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




 CAN THE FEDERAL GOVERNMENT BALANCE ITS BOOKS? A REVIEW OF THE FEDERAL 
                   CONSOLIDATED FINANCIAL STATEMENTS

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

                                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 31, 1999

                               __________

                           Serial No. 106-73

                               __________

       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
61-840                     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 31, 1999...................................     1
Statement of:
    DeSeve, G. Edward, Deputy Director for Management, Office of 
      Management and Budget, accompanied by Deidre A. Lee, 
      Administrator, Office of Federal Procurement Policy, Office 
      of Management and Budget; and Donald V. Hammond, Fiscal 
      Assistant Secretary, Department of the Treasury............    42
    Walker, David M., Comptroller General of the United States, 
      General Accounting Office, accompanied by Gene L. Dodaro, 
      Assistant Comptroller General, General Accounting Office...    13
Letters, statements, et cetera, submitted for the record by:
    DeSeve, G. Edward, Deputy Director for Management, Office of 
      Management and Budget, prepared statement of...............    46
    Hammond, Donald V., Fiscal Assistant Secretary, Department of 
      the Treasury, prepared statement of........................    61
    Horn, Hon. Stephen, a Representative in Congress from the 
      State of California, prepared statement of.................     3
    Turner, Hon. Jim, a Representative in Congress from the State 
      of Texas, prepared statement of............................     7
    Walker, David M., Comptroller General of the United States, 
      General Accounting Office, prepared statement of...........    18

 
 CAN THE FEDERAL GOVERNMENT BALANCE ITS BOOKS? A REVIEW OF THE FEDERAL 
                   CONSOLIDATED FINANCIAL STATEMENTS

                              ----------                              


                       WEDNESDAY, MARCH 31, 1999

                  House of Representatives,
Subcommittee on Government Management, Information, 
                                    and Technology,
                            Committee on Government Reform,
                                                    Washington, DC.
    The subcommittee met, pursuant to notice, at 10 a.m., in 
room 2154, Rayburn House Office Building, Hon. Stephen Horn 
(chairman of the subcommittee) presiding.
    Present: Representatives Horn, Davis, and Turner.
    Staff present: J. Russell George, staff director and chief 
counsel; Bonnie Heald, director of communications/professional 
staff member; Mason Alinger, clerk; Paul Wicker, Kacey Baker, 
and Richard Lukas, interns; Faith Weiss, minority counsel; Jean 
Gosa, minority clerk; and Earley Green, minority staff 
assistant.
    Mr. Horn. A quorum being present, the Subcommittee on 
Government Management, Information, and Technology will come to 
order.
    Last year, the Nation's first ever governmentwide audit 
provided a comprehensive accounting of a multitude of financial 
problems with the executive branch of the Federal Government. I 
am disheartened to report that the results of the fiscal year 
1998 audits are equally dismal. Once again, billions of 
taxpayers' dollars were lost to waste, fraud, and 
mismanagement, or just can't be accounted for. This audit is 
required by the Government Management Reform Act of 1994, a 
bipartisan law in the 103d Congress.
    The law specified that no later than March 31, 1998 and 
each year thereafter, the Secretary of the Treasury, in 
coordination with the Director of the President's Office of 
Management and Budget, shall annually prepare and submit to the 
President and Congress an audited financial statement for the 
preceding fiscal year. The audited financial statement should 
cover all accounts and associated activities of the executive 
branch of the Federal Government.
    The required audit conducted by the legislative branch's 
General Accounting Office is being released today. The audited 
report shows that the Federal Government is unable to report 
accurately to the taxpayers or to Congress how it spent more 
than $1.8 trillion in fiscal year 1998.
    The audit report also shows that Federal agencies were 
unable to safeguard an account for $1.6 trillion in government 
assets, and estimates of future costs are off by billions of 
dollars.
    Also today we are issuing our second report card 
summarizing the results of the 1998 audit reports on the 24 
largest Federal agencies. As you can see from the grades, there 
has been very little improvement. In fact, some agencies have 
taken a step backward.
    Of the 17 agencies that submitted the required report, 5 
received F's, 6 received D's. Only two agencies, the National 
Aeronautics and Space Administration and the National Science 
Foundation, earned A's. Perhaps some of those distinguished 
scientists could be loaned out to help unscramble the tangled 
financial web which seems to plague the few other agencies.
    The grades provide a summary status of these agencies that 
have submitted their reports. But as of yesterday, 7 of the 24 
agencies still had not submitted reports, even though it is 1 
full month after the legal filing date and 6 full months after 
the end of the fiscal year.
    You will notice that these agencies, which include the 
Departments of Commerce, Education, Interior, State, and 
Transportation, received F's on their report card. It is 
troubling to this subcommittee that they are unable to provide 
this report in a timely way.
    Both the General Accounting Office's audit report and the 
individual agency reports weave a woeful tale of poor financial 
management practices within the Federal Government and the 
financial risks created by those weaknesses. We must pay close 
attention to the details of these reports because of their 
wide-ranging effects.
    This report is our second warning. Next year there must be 
significant improvement.
    I thank our distinguished witnesses for being here today to 
discuss the results of this comprehensive and important effort. 
We are delighted to have the new Comptroller General of the 
United States, Mr. David Walker, who is in charge of the 
General Accounting Office. It is Mr. Walker's first time before 
this subcommittee, and we welcome him. Accompanying him is 
Assistant Comptroller General Gene Dodaro.
    Also before us are a number of other key witnesses from the 
Office