S. 
Marshal's Service--received disclaimers of opinions on their 
individual audits in fiscal year 1998.
    On the other hand, four components--the FBI, the DEA, the 
Office of Justice Programs, and the Working Capital Fund--
received unqualified or clean opinions on their balance sheets 
in fiscal year 1998.
    The Federal Prison System received a qualified opinion in 
fiscal year 1998, which means that its financial statements 
were presented in accordance with applicable accounting 
standards except for a line item or account.
    My written statement and our financial statement audit 
provides a detailed description of how the Department and each 
of the components fared in fiscal year 1998. Rather than review 
this information, Mr. Chairman, I would move that my full 
written statement be introduced into the record, and I would 
like to summarize.
    Mr. Horn. Let me say, automatically--and I should have said 
at the beginning--every time a witness first opens their mouth 
from the first sentence, it is automatically put in the record, 
and then your remarks or summary, however you want to proceed, 
follow after to complete that.
    Mr. Bromwich. Terrific; thank you, Mr. Chairman. Rather 
than review that information, I thought it would be more 
helpful for me to focus my remarks on the challenges facing the 
Department for it to improve its financial management and 
obtain a clean consolidated audit opinion.
    First, top Department management must continue to emphasize 
the importance of these issues and provide necessary support to 
the component financial staffs. Managers must emphasize long-
term correction of problems to improve the Department's 
financial management, not just short-term fixes that will earn 
a better audit opinion.
    Some components have used contractors extensively to 
supplement their financial management staff and more quickly 
implement short-term fixes. This heavy use of contractor 
support raises two concerns: first, components may become too 
reliant on contractor assistance and not make the appropriate 
systemic changes, and, second, the components financial 
management staffs will not learn from this process if 
contractors are shouldering the bulk of the responsibility.
    This leads to another observation: we see a shortage of 
adequately trained financial management staff at the 
Department. While this shortage precipitates the extensive use 
of contractors, it also has caused many Department components 
to struggle to meet the deadlines required to ensure a March 
1st release of the consolidated audit report. In addition, many 
Department components could fail in the future if anything 
happened to their handful of key financial managers.
    Successful implementation of new financial systems is 
critical to the Department's future of financial management 
success. The U.S. Marshal's Service encountered numerous 
difficulties implementing its new system, and this had a 
significant adverse impact on its audit results in fiscal year 
1998.
    Finally, Mr. Chairman, your invitation letter to this 
afternoon's hearing requested that I address financial 
management practices of three of the Department of Justice's 
components--DEA, INS, and the Marshal's Service--and I would 
like to end my oral presentation by referring to the 
experiences that we had in those three components.
    First, with respect to the DEA--the DEA received an 
unqualified opinion on its balance sheet and a disclaimer on 
its remaining financial statements. The DEA made significant 
progress in fiscal year 1998 addressing previously identified 
weaknesses. For fiscal year 1998, it had four reportable 
conditions, one of which was considered a material weakness. 
Implementation of a new core accounting system along with the 
commitment by senior management was critical in resolving many 
of DEA's outstanding issues. A particular challenge in fiscal 
year 1999 for the DEA is the replacement of key finance 
personnel.
    The Immigration Service. For the third straight year, INS 
received a disclaimer of opinion on its fiscal year 1998 
financial statement. INS had nine reportable conditions of 
which five were considered material weaknesses. Although 
improvements were made in many areas--for example, INS reduced 
its material weaknesses from eight to five--weaknesses continue 
to exist in the overall control environment that prevents INS 
from producing auditable financial statements.
    During fiscal year 1998, INS management began or continued 
several initiatives to reduce longstanding financial management 
issues, including a restructuring of its regional accounting 
operations and resolution of problems in its property 
subsidiary system. Successful implementation of the new core 
accounting system scheduled for October 1, 1999, together with 
development of adequate staffing levels, are critical to 
improving financial management at INS.
    The Marshal's Service. Like INS, the Marshal's Service 
received its third straight disclaimer of opinion on its fiscal 
year 1998 financial statements. It had three reportable 
conditions of which two were considered material weaknesses. 
The U.S. Marshal's Service was unable to process routine 
transactions in accordance with standards and provide documents 
on a timely basis in order to complete the audit.
    There were also significant internal control weaknesses 
over its new financial management system, called STARS, which 
was implemented in fiscal year 1998. The weaknesses identified 
in STARS represent the most significant challenge to the 
Marshal's Service in resolving its outstanding issues.
    Mr. Chairman, as I look back on the Department's 
experiences with consolidated financial audits, results from 
the first audit in fiscal year 1996 clearly were not 
encouraging. Regrettably, the results for fiscal year 1997 were 
even more disappointing as the reality of the new financial 
reporting requirements sank in, and the Department enforced the 
March 1st deadline established by the act. There was also very 
little time for corrective action to take place between 
completion of the fiscal year 1996 audit and initiation of the 
fiscal year 1997 audit.
    The Department has made noteworthy progress in fiscal year 
1998. However, it faces major challenges with the 
implementation of new financial systems, increasing financial 
reporting requirements, and a shrinking of the pool of 
qualified financial managers.
    The success of the consolidated effort is dependent upon 
the success of individual component audits. Several components 
have longstanding financial problems that are now just 
beginning to be addressed after years of neglect. Some of these 
problems are not easy to correct. The Department needs to 
concentrate its efforts on the four components that received 
disclaimers of opinion in fiscal year 1998 while at the same 
time maintaining the successful results obtained in other 
components.
    Mr. Chairman, I would be happy to answer any questions you 
might have.
    [The prepared statement of Mr. Bromwich follows:]

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    Mr. Horn. I thank you. If we might, I would like to finish 
with the three of you and then have the questions.
    Mr. Ose has joined us, and we are delighted to have you 
here. We are through the first witness, the Inspector General, 
and we are now starting on--does Ms. Kessinger have anything to 
add to what Mr. Bromwich said?
    All right, Mr. Colgate is the Assistant Attorney General 
for Administration; go ahead.
    Mr. Colgate. Thank you. Mr. Chairman, I would like to first 
start off by saying that I endorse the observations that have 
been made by the Inspector General. I don't think that there is 
by and large a disagreement between the IG and myself on this, 
and I think that is important to start off by saying that.
    I am pleased to have the opportunity to appear before you 
today to discuss the status of financial management at the 
Department of Justice. As the Assistant Attorney General for 
Administration, I am fully committed to ensuring our financial 
operations, systems, and internal controls meet and exceed 
Federal standards. I also recognize the tremendous value in 
having our financial operations independently reviewed through 
the audited financial statement process. Excellence in 
financial management is an established goal in the Department's 
annual performance plan. The Attorney General and I are 
committed to obtaining an unqualified Department-wide opinion 
on our financial statements, and we are making every effort to 
do that this year, although it is a very sizable task.
    At the outset, I recognize we face major financial 
management challenges. We need to make significant improvements 
in our business practices, systems, and oversight if we are to 
meet Government-wide standards, improve accountability, and 
produce better performance information. As our audit results 
attest, we have made progress. However, we have not yet 
attained the degree of precision in our operations that the 
Federal financial management improvement legislation of the 
nineties requires.
    This afternoon, I would like to discuss our improvement 
efforts in two primary areas: first, our audit correction 
action plan in high risk areas, and, second, our systems 
efforts. While several of the Department's components obtained 
clean opinions on some or all of the 1998 statements, the 
auditors could not render an opinion on the consolidated 
Justice statement for the third year in a row. Clear progress 
this year was evidenced from the fact that our material 
weaknesses were reduced from 26 to 13, but we have more work to 
do.
    After 3 years of audits, the Department components with 
isolated exceptions have been able to effectively resolve our 
pure accounting weaknesses. The steps taken by the Bureau of 
Prisons and the FBI to resolve their obligation and property 
problems are good examples of the success that we have had. 
Conversely, weaknesses in the business practices and controls 
are taking much longer to address.
    We are making concerted efforts to address our high risk 
areas. The Drug Enforcement Administration has made major 
changes in its financial controls to minimize the potential for 
reoccurrence of the two employee embezzlements. The DEA has had 
PriceWaterhouseCoopers verify its new controls, demonstrating 
DEA's commitment to addressing past weaknesses.
    Improvements are also underway at the Immigration Service, 
although more time is needed to fully address their remaining 
weaknesses. INS has reorganized into regional finance centers 
with specialized functions to improve service and has made 
progress in reconciling its fund's balances.
    The Marshal's Service has encountered shortfalls in their 
budget this year, which are largely a factor of their virtually 
uncontrollable workload. My senior staff are analyzing the 
Marshal's Service's budget situation as well as evaluating its 
efforts to address the accounting and systems weaknesses cited 
in the audit.
    The Assets Forfeiture Fund now has a consolidated national 
tracking system in place, and the auditors recognize that 
substantial control improvements were made this past year.
    The second area I would like to discuss is the status of 
our financial systems projects. Although new accounting systems 
alone will not solve all the weaknesses cited in the audit, 
improved systems which comply with Federal accounting and 
security requirements are essential to our success. Installing 
new systems requires massive and complex multi-year projects. 
Six of the nine entities or funds which received separate 
financial audits were impacted by significant system projects 
during the 1998 audit. Further, all nine will be impacted by 
major projects or reviews before the 1999 audits are completed.
    During the past year, we have completed the move of 100 
Bureau of Prisons financial management offices onto the 
Department's upgraded system. DEA, INS, the Marshals, and the 
Office of Justice programs continue to refine commercial, off-
the-shelf system solutions that have been installed. The 
majority of components are now operating Y2K compliant 
commercial packages or have renovated their financial systems. 
I have recently initiated a comprehensive review of the systems 
efforts at DEA and the Marshals Service. I anticipate the 
reviews will reaffirm the progress made in the new systems, 
address the audit issues, and offer recommendations for most 
effectively completing the remaining portion of both projects.
    In closing, I am encouraged that we have made substantial 
progress with the audits and that we are seeing some 
significant progress in our systems efforts. Where we have 
ongoing problems in underlying business practices and program 
controls, we have the active involvement of senior management 
in addressing these problems. Most importantly, I am personally 
committed, as is the Attorney General, to seeing our finance--
our fundamental business practice problems solved through the 
carefully planned reengineering of our operations.
    Mr. Chairman, this concludes my prepared statement. I would 
be more than glad to answer any questions that you or other 
members of the committee may have. Thank you.
    [The prepared statement of Mr. Colgate follows:]
    
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    Mr. Horn. We thank you for that statement. I note, Mr. 
Colgate, that you have had some experience in various agencies 
as a senior civil servant of Budget Officer of Finance, so 
forth. Who is the Chief Financial Officer for Justice?
    Mr. Colgate. The Department of Justice has not appointed a 
Chief Financial Officer since the act was enacted because of 
this dichotomy of having the Assistant Attorney General for 
Administration being a career civil servant. So, that position 
has not been filled. I have essentially been performing the 
functions of the act.
    Mr. Horn. Who is the Chief Information Officer in the 
Department of Justice?
    Mr. Colgate. I serve as the Chief Information Officer at 
the Department of Justice.
    Mr. Horn. Don't you think that part of the problem here is 
that we have nobody that can work a 7-day week and 18 hours a 
day to get this job cleaned up, in either case? You are holding 
three positions.
    Mr. Colgate. I don't think that it is so much of the fact 
that I am holding the three positions. I think that really the 
underlying issue is that we are trying to make some major 
changes in our financial systems at the Department of Justice 
at the same time trying to engrain within the culture at the 
Department the importance of an audited financial statement.
    I think that I have been very well supported by the staff 
who works in this area and that we can address these issues. I 
don't necessarily believe that it is the appointment so much 
but the order of magnitude of the changes that we have to 
undertake.
    Mr. Horn. Well, don't you think--given the situation in 
Justice where they are not able to show us a balance sheet, the 
accountants--don't you think that we ought to have a full-time 
CFO to concentrate on those problems and a full-time CIO to 
concentrate on those problems. When you have this kind of a 
situation, it seems to me you need to take some obvious common 
sense measures. When Congress passed those laws on a bipartisan 
basis, they did not think that Assistant Secretaries for 
Administration or Assistant Attorney Generals would take over 
those things themselves.
    Now, I have had this running war with the Treasury 
Department which is also screwed up, and the Assistant 
Secretary for Management has held all the positions, and the 
result is they can't give the full-time attention that Congress 
knew 5 years ago in the 103d Democratic Congress when I came in 
here--they knew, ``Hey, we have to spend time on this. We have 
to have the expert that knows something about finance, 
something about computing.'' Now, we didn't think it was all 
combined in one superhuman, I guess I would say. So, what do 
you think about that?
    Mr. Colgate. My personal view is that at the Department of 
Justice, I think the senior management has liked the notion of 
one-stop shopping. When there is an administrative issue, 
whether it be financial management or technology issue, instead 
of going to various different players, that they can hold one 
person accountable who can coordinate and investigate and get 
back to them on what corrective action needs to be taken.
    I think that we can adequately perform the functions of the 
underlying statute, whether it be the Clinger-Cohen statute 
related to technology or the Chief Financial Officers Act, and 
I think that is why we have this situation, as you point out, 
in the Department of Treasury as well as Justice, the senior 
political leadership want to be able to reach out and hold one 
person accountable, and that is the tension that is here.
    Mr. Horn. And to whom do you report?
    Mr. Colgate. I report to the Deputy Attorney General, but I 
can assure you that when it comes to management and 
administrative issues, the Attorney General involves herself 
personally on these issues.
    Mr. Horn. Does the Attorney General know about the 
situation on these financial statements?
    Mr. Colgate. Yes, she does. As a matter of fact, she has 
called in all of the heads of the components and has made it 
really clear to them that she wants this situation straightened 
out, and she plans to hold additional meetings now that we have 
the results of the 1998 audit and there has been improvement. 
We are pleased to see that the Office of Justice programs has 
moved to a balance sheet clean opinion as well as the Drug 
Enforcement Administration, but that is not satisfactory--and 
she holds them personally accountable and meets with them on a 
periodic basis to address these concerns.
    Quite honestly, Mr. Chairman, I am quite glad that we now 
have a cabinet officer who very much understands from her 
experience working in Florida of being an individual who was 
audited when she was State's attorney; who had to go through 
the laborious task of doing an inventory; who understands and 
appreciates the importance of audited financial statements. She 
truly believes that when an organization moves to get a clean, 
audited financial statement, that you essentially address 
important internal control situations that but for having this 
audited financial statement, would just languish.
    Mr. Horn. Does she know that she has an option and could 
appoint a Chief Financial Officer and a Chief Information 
Officer?
    Mr. Colgate. Yes, she does.
    Mr. Horn. And she rejected that approach or what?
    Mr. Colgate. I will give you my observation--I wouldn't 
want to speak for the Attorney General, but I will give you my 
observation--I think she likes the notion of what I will 
jokingly refer to as one-stop shopping.
    Mr. Horn. Why would having three people divide that work, 
get more done, and not have to be a bunch of bureaucrats about 
it, it seems to me they could work as a team, and you could 
still get one-stop shopping, because you have to be overworked 
in this job; same as Mr. Munoz in Treasury when he was there. I 
know, I have been in an administration; I know the hours people 
put in, and you have a very distinguished record. I mean, you 
have the Distinguished Service Award for your administrative 
programs; you got the Meritorious Executive Distinguished 
Executive Presidential Rank Award. So, there is no question, 
you have a lot of ability, but you can have the greatest amount 
of ability, and if you don't have the time in which to get 
something done, it eventually becomes the big avalanche. It 
isn't just a little snowball; it is a big avalanche, and it 
seems to me you should all rethink and she should rethink and 
the Deputy Attorney General should rethink, ``How do we get on 
top of this?'' And it should be thought of on an emergency 
basis, and people should put the horses in there that they need 
to carry the load.
    So, let me move on, but I have very strong feelings on it 
why certain agencies have problems. You just can't be 
everywhere everyday on all these issues, and it simply 
backfires on you, and I think this has backfired. So, we need 
to give this a little attention, and we need to get somebody as 
the Chief Information Officer and a Chief Financial Officer, 
and I think the one-stop service is nonsense, if you can't do 
it when you have three high-powered people. And if you can't, 
then there is a problem in building a team.
    So, let me go now to the computer security weaknesses and 
for the fiscal years 1997, 1998, the pervasive computer 
security weaknesses have been reported at the Department data 
centers as well as at the FBI's data center. Now, these 
weaknesses affect the integrity and reliability of the 
Department's financial information and other program 
information maintained on those sites. In addition, there are 
risks of unauthorized access to these systems. Let me ask the 
Inspector General, what type of computer security testing has 
been done during this audit?
    Mr. Bromwich. For a detailed response, I would like to turn 
to Ms. Kessinger to describe that.
    Ms. Kessinger. We hire contractor firms to do the work for 
us, and we use PriceWaterhouseCoopers to do a general controls 
review at the Rockville and Dallas data center, and we use KPMG 
to do a controls review of the data center in the District of 
Columbia for the FBI, and they do the FISCAM, which is the 
audit program the GAO prescribes and that is where we get our 
results from. They also did some applications testing during 
the last year on various accounting systems throughout the 
Department. There were improvements this year in the security 
controls in the Department's data centers, in particular, and 
we were able to rely upon them and make that conclusion for the 
first time this year.
    Mr. Horn. Do you want to add anything, Inspector General?
    Mr. Bromwich. No, Mr. Chairman.
    Mr. Horn. Is the testing that is done actually--does it try 
to gain unauthorized access to the Department's system when you 
are testing it yourself?
    Ms. Kessinger. Yes, we do penetration testing at both of 
the data centers.
    Mr. Horn. Do you ever think of going out to a high school 
and getting one of those little nerds that stays up all night 
to crack into departmental securities? [Laughter.]
    Ms. Kessinger. Ironically, you know, that is--we do testing 
from several different perspectives; from an outsider 
perspective with little or no knowledge of the Department or 
with some access to a building, for instance, a contractor that 
is in the FBI building. And with little or no knowledge of the 
Department, there was some access gained. I don't know that I 
think the high school student could have done it, but----
    Mr. Bromwich. We use big nerds rather than little nerds, 
Mr. Chairman.
    Mr. Horn. You would be amazed the talents that lie out 
there beyond the Appalachians.
    Could you please elaborate on what the risk is in your 
judgment now? How secure is secure?
    Ms. Kessinger. I would say that we don't have a humongous 
risk. I would say we have a risk. We have especially a risk 
with our own employees and our contractors. There are a lot of 
contractors in this Department and with people walking around 
our buildings and that kind of thing, I think it is very, very, 
very difficult to ever lessen those risks, and we can never do 
enough in the training, prevention, those kinds of issues, and 
there has to be almost constant pressure from the top down on 
those issues, and we need to increase that pressure.
    Mr. Horn. Now, do we know how many penetrations have 
occurred from outside the system and how many have been 
internal where somebody just wants to sort of snoop around; 
sees somebody's file?
    Ms. Kessinger. You mean someone other than our auditors?
    Mr. Horn. That is correct. Do we have any data on that?
    Mr. Colgate. I could provide to the committee, for the 
record and I like the notion of what Ms. Kessinger said of the 
pressure--this is something that the Attorney General is very 
focused on. We just recently completed our first series of 
penetration testing within the Department of Justice, and we 
were very concerned about the results of that penetration 
testing. It looked at it from outside access as well as the 
notion of social engineering with our own employees to gain 
access of these systems. The AG was not satisfied with the 
results of it, and we have essentially received corrective 
action plans of every one of the systems that we have tested in 
the first round--I believe we received them all--and we put the 
components on notice that we will, this fall, after giving them 
time to correct the deficiencies that we have identified, we 
will again conduct a series of tests to ensure that the 
corrective actions that they have identified have actually been 
implemented.
    As well, Mr. Chairman, we plan to conduct a second round of 
penetration testing of additional systems within the Department 
of Justice. We have made the fundamental commitment that 
computer security is basic business of the Department of 
Justice, and we will dedicate the necessary resources to ensure 
that we correct any deficiencies that we can define. We have 
been, in my personal opinion, too lax in this area, but I think 
that we have gotten some folks' attention through these recent 
rounds of penetration testing.
    I am pleased that when it comes to the audited financial 
statement that in 1998 we moved from a material weakness as it 
relates to our financial systems to a reportable condition. 
That doesn't mean we let up until we get this absolutely 
corrected.
    Mr. Bromwich. Mr. Chairman, if I could just add, beyond the 
computer security testing that we do in the context of the 
financial statements, my office has a separate computer 
security office that does this kind of work in the Department, 
so we are working very hard on these issues across a number of 
components, and I must say that the management of the 
Department has been quite responsive to the audits that we have 
done and is trying to move quickly to address the deficiencies 
that we have noted.
    Mr. Horn. Could you give me a ranking of what are the 
easiest components of the Department of Justice in terms of 
penetration?
    Mr. Bromwich. We haven't done them all, so I can't give you 
a comprehensive one. We have done work in the Rockville data 
centers and the Dallas data centers; we found some problems 
there, and those are being addressed, and we are continuing to 
do work in other components of the Department, but we haven't 
yet done it throughout the Department so that I could give you 
a ranking of the sort that you are requesting.
    Mr. Horn. Now, is there a way that you would know and the 
Assistant Attorney General would know when these systems of the 
different components--because some of them aren't probably 
comparable; I would suspect you might even have a little 
inoperability problem--but would you know if there has been 
penetration, and to whom is that report given if they can tell 
immediately that the system has been broken into?
    Mr. Colgate. We could provide--we do have a mechanism in 
which when we are broken into, and we were broken into in a 
very visible way. It was not too long ago that the Department's 
Website was broken into by a hacker and pornographic and 
obscene material was placed in lieu of the Department's 
Webpage. We do have an incident response system so that when 
these do become known to us, that we institute it, and I will 
tell you, Mr. Chairman, we bring in the Federal Bureau of 
Investigation, and we have brought in other assets to let 
people know that we are not going to take this lying down. We 
had a recent, what they determined, denial of service, I would 
say, within the last 3 months, again, where someone tried to 
flood our Webpage. We are very sensitive to this. It is the 
major focus in the Department's budget really from a nationwide 
perspective in beefing up our capability to deal with what we 
call cyberattacks and cyberterrorism. We are taking it very, 
very seriously, and we want folks to know that if you try this, 
we will investigate.
    Mr. Bromwich. As a routine matter, these would not be 
reported to us unless it was clear that it was a Department 
employee who was involved, and then that would be within our 
investigative jurisdiction.
    Mr. Horn. Have you had any Department employees that have 
been involved?
    Mr. Bromwich. In terms of penetration?
    Mr. Horn. Right.
    Mr. Bromwich. Not that I am aware of, no.
    Mr. Horn. OK, in terms of being curious about the file.
    I am going to ask one more question on this, and yield all 
the time she wants to Vice Chairman Biggert. I understand that 
the Immigration and Naturalization Service has been penetrated. 
What is that situation all about? Is that just eager beaver 
immigration lawyers or what?
    Mr. Bromwich. I am not aware of it.
    Ms. Kessinger. Our PriceWaterhouseCoopers auditors when 
they did some testing were able to get into the Immigration 
network through some----
    Mr. Horn. So, it was just through the 
PriceWaterhouseCoopers camp?
    Ms. Kessinger. Yes, it was just through the testing, yes.
    Mr. Horn. So, that is no outside; it is a test you 
conducted inside?
    Ms. Kessinger. Right, and those results were passed on to 
the Department, and they are working on them.
    Mr. Horn. OK. I now yield to the vice chairman, Mrs. 
Biggert of Illinois.
    Mrs. Biggert. Thank you, Mr. Chairman. It is my 
understanding after hearing your testimony that several DEA 
employees have been involved in two different cases of 
embezzling DEA funds, and one case involved a single DEA 
employee who allegedly embezzled more than $6 million during a 
6-year period. The employee allegedly submitted hundreds of 
false payment vouchers seeking reimbursement for services never 
performed by a sham corporation he established, and the second 
case involved collusion among three DEA employees who used DEA 
funds to purchase various electronic and other equipment valued 
at approximately $2.7 million that was diverted for their own 
use.
    And it has been reported that during that period in which 
the embezzlements occurred, financial management weaknesses and 
DEA-controlled environment included ineffective segregation of 
duties, failure to require appropriate approvals, inadequate 
supporting documentation, inaccurate accounting and control 
over property and equipment. These financial management 
weaknesses significantly impaired the organization's ability to 
prevent or properly detect improper actions by employees, and, 
Mr. Colgate, what has the DEA done to correct these control 
problems and to prevent further embezzlements from occurring?
    Mr. Colgate. Your summary was an accurate one of the 
situation that occurred. We did have a fundamental--in my 
personal opinion--a fundamental breakdown in the notion of 
segregation of duties and internal controls that allowed the 
situation where one employee was able to obligate the funding 
and essentially control the disbursement of the funding which 
resulted in this loss.
    I am pleased to say that DEA has taken corrective action in 
addressing these internal control weaknesses. It is my 
understanding that they brought in an independent accounting 
firm to look at the revised internal control processes and have 
implemented those processes.
    We have moved DEA, and DEA, I think, in part--Mike, and you 
have to correct me if I am wrong--one of the reasons why in 
previous years that they received a disclaimed opinion was 
because of these very internal control deficiencies that you 
have outlined. For fiscal year 1998, at least as it relates to 
the balance sheets, DEA has received a clean opinion.
    So, I will say that I am pleased that DEA has taken this 
very seriously; has reviewed their internal control procedures; 
has brought in an outside firm to validate those procedures, 
and I think that we have taken the necessary corrective 
actions, but I think your summary of the situation was an 
accurate summary at the time.
    Mrs. Biggert. Well, maybe to ask, then, of Mr. Bromwich, 
what did the auditors do to satisfy themselves that these 
control weaknesses had been addressed?
    Mr. Bromwich. Well, I agree with Mr. Colgate that your 
summary in looking at the inadequate segregation duties was, in 
fact, a major cause that led to the $6 million fraud; that and 
the fact that it related to covert law enforcement activities 
which unfortunately is frequently an excuse for violating 
fundamental rules of financial management. I share Mr. 
Colgate's view that, in fact, the DEA did attack this problem 
aggressively; did attack specifically the segregation of duties 
issues, and did tighten up its financial controls in a way that 
certainly minimizes the possibility that this kind of fraud 
will occur again.
    Mrs. Biggert. Well, it is my understanding that the 
auditors reported this year that the weaknesses that allowed 
the embezzlements to occur still exist, and, specifically, that 
of 153 paid invoices, they tested that 21 of those lacked 
evidence that DEA ever received the goods or services, and 10 
were missing approval for payment. So, I am wondering why--in 
the light of these recent embezzlements--why the invoice is 
being paid without documentation of receipt and acceptance?
    Ms. Kessinger. During our testing, it is normal for us to 
find these kinds of issues and testing of invoices and 
disbursement. We would normally either look for additional 
documentation that would support that it was an appropriate 
payment or that something occurred. We were also covering the 
period fiscal year 1998, which started back in October 1, 1997, 
and it is probably a lot of these things that were implemented 
may not have been implemented at the beginning of the fiscal 
year and were implemented during the year. The auditors were 
able to do enough testing to get comfortable really that the 
numbers were substantially correct.
    Mrs. Biggert. So, will you continue then to monitor these 
weaknesses to ensure that this doesn't happen----
    Mr. Bromwich. Yes, absolutely.
    Mr. Colgate. It is my understanding that it is part of the 
routine review that would occur every year, so that they test 
it to ensure that there are proper receiving reports, proper 
invoices that support the payments, because we don't want to 
ever get ourselves in that situation again.
    Mrs. Biggert. Well, it seems like you might want to do some 
special checks on this rather than wait for a whole year to 
ensure that this hasn't occurred.
    Ms. Kessinger. We will be doing interim testing during the 
summer, and then we do the substantive testing in the fall, so 
we are pretty much in there almost on a year-round basis at 
this point.
    Mrs. Biggert. OK. Thank you, I yield back my time. Thank 
you.
    Mr. Horn. I thank the gentlewoman. Those are good 
questions, and you are welcome to do a lot more. I am only 
going to pick on a few things here, and then we will move 
along, so if you see--OK, well, I understand that. This is sort 
of a busy day for everybody.
    On the Immigration and Naturalization Service, I guess 
since there was a problem on their financial aspects, I guess I 
would say, in 1998, as I understand it, the auditor of INS 
identified nine significant weaknesses. The auditor then 
reported ``that INS has not established effective controls to 
ensure that transactions were accurately and completely 
reported.'' They went on to say they ``could not satisfy 
themselves as to the extent to which INS financial statements 
are affected by this matter.'' In addition, the auditor 
reported that INS could not agree that its accounts with the 
Treasury were off $76 million. They couldn't come up with an 
accurate listing of who they owed--to whom they owed money. 
They couldn't account for the revenue collected from applicants 
in advance of processing, just to mention a few things. So, I 
guess I would ask, Mr. Colgate, what actions are you taking to 
ensure these weaknesses will be corrected in a timely manner?
    Mr. Colgate. I have no dispute with the findings of the 
auditor. Our biggest concern initially was this whole notion 
that there wasn't sufficient reconciliation--I believe you use 
the term $77 million--between the INS' balances and those 
reflected by the Department of Treasury.
    Mr. Horn. That was $76 million.
    Mr. Colgate. Yes. We are concerned about that, and INS has 
established a very aggressive corrective action plan. They have 
brought in an outside firm to help them reconcile the balances 
where there have been discrepancies. I would say if you asked 
me a couple of years ago where my greatest concern was within 
the Department of Justice, I would have to say within the 
Immigration Service. I would say based on the results of our 
1998 audit and the commitment by the Commissioner and the 
organizational changes of moving to regional financing centers, 
my personal view is that INS would receive the most improved 
player award for 1998. I am hopeful that given the level of 
commitment that INS has demonstrated in 1998, if we can 
continue that level of commitment in 1999, that we can move to 
the situation where INS would have a qualified opinion and be 
able to overcome these deficiencies that have been listed.
    The second observation I would offer is that it is very 
important that we complete moving INS from an antiquated system 
to the cross-servicing arrangement that it has entered into 
with the Department of Commerce to move to a new financial 
management system. With the change in the system and the 
continued commitment of the Service to get its financial house 
in order, I think that we can overcome this.
    Mr. Horn. Is there suspicion of embezzlement with this $76 
million?
    Mr. Colgate. It is not so much the suspicion of 
embezzlement, but I would say that we always have to be 
suspicious until we get our total financial house in order. So, 
I don't want to totally disclaim it. I think it is more of a 
situation of making sure that we accurately reflect the 
obligations that we incur; that we accurately reflect the 
receipts that we receive, because when you look at the INS, I 
believe it is almost a third of its operational expenses are 
paid for by offsetting collections, so it is very important for 
us to have sound financial management in an agency that 
receives almost a third of its funding through receipts.
    Mr. Horn. Have we analyzed who is at what financial station 
that is inputting in these different accounts and examines 
whether there is a possibility there for embezzlement or fraud?
    Mr. Colgate. I will have to provide that for the record; I 
don't know the detailed answer. I would point out, though, that 
my staff has informed me that INS, since the closing of the 
1998 audit, has been able to completely reconcile, at this 
point in time, that balance that is in dispute between Treasury 
and INS, so I think that is a good indication. I will give you 
those detailed answers that you request.
    Mr. Horn. OK, without objection, it will be in the record 
at this point.
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    Mr. Horn. You are saying it is detailed within the $76 
million. Is that what we are talking about? In other words, it 
is the whole $76 million, you are saying you are getting 
reconciliation now?
    Mr. Colgate. It has been pointed out to me--and if I have 
made a mistake, I will make sure I clarify for the record--but 
I have been told that the $76 million that was not 
reconciliated has been, at this point in time, completely 
reconciled to the Department of Treasury.
    Mr. Horn. OK. I will tell you one thing I learned as a 
chief executive was make sure that person that never takes a 
vacation takes a vacation, and have someone else sit at their 
desk and see what kind of weird transactions come through. So, 
you might want to think about that, rotating people around or 
something.
    Mr. Colgate. That is a very good point. I think that was a 
classic example that was in the DEA situation that we were 
questioned about earlier. Essentially, my recollection was that 
your new employee who worked at another agency had moved into 
the accounting operations and was in a similar situation as you 
described and looked at those invoices and said this doesn't 
make a lot of sense. I think your observation is a good one.
    Mr. Horn. Well, that is what management should be aware of. 
It doesn't mean all our employees get that way, but sometimes 
people are under a lot of pressure we don't know about. 
Sometimes people do weird things when they are under either 
that kind of either financial pressure on a mortgage or they 
have a child on drugs and they need treatment or whatever, and 
all I am saying is there are ways that good auditors know, and 
I found over 18 years as a CEO, I always kept the auditor 
afterwards where I could eyeball him and he could eyeball me, 
and I said, ``OK, tell me what you found on I don't know how 
many other campuses in the State of California, and let me 
know, and what do you do to do it.'' And, obviously, making 
sure that sort of two people have to know about what the 
financial input and the financial output. It is just watching 
some things that we think, ``Gee, you know, such a dedicated 
person,'' and, yes, dedicated, right, to bring their bank 
accounts up. So, you need to look at that.
    In terms of the Community-Oriented Policing Services, 
otherwise known as COPS, I noticed the Inspector General's 
Audit Division performs numerous audits each year to determine 
whether the recipients of the Community-Oriented Policing 
Services grants are misusing the funds. The audits during the 
previous year identified over $35 million of questioned costs 
and over $60 million of funds that could be put to better use. 
In addition, the auditor of the Offices, Board, and Divisions' 
fiscal year 1998 financial statement identified a weakness in 
the COPS Program involving inadequate documentation in the 
grant files. Now, what can you tell us, Inspector General, 
about that, or Mr. Colgate?
    Mr. Bromwich. Mr. Chairman, we are doing, as you know, a 
substantial amount of work in the COPS Program. We are right 
now compiling a summary of all of the work that we have done to 
date that synthesizes into categories the various problems that 
we have identified.
    In addition to that, we are doing a major internal audit of 
the administration and management of the COPS Program that is 
close to being releasable in draft form within the Department, 
and I anticipate that that will be released publicly fairly 
soon.
    So, we are visibly engaged in overseeing this particular 
program.
    Mr. Horn. And is that looking at the other end of the grant 
in the locality and whether they are following----
    Mr. Bromwich. Yes.
    Mr. Horn. Is that sort of a random sample or are you 
looking at that----
    Mr. Bromwich. Not a completely random sample, Mr. Chairman. 
It began as our following up on specific referrals that were 
made to us by COPS management. They said, ``We think we have 
problems with X, Y, and Z grant recipients for these reasons.'' 
And so we began by looking at those. Since that time, as we 
have done more of them, we have been selecting for ourselves, 
approximately 50 percent of the COPS audits that we are doing. 
So, it is a mix of referrals and self-selected grant audits.
    Mr. Horn. Well, I thank you for that information.
    Let me just ask Mr. Colgate a couple of closing questions 
here, because I know you have, I believe, another hearing to go 
to, Inspector General. So, I would just like to know what 
percent of your time on the average, let us say over a month, 
do you spend in your role as Chief Financial Officer? What 
percent of your time, generally, do you spend in your role as 
Chief Information Officer? What would you say off the top of 
your head?
    Mr. Colgate. I would spend, I would say, at least two-
thirds of my time related to Chief Financial Officer type of 
activities. I would say that when it comes to CIO activities, 
there has been far more delegation to whoever was the Deputy 
Assistant Attorney General in IRM. I am not going to kid you, 
my background, as you noted, I mean--I have been Director of 
Finance staffs and budget officers in three different agencies, 
and my interest and my love is financial management. So, I 
would say the majority of my time is spent on financial 
management issues.
    Mr. Horn. OK, and then how much on the Chief Information 
Officer's role?
    Mr. Colgate. I would say probably--to be quite candid with 
you, I would say probably--if I was to measure it any one day, 
I would say 65 percent of my time is spent on CFO or financial 
management type of activities. I would say that 15 percent of 
my time is spent on administrative type of issues, whether it 
be personnel or whatever, and then the smallest portion of my 
time would be related to CIO type of activities.
    Mr. Horn. OK. My last question to you, Mr. Colgate, is the 
debt collection situation. According to the Department of 
Justice's fiscal year 2000 summary performance plan, the 
Department has completed a comprehensive debt management review 
focusing on the Department's and components' efforts to 
implement the, if you will, the Horn-Maloney effort in 1996, 
otherwise known as the Debt Collection Improvement Act which we 
just happened to get in the Omnibus bill that year, and I guess 
I would ask you what were the results of this review including 
the efforts to collect debts referred to from other agencies? 
Do you have any thoughts on that?
    Mr. Colgate. I don't have--I will provide in detail the 
results of that review. I know that we are in the process right 
now of putting out our Privacy Act notices that we can begin 
this summer referring debts, the DOJ debts to be serviced by 
the Department of Treasury, but we have to get this Privacy Act 
notice out before we can begin that referral process. But, 
specifically, on the status by appropriation, I would be more 
than glad to give you that detail by account.
    Mr. Horn. If you would, without objection, it will be 
inserted at this point, and I guess I would ask what 
improvements are being made as a result of this review, because 
I am interested in your role in relationship with other 
departments of the Federal Government where we are also trying 
to get active, aggressive debt collection?
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    Mr. Colgate. We are in the process, Mr. Chairman, of 
implementing a new system so that we can significantly improve 
the management of the Government's debt and the ability to not 
only improve its management but its referral out to either 
private counsel or Assistant U.S. Attorneys to collect. I have 
been very pleased at the levels of debt referals, in 
particular, in the Department of Education, we have received a 
significant increase in the number of student loan cases that 
have been turned over from the Department of Education to the 
Department of Justice for collection. That is really good news 
for the taxpayer, because to the extent that we can 
aggressively go after those using private counsel, in many 
instances, you can essentially return those loan balances to 
provide additional loans to new college students.
    I will be more than glad to give you a list over the last 3 
years of increases in our civil debt collection, and we can 
give it to you by client agency is my recollection. In summary, 
we are making some system improvements. I am pleased to see 
client agencies like Education increase their referrals to us. 
I think we have made important strides here, but there is more 
work to do.
    Mr. Horn. Well, I am glad to hear that and any guidance you 
can give us on that, we will be holding extensive hearings on 
the debt collection in other agencies, and I am glad to hear 
that you see a real change with some of the Departments. We 
will be going over with the ranking Democrat as well as some on 
the majority that have not been able to get here because of 
markups and other things, some of the other questions that we 
might not have in the record, and we would be most grateful if 
both the Inspector General and the Assistant Attorney General 
would give us a reply, and we will put the question and the 
answers, at this point, in the record, without objection.
    [The information referred to follows:]

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    Mr. Horn. So, that is all I think we are going to do today 
on the Department of Justice. So, you are free to leave, but in 
answering the questions, you are still under the oath that you 
took to tell the truth and nothing but the truth. So, thank you 
very much for coming.
    Mr. Bromwich. Thank you, Mr. Chairman. I want to again 
express my appreciation for your being flexible in terms of the 
order of panels this afternoon.
    Mr. Horn. Glad to try to be flexible.
    OK, we are now ready on panel two, and that is the Federal 
Aviation Administration.
    [Pause.]
    Mr. Horn. All right, if the four witnesses and anybody who 
is their assistant who might be talking, I would just have you 
all stand and be sworn in at once.
    [Witnesses sworn.]
    Mr. Horn. All right, 1, 2, 3, 4, 5, 6, 7, 8, 9, 10, 11, 
12--you almost equal the Pentagon--[laughter]--have affirmed to 
the oath, and they are free to talk into the record.
    So, let us start just down the order on the agenda and the 
lineup we have in the first part of the panel. Ms. Linda Calbom 
is the Director, Resources Community and Economic Development 
Accounting and Financial Management from the General Accounting 
Office. Thank you for coming and being lead witness.

   STATEMENTS OF LINDA CALBOM, DIRECTOR, RCED ACCOUNTING AND 
 FINANCIAL MANAGEMENT, GENERAL ACCOUNTING OFFICE; JOHN MECHE, 
 DEPUTY ASSISTANT INSPECTOR GENERAL, FINANCIAL, ECONOMIC, AND 
  INFORMATION TECHNOLOGY, DEPARTMENT OF TRANSPORTATION; DAVID 
   KLEINBERG, DEPUTY CHIEF FINANCIAL OFFICER, DEPARTMENT OF 
TRANSPORTATION; AND CARL SCHELLENBERG, CHIEF FINANCIAL OFFICER, 
                FEDERAL AVIATION ADMINISTRATION

    Ms. Calbom. Thank you, Mr. Chairman. I am pleased to be 
here today to discuss financial management issues at the 
Federal Aviation Administration. As you know, in January 1999, 
GAO designated FAA financial management as a high-risk area 
because of serious and longstanding accounting and financial 
reporting weaknesses. These weaknesses render FAA vulnerable to 
waste, fraud, and abuse; undermine its ability to manage its 
operations, and limit the reliability of financial information 
provided to the Congress and taxpaying public.
    Since 1994, the Department of Transportation's IG has 
undertaken audits of FAA's financial statements and has 
consistently been unable to determine whether the financial 
information is reliable. This pattern of negative financial 
results continues today with the IG's recent financial audit 
report, a disclaimer of opinion on FAA's fiscal year 1998 
financial statements, and I know Mr. Meche will talk a little 
bit more about that.
    Four fundamental problems must be resolved before FAA can 
achieve the most basic level of financial accountability. 
First, the agency must resolve the serious problems related to 
accounting for property, plant, and equipment, and institute 
systems, procedures, and controls to ensure that accountability 
is maintained on an ongoing basis. Since 1994, the IG has 
consistently reported that these assets are being 
inappropriately expensed or otherwise unaccounted for, and 
current estimates are that the asset balance may be understated 
by as much as $5 billion to $10 billion.
    During the audit of the fiscal year 1998 financial 
statements, the IG specifically identified $1 billion of 
equipment that was not recorded on the books as well as 
numerous other errors and weaknesses in FAA's process for 
keeping track of property and equipment.
    The second issue FAA must address is to complete its 
improvements to its inventory accounting system, particularly 
related to spare parts at thousands of field locations around 
the country. FAA does not currently have a reliable system in 
place to track and control these field spare parts on a 
continuous basis.
    The agency's lack of accountability for property and 
equipment and inventory impairs its ability to efficiently and 
effectively manage operations that use these assets and expose 
the agency to waste, fraud, and abuse. For example, lack of 
physical controls over inventory and equipment could result in 
the costly, unnecessary acquisition of assets already on-hand, 
shortages of critical parts, delays in ordering needed assets 
or undetected theft or loss.
    The third basic problem FAA must address is to implement a 
cost accounting system capable of reliably accumulating full 
project cost information. The lack of cost accounting 
information impairs FAA's ability to make effective decisions 
about resource needs; to adequately monitor and control major 
projects such as the $42 billion air traffic control 
modernization project that you mentioned, Mr. Chairman, and to 
identify and avoid waste. The lack of cost accounting 
information also limits the ability of FAA management and other 
decisionmakers to develop a system of user fees based on the 
cost of services provided. And, finally, it limits the agency's 
ability to meaningfully evaluate performance measures in terms 
of efficiency and cost effectiveness.
    And the fourth issue FAA must address is its other 
financial reporting weaknesses that preclude it from preparing 
meaningful financial statements. Audited financial statements, 
as you were mentioning as well, are designed to provide a 
public report of how taxpayer money provided to a given agency 
was spent and when linked to performance measures what the 
taxpayer got for their money. However, as evidenced by the 
numerous problems in preparing the basic financial statements 
that were reported by the IG, FAA lacks this fundamental level 
of accountability.
    FAA's senior management has indicated that they recognize 
the urgency of addressing their financial management 
deficiencies, and they are working diligently toward correcting 
them. However, they are still far from financial 
accountability. Until the agency is able to correct its basic 
accounting deficiencies and produce a complete set of auditable 
financial statements, it will continue to be negligent in its 
duty to the taxpaying public to be a responsible steward for 
the billions of dollars it is provided annually to carry out 
its mission.
    That concludes my statement, Mr. Chairman.
    [The prepared statement of Ms. Calbom follows:]

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    Mr. Horn. Thank you very much. We will now move on to John 
L. Meche, the Deputy Assistant Inspector General for Financial, 
Economic, and Information Technology for the Department of 
Transportation. Welcome.
    Mr. Meche. Thank you. Good afternoon, Mr. Chairman. Thank 
you for inviting the Inspector General's Office to testify on 
FAA's financial management. In the interest of time, I will 
summarize my prepared statement. I will cover three topics: 
FAA's current financial status, actions to develop a cost 
accounting system, and challenges ahead for FAA.
    Seven years ago, we began auditing the FAA financial 
statements. To be frank, the books and records at that time 
were in very poor shape. Since then, FAA has done lots of work; 
and made many improvements. Unfortunately, some issues 
identified years ago still haunt FAA. About 3 months ago, we 
briefed FAA on the results of our audit for fiscal year 1998. 
We informed FAA that it would not get a clean opinion this 
year, and that fiscal year 1999 was already in jeopardy. At 
that time, FAA decided it had to tackle these tough issues. 
FAA's toughest challenge is the property and equipment accounts 
which totaled about $12 billion. Much of this is old stuff, and 
the records do not exist or cannot be easily found. FAA has put 
together a task force involving headquarters and its regional 
employees. We and GAO are working with FAA to find acceptable 
solutions, and, Mr. Chairman, it is working.
    For example, FAA's voice switching control systems, 
installed in 23 locations, were on the books at $234 million. 
By using budget information and national contracts, the FAA was 
able to document its true cost as $1.1 billion. The difference 
becomes really important if FAA is to recoup its full cost from 
user fees.
    Turning to cost accounting, FAA had set out to develop a 
system by October 1, 1998, but the project has not gone 
smoothly. FAA recently acknowledged it could not implement the 
cost accounting system by its milestone of March 31, 1999 and 
has revised the schedule. As of today, FAA plans to have a 
fully operational cost accounting system by the end of fiscal 
year 2001. The FAA needs cost accounting for management 
purposes, but it is vital to establishing user fees if and when 
they are authorized.
    The FAA must address one other issue. The cost accounting 
system gets its source data from the Department's accounting 
system. During the past 7 years, including this year, we 
identified significant financial control deficiencies within 
the existing system. Without a clean audit opinion on its 
financial statements, the FAA cost accounting system, even if 
flawlessly designed, will not produce defensible cost-based 
data. The Department plans to replace the accounting system by 
June 2001.
    The FAA and the rest of the Federal Government is moving to 
measuring performance as required by the Government Performance 
and Results Act. This will require financial systems that can 
link cost information to performance data, and provide 
information on cost effectiveness of FAA's major programs. 
Unfortunately, FAA's current financial systems do not produce 
the data it will need.
    In conclusion, FAA is making an extraordinary effort to fix 
the books by the end of fiscal year 1999. But, Mr. Chairman, 
that is not good enough. Unless FAA fixes the financial systems 
for the long term, FAA's books are likely to revert to their 
current inaccurate position.
    FAA is facing difficult financial conditions. To control 
and monitor its costs, FAA needs basic financial tools, 
including a reliable cost accounting system and good financial 
data. It will take leadership, dedication, commitment, and very 
hard work to solve these financial issues. FAA now has the team 
in place and has the support of the Department's Chief 
Financial Officer. We in the IG's Office stand ready to assist 
the FAA Administrator and her Chief Financial Officer in any 
way we can to make this a success for FAA, DOT, and the Federal 
Government.
    Mr. Chairman, that concludes my oral comments. I will be 
pleased to answer any questions.
    [The prepared statement of Mr. Meche follows:]

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    Mr. Horn. We will defer the questions till we have 
everybody's statement before us.
    Now, I don't know who is to talk first, but in the line, 
Mr. Kleinberg is the Deputy Chief Financial Officer, but Mr. 
Schellenberg is the Chief Financial Officer. So, who is first?
    Mr. Kleinberg. I will speak first. I am from the Department 
of Transportation; Mr. Schellenberg is from----
    Mr. Horn. Mr. Kleinberg is going into the Valley of Death, 
I guess, and you are on the horse right behind him. [Laughter.]
    Mr. Kleinberg. Mr. Chairman and members of the 
subcommittee, thank you for the opportunity to speak before the 
subcommittee and to testify on FAA's improvements in financial 
management and the Department's actions to encourage and 
support FAA's efforts.
    We are pleased with the improvements that FAA has been 
making in financial management over the past years and 
especially their recent stepped up efforts. The audited 
financial statement process has been of great benefit in 
improving financial management throughout the Department. It 
has brought greater discipline and focused the financial 
management activities.
    The material weaknesses identified by the DOT Inspector 
General have directed DOT organizations to areas that can 
benefit from financial management improvements. FAA has been 
preparing financial statements for audit for the past few 
years. Material weaknesses have been identified in the areas of 
property, plant, equipment, and inventory. Corrective action 
plans for these areas have been developed. Some actions have 
been completed; others remain in the process of being executed. 
These corrective action plans have extended over multiple years 
and have involved numerous FAA offices. FAA has mobilized both 
financial and program officials from headquarters, regional, 
and field offices to assure the needed financial improvements 
are implemented.
    These financial management improvements must be 
accomplished while at the same time not compromising vital 
programmatic activities. Although the task has involved adding 
new responsibilities and priorities to many FAA offices, FAA 
has been making excellent progress in eliminating material 
weaknesses through the execution of these corrective action 
plans. The FAA Administrator, the DOT Chief Financial Officer, 
the DOT Inspector General frequently review FAA's progress in 
achieving these corrective actions. They support FAA's 
endeavors and believe that they are on a reasonable course to 
achieve a clean opinion.
    The Secretary, the FAA Administrator, and the Chief 
Financial Officer are committed to meeting the President's goal 
of a clean audit opinion for the Department for fiscal year 
1999. To accomplish this goal, FAA must also receive a clean 
audit opinion in their fiscal year 1999 statement. In line with 
this important goal, FAA's corrective action plans are 
scheduled to be completed in fiscal year 1999. FAA's 
organizations are currently ahead of schedule in completing 
their required goals and milestones. This should allow ample 
time for the General Accounting Office and the DOT Inspector 
General to review FAA activities and to render a clean audit 
opinion for fiscal year 1999.
    We believe the FAA's actions demonstrate their full 
commitment to improving financial management. They are taking 
the necessary steps to demonstrate to the General Accounting 
Office and the DOT Inspector General that their financial 
statement is deserving of a clean audit opinion. A clean audit 
opinion for FAA will assure the Congress and the American 
public that FAA resources are being managed wisely and in the 
public's best interest.
    I will be pleased to respond to your questions after the 
cycle is over.
    [The prepared statement of Mr. Kleinberg follows:]

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    Mr. Horn. Thank you very much. Mr. Schellenberg, the Chief 
Financial Officer of the Federal Aviation Administration.
    Mr. Schellenberg. Thank you very much, Mr. Chairman. It is 
a pleasure to be here to explain what the FAA is attempting to 
do to resolve both of these major issues. I want you to know 
one of our agency's top priorities is to enhance FAA's 
financial credibility and integrity as quickly and effectively 
as possible.
    Recently, the General Accounting Office put FAA on its 
high-risk list for financial management for two key reasons: 
the agency's failure to receive a clean audit opinion on its 
financial statements, and the lack of a fully implemented cost 
accounting system. We are fully committed to taking those 
actions necessary to give the DOT Inspector General the basis 
on which they can provide us a clean audit opinion.
    Getting such an audit opinion is important to us not only 
as a part of the goal to achieve a governmentwide unqualified 
audit but also to assure the public that the assets entrusted 
to the FAA are properly managed and accounted for. To ensure 
success in this effort, we are working cooperatively with the 
Office of Inspector General and the General Accounting Office 
to identify and rectify those financial discrepancies that are 
holding the agency back from receiving a clean audit opinion.
    Together, we have identified three critical areas that the 
FAA must address that had previously been overlooked for years. 
First, reduce the FAA's work in process account which has been 
overstated as completed facilities and facilities and equipment 
were not transferred to the appropriate fixed-asset accounts at 
appropriate times. Second, the need to adequately document the 
agency's assets at sites throughout the country, and, third, 
the need to adjust accounts for personal property, such as 
radars and switching systems, to properly reflect their full 
costs.
    Let me emphasize at this point that the deficiencies that 
we have described in those three circumstances relate to the 
appropriate accounting process not the agency's ability to 
locate those assets. In other words, it is not a loss of 
assets, it is a question of an appropriate accounting 
treatment.
    As the agency's Chief Financial Officer, I am leading the 
FAA's monumental effort to tackle these problem areas. Together 
with the Office of Inspector General, we have set goals and 
targets for FAA employees at headquarters and each of the 
regions to complete this work. Led by each regional 
administrator, dedicated teams have been formed throughout the 
regions to undertake this work according to established goals 
and processes.
    For example, early in fiscal year 1998, the agency convened 
a field spare parts inventory conference to coordinate the 
physical inventory with the regional liaisons at over 800 
sites. This analysis resulted in the FAA changing the 
methodology it uses to price the agency's inventory to more 
accurately reflect the cost of that inventory. Since then, both 
GAO and OIG have sampled the inventory and found no material 
discrepancies for the line items sampled. Another full wall-to-
wall inventory is planned for later this year.
    In order to correct other financial statement deficiencies, 
we will work with the Department and the IG to develop and 
implement changes to our existing accounting systems; to 
capture the new standard general ledger accounts, and change or 
convert existing records to meet new reporting standards. We 
have also accelerated our efforts with regard to developing a 
process improvement plan. This plan when completed will 
identify all changes in requirements needed to ensure that the 
FAA has in place the correct automated systems, procedures, and 
resources necessary to ensure the continued integrity of our 
financial systems for the future. I share Mr. Meche's concern 
that we institute processes so that we don't have to play 
catchup again in the future, and that not only do we get a 
clean audit opinion, we keep a clean audit opinion.
    The deadlines we have set for ourselves will enable the 
task to be completed with ample time remaining for the Office 
of Inspector General to issue a clean audit opinion in fiscal 
year 1999. We are pleased to be able to report that as of mid-
March, each region and center and their respective lines of 
business is ahead of the goals for accomplishing these tasks, 
and we anticipate having this work fully completed on time.
    The second reason why FAA was put on the GAO high-risk list 
was the lack of a fully implemented cost accounting system. It 
should be noted, however, that the FAA is one of the first 
Federal agencies to take steps to establish a full cost 
accounting system based on generally accepted government 
accounting principles. We have not just embarked on a 
traditional cost accounting system but one that incorporates 
non-financial with financial transactions in order to allocate 
and determine the full cost of FAA's services. So, it is a 
combination of performance measurement as well as the financial 
data so that we can have, in fact, the kind of information Mr. 
Meche referenced earlier. Knowing these costs will allow us to 
track our performance and make informed management decisions 
both which will help the agency better control its costs.
    FAA commenced this effort 2\1/2\ years ago and will deliver 
the first phase of the cost accounting system to support the 
air traffic service organization by the fourth quarter of 1999. 
Thereafter, other lines of business will be added in phases so 
that the cost accounting system will be fully implemented 
throughout the agency by the end of fiscal year 2001.
    In our discussions with private companies that have 
implemented similar cost accounting systems. We determined our 
5-year completion target falls well within the range of best 
business practices. Although the FAA has been held at fault for 
not having delivered a complete cost accounting system. We 
believe that the FAA should also be given the credit for having 
taken these pioneering steps.
    Let me summarize by saying that the FAA is undertaking 
serious, comprehensive steps to regain our financial 
credibility and integrity. We are cooperating fully with the 
Office of Inspector General and the General Accounting Office 
on an ongoing basis to achieve these goals and to avoid any 
future problems. We have every confidence we will meet these 
goals of achieving a clean audit opinion and implementing the 
first phases of our cost accounting system in fiscal year 1999.
    And if I may be permitted a personal comment when the 
Administrator appointed me to this position during the middle 
of the summer, it was made crystal clear to me by her and later 
by the Chief Financial Officer of the Department that these two 
functions, that delivering a clean financial statement and a 
cost accounting system were the two major priorities that I 
needed to proceed with. Let me assure you I am directly focused 
on doing exactly those things. When I found that we were not 
proceeding in both of those areas with the speed and with the 
diligence that was necessary, we stepped in; we reorganized; we 
took steps; we instituted new processes; we made 
accountability; we made overtures to the OIG and the GAO to 
work constructively to resolve issues in advance. I think we 
are on track at this point, and I look forward to the fact that 
we will be able to achieve that statement of cleanliness this 
fiscal year. Thank you.
    [The prepared statement of Mr. Schellenberg follows:]

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    Mr. Horn. Well, we wish you well on that point. Just so I 
get the relationship of reporting correct in my mind, Mr. 
Schellenberg, you report to whom in the Federal Aviation 
Administration?
    Mr. Schellenberg. I report to the Administrator, Mrs. 
Garvey.
    Mr. Horn. OK, and to whom does the Chief Information 
Officer report?
    Mr. Schellenberg. The Chief Information Officer who is a 
new gentleman that has just joined us also reports to Mrs. 
Garvey.
    Mr. Horn. OK, and so you have full responsibility for being 
the Chief Financial Officer.
    Mr. Schellenberg. That is correct.
    Mr. Horn. All right. Who is the Assistant Administrator for 
Management or whatever that position is called?
    Mr. Schellenberg. Well, we no longer have an Assistant 
Administrator for Management, sir. What happened is that we 
have Assistant Administrator for Financial Services, and I am 
that person. We have an Assistant Administrator for Human 
Resource Management, and that is Ms. Glenda Tate. And we have 
an Assistant Administrator and Chief Financial Officer, and 
that is Mr. Daniel Meehan. I have some slight administrative 
duties.
    Mr. Horn. Wait a minute right there. You are the Assistant 
Administrator for Financial Services.
    Mr. Schellenberg. And Chief Financial Officer.
    Mr. Horn. And you are also Chief Financial Officer, but you 
just named that other person Chief Financial Officer.
    Mr. Schellenberg. Oh, I am sorry. The other person I named 
was the Chief Information Officer; I probably misspoke.
    Mr. Horn. OK, yes.
    Mr. Schellenberg. And that is Mr. Daniel Meehan.
    Mr. Horn. OK, so your role as Assistant Administrator for 
Financial Services, did that precede your coming to the agency? 
I mean, has that position been around for a long time?
    Mr. Schellenberg. No, no, that was just created. I have 
been in the agency for a long time, but I was appointed to that 
position, and it was created for the first time last summer.
    Mr. Horn. OK, so you are not really doing anything other 
than the Chief Financial Officer operation.
    Mr. Schellenberg. That is correct.
    Mr. Horn. OK, that is what I wanted to get straight, 
because I wondered if you were reporting to an Assistant 
Administrator for Financial Services, because the role should 
report to Mrs. Garvey, the Administrator. Good, OK.
    Now, we welcome Mr. Turner, and we are just finished the 
testimony, and we are into questions now, and if you would like 
to say anything at this point, you are certainly welcome.
    Mr. Turner. You go right ahead.
    Mr. Horn. OK. Well, let me ask the General Accounting 
Office, Mrs. Calbom, is it true that the items mentioned are 
missing or there was a mention that these items were not 
missing? What is the finding of the General Accounting Office?
    Ms. Calbom. You are talking about the property and 
equipment items?
    Mr. Horn. Right.
    Ms. Calbom. I think what has been happening is over the 
years as equipment is purchased it is being charged through to 
the expense accounts, so it just flows through operations, and 
it is not then being tracked on an ongoing basis. And what the 
IG is finding is they are trying to go back--actually. The 
agency, with the IG looking right behind them as they go, is 
trying to go back and reconstruct the records, so they can 
figure out which assets should have been put on the books and 
kept on the books, so they can track those assets on an ongoing 
basis. So, I think that is mostly what they are finding. They 
are also finding situations, I know there was at least one 
situation that is in the IG's audit report, where there was a 
structure on the books for $1 million, and the structure had 
been demolished 10 years ago. So, it is a lot of sloppy 
bookkeeping is what it is.
    Mr. Horn. And that is to be done by the Federal Aviation 
Administration or is to be done by the Department of 
Transportation?
    Ms. Calbom. The cleaning up?
    Mr. Horn. Well, the keeping of what data when and where.
    Ms. Calbom. Oh, it is FAA's job to be doing that.
    Mr. Horn. OK, so each service agency, whatever they are 
called, within the Department of Transportation has their 
responsibility.
    Ms. Calbom. Yes, it is fairly autonomous, and FAA, as you 
know, then prepares its own consolidated financial statements 
which are subjected to an independent audit.
    Mr. Horn. Interesting. OK, let us take a look at some of 
the property, plant, and equipment just to review it. You say 
FAA spent $26 billion on its Capital Improvement Program. Now, 
those are the ones related to the Airport Improvement Fund, I 
assume; the special trust fund that is set aside? Or is that 
general fund money beyond the trust fund? Like a third runway 
at Los Angeles International; a lot of that would come out of 
the trust fund.
    Ms. Calbom. Correct me if I am wrong, but I believe a lot 
of that relates to the Air Traffic Control Modernization 
Program.
    Mr. Horn. OK. So, that is in terms of facilities for the 
FAA to do its job itself, OK.
    Ms. Calbom. Correct.
    Mr. Horn. All right. And then we noted that they reported 
less than $12 billion in gross property, plant, and equipment 
asset costs. Is that correct?
    Ms. Calbom. Yes, I believe it was right around $12 billion 
that is on the books, and when we say gross, we mean before 
depreciation is considered.
    Mr. Horn. Well, then comes the obvious question: If you 
have spent approximately $26 billion on capital year 
improvement during fiscal years 1982 through 1998 and the 
financial statements reported less than $12 billion in gross 
property, plant, and equipment asset costs, the question is 
where is the remaining $14 billion?
    Ms. Calbom. Right.
    Mr. Horn. So, where is it?
    Ms. Calbom. That is the question that is being pursued 
right now by FAA officials as well as--as I was saying, the IG 
has been looking at what they are coming up with, and they are 
trying to go back and reconstruct the records and determine 
which of those funds that were spent really should have been 
assets that are capitalized on the books. There is certainly 
some of the property that was properly expensed, and certainly 
there is some of it that relates to projects that were 
abandoned or written off.
    Mr. Horn. Has anybody checked those projects to see if they 
were ever built?
    Ms. Calbom. Well, I think as far as the funds that they are 
identifying that relate to assets that should be capitalized--
and Mr. Meche can probably answer this better--but I believe 
that they are going out and taking a look at those assets and 
ensuring that, in fact, they are there.
    As far as the funds that relate to the scrapped projects, 
so to speak, that is money that was spent that isn't providing 
any long-term benefit.
    Mr. Horn. Well, we ought to be check to see if the 
structure is there. I am not being humorous about it, but the 
Subcommittee on Appropriations, independent offices, HUD, so 
forth, went checking in New Orleans to see where the buildings 
were that the Department of Housing and Urban Development had 
been granting money to them over time, and they found a lot of 
buildings that never even were erected, but somebody got the 
money. So, we ought to check that.
    Mr. Meche. Mr. Chairman.
    Mr. Horn. Yes.
    Mr. Meche. We know where most of that money has gone. We 
are, in fact, in the process of rebuilding the records. There 
was about $5 billion--and that is a very rough estimate right 
now, because we are looking to the future--there is about $5 
billion of that difference that was, in fact, expensed off the 
records, and we are rebuilding those records right now with FAA 
to be able to get that amount. There is another at least $2 
billion, maybe $3 billion that we know. For example, the money 
for the AAS system that was spent, but it never came into 
production. So we know right now where a lot of that money is.
    Mr. Horn. Well, you have me down to presumably $5 billion 
or if you muddled a couple of things there, I am not quite sure 
what the net balance is, but I asked where is the remaining $14 
billion, and I think you said, ``Well, we certainly have about 
$5 billion we think we know.'' And, obviously, then, what has 
happened to the $9 billion?
    Mr. Meche. That is correct, sir, and we are reconciling 
that number down, and what we are finding so far is the kinds 
of situations that I described. It is where FAA has not put the 
system in place because it just never got off the ground, but 
yet the money was spent. So, that is part of the money that you 
are looking at, as well as expensing it and not capitalizing it 
on the records. That is what the situation is with the $5 
billion we know about right now.
    Mr. Schellenberg. Mr. Chairman, maybe I can help a little 
bit also.
    Mr. Horn. Please.
    Mr. Schellenberg. What we are really talking about is the 
appropriate status on the records, not the location of the 
assets. For example, it could be a question of where the FAA 
had charged an asset to an inappropriate account. In such a 
case, we are going back and correctly capitalizing the asset 
while placing it where it properly belongs in our financial 
statements records.
    Mr. Horn. Well, let us take that item and example. Who 
signs off on that particular asset item so that there is some 
senior management responsibility? Would that be you signing off 
on it or your predecessor?
    Mr. Schellenberg. The actual decision to expense a 
particular item?
    Mr. Horn. Yes, right.
    Mr. Schellenberg. It would be handled by the offices, 
particularly on a regional basis, that were in charge of doing 
the accounting for that particular project. As a practical 
matter, I can't find any proper justification for expensing 
what should have been capitalized; it should have been 
capitalized.
    Mr. Horn. Do those papers still exist with somebody's 
signature on it? Did somebody assume responsibility, and did 
they not then just input it properly or improperly at the 
headquarters level?
    Mr. Schellenberg. It was a combination of two pieces: 
expensing it improperly and leaving it for too long in a work 
in process kind of account. What we are doing in the one case 
is the catch-up work to take things out of work in process that 
have been completed long ago and putting those now in 
appropriate asset accounts. Next we go back and recalculate and 
redetermine the appropriate figure to put on the capital 
account and the appropriate figures to actually expense. When 
we have finished this work in the June timeframe, we will have 
an accurate statement of what is legitimate work in process, 
what is legitimate expense, and what is legitimately assigned 
to those capital asset accounts. We are putting those figures 
where they should have been all along.
    Mr. Horn. Sure. Do we have any sort of feeling as to how 
many thousands items there are here? Are we talking hundreds of 
items or what?
    Mr. Schellenberg. We are talking thousands of items. We are 
working on the most significant items. We are ensuring that 
current assets are appropriately accounted for. We are working 
collectively and quite cooperatively with the Inspector General 
and the GAO to ensure that we identify and characterize the 
most material parts of inventory, so that everything is 
appropriately accounted for. So, it is literally thousands of 
job orders that have to be appropriately characterized.
    Mr. Horn. Now, in your judgment as Chief Financial Officer, 
do you think that the FAA has the appropriate system and 
equipment to do this job?
    Mr. Schellenberg. I think we have in place the appropriate 
equipment and systems to do the catch-up. I do not yet think we 
have in place the appropriate systems to keep current. We have 
some groups that will develop those systems so that if you ask 
me that question in 2 months, I feel confident I will be able 
to tell you at that point, we have the systems that will let us 
stay current. So, we are working on one; one I think is in 
place.
    Mr. Horn. Now, in terms of just the equipment--let us not 
talk about property for a minute or big structures--do you have 
a system now that you feel will keep track of the billions of 
dollars in equipment that FAA purchases?
    Mr. Schellenberg. Yes.
    Mr. Horn. So, you think you are OK on that one?
    Mr. Schellenberg. I think we will be OK.
    Mr. Horn. Have you evaluated the FAA's plans to correct 
their records for items that have not been recorded in the 
past, and, if so, do you think this effort will be successful?
    Mr. Schellenberg. Yes, we have taken a look at that, and I 
think it will be successful.
    Mr. Horn. OK. Let us see, I think we have enough on that. 
If we haven't, we will send you a few questions after the 
hearing.
    Let us talk a little bit about air traffic control 
modernization. I served on the Aviation Subcommittee when I 
first came here and had a few views as I went out and looked at 
that thing, and it turns out I was right, and the FAA was right 
to cut if off at $4 billion. I would just like to know why they 
didn't cut it off at about $4 million, $40 million or $400 
million? The IRS went to $4 billion also. I don't know if they 
were cloned so that FAA and IRS--you got different letters, but 
it didn't sound like a clone, but they end up with the same $4 
billion, and I guess nobody gets their attention until a few 
billion are spent in Government.
    Now, the General Accounting Office testimony indicates that 
the $42 billion Modernization Program is expected to continue 
through fiscal year 2004. This is a significant program, and I 
believe its expected costs will be an additional $16 billion 
over the next 6 years for such things as radar navigation, 
communications equipment, as well as computer software. When we 
buy this additional equipment, I am concerned whether or not 
you will be able to account for it properly. What do you think?
    Mr. Schellenberg. I am concerned about that too. That is 
exactly why I convened this group to get together to design the 
kind of system that will let us keep current and make sure that 
as those items are acquired, they are appropriately 
characterized in the accounts and that we are current with the 
process.
    Mr. Horn. Well, I guess I will ask the obvious, because it 
seems to me there must be some corporations in America that 
have related things to deal with in terms of categories and 
that maybe you could get it off the shelf or have you looked at 
that? Or has the Chief Information Officer looked at that? Or 
is the person too new to look at it?
    Mr. Schellenberg. Well, I don't. I will defer to Mr. 
Kleinberg on that issue, if I may, please.
    Mr. Kleinberg. We have looked at it in the sense that we 
have adopted an Oracle financial package that we are putting in 
the Department that will be in place in 2001. That handles, 
obviously----
    Mr. Horn. And you have already tested this Oracle system to 
see if it does for you what you want it to do?
    Mr. Kleinberg. We tested it in the first stage; the second 
stage of a more refined testing starts next month and will be 
completed by the middle of June at which time we get into what 
we call the final build stage. By Oracle's own management view, 
they think we are chasing them rather than them chasing us at 
this stage, and we hope that continues. So, we think that that 
is the type of package that is supplying chain management 
although if all the other types of software at the private 
sector do use similar type things, it will be available to us 
and subtle enough to handle all of these problems.
    Mr. Horn. So, you are not the alpha site, you are the beta 
site.
    Mr. Kleinberg. No, actually, we are beyond the beta site in 
the sense that this is proven by about 5,000 corporations 
already.
    Mr. Horn. Good. Well, we will extend the alphabet a little 
bit. [Laughter.]
    No, I am glad that you let somebody wear themselves out in 
making sure it works.
    Mr. Kleinberg. Exactly.
    Mr. Horn. It makes sense.
    OK, inventory. I understand from the testimony here that a 
lot of progress has made in the ability to keep track of 
inventory located in your warehouse, as I understand it, in 
Oklahoma City. However, there still seems to be problems 
keeping track of parts located in the field. This seems 
especially critical since those parts are scattered around 
30,000 locations throughout the country. You might have some 
overseas also; I know you keep some people overseas. FAA, I 
would have the question is, what are you doing to ensure that 
you have a system in place that can keep track of these parts 
on an ongoing basis? I guess, Mr. Schellenberg, that all was 
headed in your direction.
    Mr. Schellenberg. I rather expected it was. We have been 
doing a number of things on our field spares. We have conducted 
physical inventories to ensure the present location of all 
those items. We did one last year; we will do another one this 
year. We are also in the process of developing the perpetual 
inventory system to keep better track of those field spare 
items. Again, the question associated with those field spares 
is often the fact that you need a critical part in another 
facility and sometimes the issue has been that it has been more 
pressing for our folks to restore that facility--get it there, 
get the equipment running--than it has been to do the 
paperwork. What we need to do in the new system is to make it 
simple enough, quick enough, and easy enough that inventory 
tracking steps happen quickly, easily, and currently, so that 
we have an accurate and complete status that is up to date at 
the moment.
    Mr. Horn. Yes, having heard the question and the answer, I 
would like to know from the Inspector General and from the 
General Accounting Office, do you think they are on the right 
track or are there real problems here?
    Mr. Meche. Mr. Chairman, I think they are on the right 
track. We recommended to FAA about 5 years ago that they 
establish a perpetual record system for these field spares. It 
wasn't until about 6 months when Mr. Schellenberg came on board 
that we brought this to his attention. We showed him what the 
results were and convinced him that it was time for FAA to 
establish perpetual records, and he has, moved out on that. As 
soon as the FAA gets those spares into inventory--there is 
going to be a physical inventory--we will test it, and assuming 
that there is no problem with the accountability, we will be OK 
with it.
    Mr. Horn. Ms. Calbom, for GAO, what is your reaction?
    Ms. Calbom. I guess we still have some concerns about the 
field spares inventory at this point. As stated in my 
testimony, when we took a look at some of the test counts that 
the IG did in the field--we, ourselves, did not do test counts 
in the field; we did them at the big warehouse but not in the 
field--we were just concerned that at all the sites the IG 
staff went to there were a number of problems that were 
discovered, and we really felt like probably the count process 
may not have been a good process. It is real hard tell if they 
truly had a good handle on what was out there.
    I am happy to hear that they are going to do another 
complete count for the fiscal year 1999 audit, and then the IG 
will go in and take a look at those, and we will be following 
up on that as well. And I do agree with Mr. Meche that they are 
beginning to implement a perpetual inventory system which is 
something where they can keep track of the ins and outs, and 
so, at any given point in time, they know what they have at 
different locations, and I think that is really essential for 
this type of operation, because, like you say, it is scattered 
all over the country. And when you have spare parts like this, 
I mean, some of them are really critical, it is important if 
you have modifications or other things like that, it is very 
important from an operational standpoint, to know where those 
are so that they can be updated if need be.
    Mr. Horn. Well, let us put it this way, thousands of 
American firms that assemble things or manufacture have adopted 
the so-called Japanese inventory system where your parts are 
fed into when you need them in some way, obviously by computing 
the stocks down to a certain level. Is there any possibility 
that the kind of parts FAA needs and has in that huge warehouse 
in Oklahoma City where that can be directly sent to people in 
the field by the person that is making them? And I don't know 
if you have looked at that or that would save you warehouse 
space or what, but it is something you might think about.
    Mr. Schellenberg. We have done much of that, Mr. Chairman. 
Let me also point out that at most of these field facilities it 
is not a question of manufacturing something that you have 
anticipated demand for, it is often a question of a part 
failure that needs to be replaced very quickly in order to 
preserve their safety. So that we try to anticipate; we try to 
stock these facilities with the required number, but there will 
often come times when it doesn't happen exactly the way you 
planned. What we want to do is to have economic quantities, but 
we also need to have the ability to respond very rapidly. So, 
we are doing what you are suggesting; it is a difficult balance 
to take at times.
    Mr. Horn. Give me an idea of what the FAA needs in parts. 
Is this for radar or what?
    Mr. Schellenberg. This could be the major tube for a radar. 
It could be major components of air ground----
    Mr. Horn. Tube for radar? You mean, we are not still using 
vacuum tubes, right? LAX was until recently, I think.
    Mr. Schellenberg. The tube is the major thing that 
generates the radar signal, the clystron, on many of our 
things. It could be air ground communications equipment; it 
could be something that is a part of a navigational aid. So, 
when these things cease working, we need to get them back up 
and operating as soon as possible. So, it is a question of 
anticipating what parts are going to fail, and that is not 
always an easy process.
    Mr. Horn. Well, I am glad you are taking a look at it. Do 
you know in your current inventory different parts are there in 
that Oklahoma City warehouse?
    Mr. Schellenberg. I don't have the number at my fingertips; 
we will be happy to provide it.
    [The information referred to follows:]

    The total inventory of items at the Logistics Center in 
Oklahoma City is 84,143 items.

    Mr. Horn. The Air Force, I found, over the years, has so 
many spare parts it is unbelievable, and a lot of them are 
planes they no longer order, so when you have a master sergeant 
that knows what they are doing there, why, they can usually 
clean up that inventory.
    Mr. Schellenberg. We are doing an interesting thing, Mr. 
Chairman, that you might be interested in. We are now operating 
our logistic center as a franchise fund. The individual 
facilities that now need to have parts are being charged for 
those parts, so that they now have financial accountability. 
This has increased their awareness of economic quantities to 
have on hand, so it is working a very positive effect.
    Mr. Horn. And routine maintenance to be preventive 
maintenance to help extend life.
    Mr. Schellenberg. Yes.
    Mr. Horn. Well, that makes sense, and I congratulate you on 
that.
    Financial reporting. It has been mentioned that there are 
significant errors in the 1998 financial statement, including 
problems with statements of budgetary resources and net costs. 
In addition, FAA's financial statements, themselves, say that 
``some of the budgetary balances from the general ledger were 
not accurate or were incomplete in the accounting system.'' I 
guess I would ask the Inspector General, what do you mean in 
your report when you say that $7.2 billion unobligated balance 
in the statement of budgetary resources could not be 
substantiated?
    Mr. Meche. Mr. Chairman, this is the first year that we 
have had to audit these new statements. What we have found in 
this particular example you are talking about is that this is a 
cumulative figure that has built up over years. For auditors to 
come in for the first time--I mean, for auditors to validate 
that number, they have to be able to track it back to every 
single dollar that it is involved, and when you are dealing 
with transactions that have been occurring over 15 to 20 years, 
it is just not possible to do. That is what we ran into with 
these new statements.
    Mr. Horn. What you are saying is there is no way we can 
ever check this?
    Mr. Meche. I believe that is probably correct. We have 
tried to do some of that work this year, and we have been able 
to get to some of the dollars, but certainly not anywhere near 
the total amount, because it just keeps going further and 
further back in time.
    Mr. Horn. What is the General Accounting Office's view and 
what is the FAA's view on this?
    Ms. Calbom. Well, as you know, Mr. Chairman, the purpose of 
adding these new statements is really so you can get, No. 1, a 
complete picture of what is going on. I mean, you have your 
statement of budgetary resources that kind of tracks things on 
a budgetary basis; you have your statement of net cost which 
then says, OK, how is the money spent specifically. If we can 
do detailed audits on our statement of net cost and then tie 
that into the statement of budgetary resources and our budget 
accounts, ultimately, then we can get some comfort on the 
validity of the numbers that are reported in the budget 
accounts.
    Unfortunately, what has happened with FAA--and there are 
other agencies where this has occurred as well--they have not 
maintained good documentation--because they never had to 
before; no one ever checked--of the budgetary accounts. This is 
the first year we have subjected some of those to audits, and 
it is a similar situation, as you have heard time and time 
again in the various testimonies on the other agencies, when we 
first started subjecting them to the audit of just the balance 
sheet and the operating statement, nobody had the records. They 
are starting to get the records now; put them together. Same 
thing on this statement of budgetary resources; they are 
finally realizing, ``OK, we have to keep records of this as 
well.'' Until we are able to do that, we are not going to have 
the full package; the last part of the package being the 
performance reporting, that we can provide that full set of 
accountability that really needs to be provided.
    Mr. Meche. And, Mr. Chairman, one other point on that: when 
FAA tried to prepare that statement this year, they had to go 
totally outside their accounting system. The accounting system 
does not have that information--that is the point that you 
pulled out of our report. One of the issues for the future that 
we talked about is having a financial system that incorporated 
all of the requirements so the system itself, automatically, 
internally, checks and balances itself to where you keep these 
things under control as you go along.
    Mr. Horn. Well, this leads, obviously, to a few questions 
on cost accounting and if we think it is reasonable at this 
point. The fiscal year 2000 budget that was submitted to us in 
Congress includes $7.5 billion in user fees to be collected 
during the 5-years beginning October 1, 1999, the beginning of 
the new fiscal year 2000. It is only about 6 months away. These 
are described as cost-based user fees, and the Inspector 
General and the General Accounting Office testimony state that 
one of your major problems in FAA is the lack of a cost 
accounting system and that this is the key to your ability to 
establish cost-based user fees. So, I would ask Mr. 
Schellenberg as Chief Financial Officer of the FAA, where do 
you stand in terms of implementation of a cost accounting 
system?
    Mr. Schellenberg. As far as the cost accounting system is 
concerned, we will deliver during the third quarter of fiscal 
year 1999 the first major phase of the cost accounting system. 
This will constitute the cost information, the fully allocated 
cost information, that will involve that portion of the air 
traffic system involving the en route and oceanic air traffic 
operations.
    This will allow for two things. This will allow for the 
issuance of an interim final rule on those fees that are 
currently authorized; that is a limited slice known as the 
overflight fee, and that will be able to be issued before the 
end of this fiscal year. We will then also have in place the 
costing information necessary to support the President's fiscal 
year 2000 budget at the $1.5 billion level. Should there be 
enabling legislation that would allow us to go ahead, the cost 
accounting information will be prepared for that. We will then 
institute the balance of the cost accounting system delivered 
also in phases.
    We will complete the first phase being the remainder of the 
air traffic system. We will then take the other agency elements 
such as the regulatory process, space transportation, those 
pieces, culminating in the last piece being delivered in fiscal 
year 2001. So that according to our present schedule, which I 
have good confidence in, we will proceed to have in place the 
necessary cost accounting pieces to support those charges 
should they be authorized as contained in the President's 
budget.
    Mr. Horn. Well, I am delighted to hear that, Mr. 
Schellenberg. I would just simply Mr. Meche, has the Inspector 
General reviewed the FAA cost accounting system designs and 
plans, and, if so, do you have any comments or concerns about 
the planned system?
    Mr. Meche. We have, Mr. Chairman. We made an initial review 
of the system last year and issued a report in August 1998. We 
identified four major issues with the development of that 
system. We pointed those out to FAA, and they are considering 
them in the schedule that they are doing right now to address 
those concerns. So, yes, we have looked at that. We have not 
looked at anything associated with the piece that is being 
developed right now that is going to support the overflight 
fees. We are waiting for FAA to have that piece in place, and 
as soon as it is we will audit it to see that the amounts are 
cost-based and that they are valid and legitimate costs going 
into accounts.
    Mr. Horn. Tell me how the overflight fees work? I am just 
not that familiar with it.
    Mr. Schellenberg. We have the authority to impose a fee on 
aircraft that fly through U.S. air space but neither takeoff 
nor land within the United States. So, that to an extent that 
someone is flying through our air space, the premise is that 
they are not otherwise paying taxes for their operation in air 
space. We capture through our air traffic system their 
presence, and we will impose a cost-based fee for that 
operation with U.S. air space.
    Mr. Horn. Is this because they are utilizing the 
information that your radar service is providing?
    Mr. Schellenberg. We are providing them air traffic control 
services within the United States, and since they neither 
takeoff nor land here, there is no basis for otherwise charging 
them.
    Mr. Horn. Can you give me a few examples of which airlines 
do this that don't land here; don't take off here, and overfly 
us?
    Mr. Schellenberg. Well, there have been a number of 
airlines, Canadian airlines were that way for a long time.
    Mr. Horn. Just go directly to Mexico, let us say, out of 
Toronto.
    Mr. Schellenberg. Right, or come from Pacific destinations 
and fly through U.S. air space and land in another country; any 
number of those.
    Mr. Horn. Fascinating. You guys in FAA ought to be the tax 
collectors for the country if you have figured out how you can 
tax people going over the air. [Laughter.]
    Mr. Schellenberg. Well, we have had our problems.
    Mr. Horn. I learn something new everyday; that is why we 
hold these hearings. That is my factoid to do something with 
tonight.
    Anyhow, your testimony laid out a number of other areas 
where cost accounting was important. Could you elaborate a 
little bit on that; I am fascinated?
    Mr. Schellenberg. Essentially, we view that there are two 
fundamental reasons for having cost accounting: one, you talked 
about, the necessary piece to support user fees, but really 
more and more important than that is the fact that the FAA 
needs to know how much it costs to deliver its services, so 
that we can effectively manage this agency in the most 
effective and efficient way. Until we have that in place, we 
are making choices often based on assumption rather than hard 
data.
    So, what we are trying to pull together is unassailable 
information that says it costs you this much to do your 
services. If you begin to compare one facility to another and 
we see the cost of operation in one is significantly different 
from the other, I think you recognize this, as we do, that the 
powerful impact that that can have on encouraging better 
operation that is more efficient.
    So, that, on the one hand, just having the information and 
knowing what your costs are will have a salutary effect on the 
agency. When we couple that information as we will with the 
performance information and how well we are delivering our 
services, then it becomes more powerful yet, and then I think 
we have the technique that the GPRA anticipated. We would 
balance those two pieces and I think greatly improve how we 
serve the public and at the cost that it takes to do that.
    Mr. Horn. Well, that leads to another question which I 
would like to have your opinion on it. You have a goal, 
obviously, and it is commendable, to receive a clean opinion on 
your 1999 financial statements on September 30th, and I would 
be curious how you plan to accomplish this given the various 
serious problems that the auditors, the General Accounting 
Office, the Inspector General have all said that FAA has, and I 
guess the question, to me, at least, is in the year 2000, that 
budget has been prepared, recommended by the President, were 
you there in time to get some input from the role of the Chief 
Financial Office in FAA, and if you need any personnel 
resources in order to get the job done or did you come into the 
system too late to get your ore into the boat and see what they 
would do with it?
    Mr. Schellenberg. I came right in the middle of that 
process, and I think we have appropriately participated in an 
effective way.
    Mr. Horn. OK, so you are not short on resources?
    Mr. Schellenberg. No, sir.
    Mr. Horn. Or did you recommend--well, let me ask you this: 
did any of your recommendations get cut at either the 
Administrator's level--this is the kind of thing OMB can't 
punish you over; once we ask it, you have to give us the truth. 
[Laughter.]
    And we don't listen to them anyway. But the question is 
obvious, did the Administrator cut your request back? Did the 
Secretary of Transportation cut it back? Did OMB cut it back? 
Who killed Cock Robin in brief? Cock Robin is probably 
regulated by FAA somewhere. [Laughter.]
    It flies, doesn't it? Or was he a little boy?
    Mr. Schellenberg. You always have me in that wonderful box. 
I can tell you, I am a good bureaucrat, and like any other 
bureaucrat, we would like to have more money that we can get. 
But what I can tell you is this: that where it has come to the 
question both in fiscal year 1999, plans for 2000, so far as 
the Administrator is concerned in providing and finding the 
dollars necessary to pursue these two critical initiatives. She 
has always been in the position of ensuring that we find the 
dollars to do so, so that I am convinced, whether it be a part 
of the 2000 process or whether it be a part of how we execute 
the budgets that we have, that we will find the dollars to make 
this happen.
    Mr. Horn. Well, I will let that one pass. [Laughter.]
    So, just let us know under oath if you have to, and if you 
have anything else to say, we will put in the record where the 
whole world can see it. [Laughter.]
    Environmental clean-up liability. I also sit beside--my 
other assignment is on Transportation and Infrastructure. I sit 
on that subcommittee, and we are very interested in this. Mr. 
Boehlert is pursuing some very good strategies on this, but the 
amount estimated for future clean-up of environmental waste, 
including fuel storage tanks, has increased dramatically since 
last year. The estimate increased by over $2.2 billion; that is 
an increase of over 237 percent. The obvious question to you, 
Mr. Schellenberg, is what has caused this huge increase and was 
something missed in prior years?
    Mr. Schellenberg. Mr. Chairman, unfortunately, that is 
something that I have little direct knowledge of. I will be 
happy to do some research for you and provide the information.
    [The information referred to follows:]

    The FAA reported, in Environmental and Disposal 
Liabilities, $1 billion in FY97 and $3.2 billion in FY98, an 
increase of $2.2 billion. Most of this increase, $1.5 billion, 
is the result of our greater recognition of, and our improved 
ability to estimate, the costs associated with the 
decommissioning of radars and navigational aids as Global 
Positioning Satellite (GPS) is implemented. As these facilities 
are decommissioned, it is incumbent that the FAA restores the 
land to its original condition. The remaining additional costs 
are associated with added costs for the replacement of fuel 
storage tanks; cleaning up and preventing releases of hazardous 
materials; and complying with OSHA and environmental mandates.

    Mr. Horn. Well, is this an FAA responsibility or is this is 
a Department of Transportation responsibility with all of your 
various components, Mr. Kleinberg?
    Mr. Kleinberg. Each organization determines its liabilities 
associated with all of those types of operational activities as 
they take place throughout facilities that they either have or 
have abandoned in some cases, and they usually go through an 
analysis of that and get the lawyers in to figure out what the 
upper levels are. So, we can, if you want, assemble it through 
the Department, Department-wide if you would like, but it 
generally comes--we will assemble it from the component 
agencies of the Department.
    Mr. Horn. But this figure is really tied, is it, to the 
FAA, this $2.2 billion?
    Mr. Kleinberg. Yes.
    Mr. Horn. And, so you have a bigger--few more billion, and 
I assume the railroad----
    Mr. Kleinberg. The Coast Guard, actually, has many, many 
facilities that they took over from Defense that have clean-up 
problems, Governor's Island being one.
    Mr. Horn. Yes, I have held hearings there, and you are 
right on that, and I can see where Coast Guard would have it no 
different than the Navy in reality which, by the way, I guess 
we authorized you two new Coast Guard cutters yesterday, 
because the Navy wouldn't give them to you, and that really 
ticked me off. I voted for it, but I told Secretary Perry when 
we were both in Panama together, he was looking at the military 
stuff and three of us were looking at the drug situation, and I 
said we need some platforms in the Puerto Rico to Panama area 
and up the west side of Mexico where we could track these drug 
planes which are just--they just sort of spit in your eye as 
they go over you, and they dump this stuff about 20 feet off 
the Puerto Rican sands or in Puerto Rico right under our noses.
    So, we were all ticked off, and we did unload on General 
McCaffrey that as far as we are concerned they ought to start 
checking everybody from Puerto Rico that lands anywhere in the 
mainland United States, because there is no question drugs are 
being brought in, and they were just helpless to follow the 
radar thing and a few Navy ships that nobody's using, keep a 
couple in the Persian Gulf, and give us help is my attitude 
here. So, anyhow you have two cutters coming out of us, 
assuming the appropriations came, and I am sure you are going 
to give a good case for that.
    I think the Coast Guard does a superb job. I didn't like 
you moving the 11th Coast Guard District from Long Beach, CA up 
to Alameda, but I think you do a superb job.
    Mr. Kleinberg. Thank you.
    Mr. Horn. Anyhow, so what has caused this thing now? Is 
this strictly FAA property or is it things they have funded 
through the Airport Improvement Fund that you get stuck with in 
terms of environmental waste?
    Mr. Kleinberg. I am informed that it is FAA property, sir.
    Mr. Horn. FAA property, OK. Do you think that is pretty 
accurate, Mr. Meche.
    Mr. Meche. Yes, sir, that is correct.
    Mr. Horn. I guess some might have said this questionable 
number impact the fiscal year 1999. You have the estimate for 
the fiscal year 2000. Are we even worse off now or will 
something be done between now and September 30?
    Mr. Schellenberg. I am informed we book the estimate each 
year, and there is no anticipation that it would go down by 
2000.
    Mr. Horn. OK. Mr. Meche, did the Inspector General look at 
this number and see if it made sense?
    Mr. Meche. We have not looked at that number, Mr. Chairman.
    Mr. Horn. OK, and I would like to know if you do look at 
it, will it possibly affect next year's opinion?
    Mr. Meche. I can certainly tell you we will look at it.
    [The information referred to follows:]

    [GRAPHIC] [TIFF OMITTED] T1686.152
    
    Mr. Horn. OK. We found with the Department of Defense, 
their environmental waste group, it just takes forever to get 
anything done. We will all be in Medicare 20 times over, I 
think, before they get something done, and then all these bases 
that have been closed sit there, and you can't put them into 
economic development or anything else.
    OK. GAO on the importance of financial statements. What the 
Inspector General has said they reported numerous areas in 
FAA's financial statements and several areas reported that they 
were unable to complete their audit due to a lack of records, 
similar reasons where we have discussed some of that, but I 
guess I would ask the General Accounting Office to explain to 
us for the record what it means, the ramifications, if FAA is 
unable to prepare reliable financial statements that can be 
audited?
    Ms. Calbom. You know, Mr. Chairman, the financial 
statements really are the public report card that an agency 
gives the taxpayers. It is similar to what any publicly held 
company reports to its shareholders. Shareholders are able to 
quickly look at what they got for their money, because 
company's report earnings per share; I mean, profit is the name 
of the game. As far as Government agencies, what taxpayers get 
for their money is outputs and outcomes, and there is an 
overall reporting scheme that the Federal Accounting Standards 
developed, and I was touching on it a little bit earlier.
    Basically, we have our budgetary statements now that are 
supposed to reconcile your budget activity for the year. Then 
you have your basic financial statements that tell you, ``OK, 
what did I spend that money on that I received? What are the 
investments the taxpayer made? What are the balances on the 
books related to those investments today?'' And then you have 
your performance reporting which is a fairly new concept in 
Government, but it is a very important one, because that is the 
piece where you say, ``All right, what did I get, and how much 
did it cost me?'' And when you get all those pieces together, 
then the taxpayer can start to say, and, more importantly, the 
Congress who is overseeing these activities, ``All right, was 
it worth it to me to receive that outcome for this much money? 
We budgeted this amount to this agency; here is how they spent 
it; here is what they got. Was it really worth it, and should 
we be shifting priorities?'' Across Government, we are far away 
from being able to do that, but you have to take things one 
step at a time, and the step that I think we are all here today 
focusing on that is critical to the whole process is getting 
these financial statements. That middle link has to be a good 
solid link or you will never get the rest of it.
    Mr. Horn. I agree with every word you said, Ms. Calbom. 
Your eloquence is right on the spot and headed in the right 
direction. There is no question that once Congress passed the 
Results Act, as we call the Performance Act--and we have 
strategic plans now going, and a lot of Federal agencies didn't 
have the slightest idea what we were talking about on the 
strategic plan, and yet every one of us that has been in local 
government or on the local Chamber of Commerce or running a 
university or whatever it is or a corporation that has stock on 
the New York Stock Exchange and so forth, all of those in the 
last 20 years have developed strategic plans. What is our 
mission? And just as you say so very well, how do we measure 
what we are accomplishing?
    And we will be looking at Australia and New Zealand that we 
have given quite a platform to here 2 years ago when we started 
in on that. They are the only two countries in the world with 
results-oriented governments. The only place in the United 
States I know it exists in government is Oregon. The State of 
Oregon has gone out and it isn't easy, as you know, to relate 
financial data to measurement of satisfaction of the clientele, 
but let us face it, we have trillions of dollars down the line 
that things are going to cost, and we have to figure out what 
do we do best with the most reasonable amount of money to 
please the taxpayers, which we are all here to serve, both in 
the executive branch and the legislative branch.
    So, I think that we are on the right track, especially when 
you can use the user fees, because I don't know how many people 
will take you into court if you didn't have a data base to back 
it up. I have seen it happen on the Airport Trust Funds all 
over the place, but I think you are on the right track, and I 
want to thank you all for testifying here today.
    It is obvious that we still have a great deal to go on 
financial accounting, but it is absolutely necessary. I think 
you obviously agree with that, and we certainly agree with you 
agreeing with that.
    If both Justice and Federal Aviation were corporations, 
they would be struggling to stay in business given the 
financial reports. Publicly held corporations have to 
accurately report their finances to stockholders, to boards of 
directors. Public agencies have to be held to the same high 
standard for their stockholders, namely, the taxpayers of the 
country, and I am glad to see the interest that both the 
General Accounting Office, the Inspector General, the 
Department of Transportation, and the Federal Aviation 
Administration has in this, and I am glad you joined the team, 
Mr. Schellenberg, because I am impressed with what you had to 
say and get on top of this situation.
    It is not easy; we all know it, but it is going to take a 
couple of years to turn this thing around, and that is true 
everywhere. All we can do is work steadily at it, and I wish 
you well, and I hope next year about this time you will have a 
lot more to say or you won't even be up here. [Laughter.]
    Mr. Schellenberg. I will opt for the second one.
    Mr. Horn. So, merry holidays, Merry Christmas. Thank you 
very much for coming.
    Mr. Schellenberg. Thank you.
    Mr. Kleinberg. Thank you.
    Mr. Meche. Thank you.
    Ms. Calbom. Thank you, Mr. Chairman.
    Mr. Horn. I am going to thank the staff that prepared this 
fine hearing, and we can start with J. Russell George, the 
staff director and chief counsel--he is off on other business; 
Bonnie Heald, I see in the corner back there, director of 
communications, professional staff member for the Subcommittee 
on Government Management, Information, and Technology, and the 
right arm on this hearing happens to be the left arm, Larry 
Malenich who is the GAO detailee; Mason Alinger, over there in 
the corner, principal staff assistant and clerk, and Kacey 
Baker, an intern, was here, but she helped on this; Faith 
Weiss, for the minority; Ellen Rayner, the chief clerk for the 
minority and our two court reporters, Kristine Mattis--is it, 
have I got that right? And Carl Huang. I thank you all, and, 
with that, this hearing is adjourned.
    [Whereupon, at 4:10 p.m., the subcommittee was adjourned.]

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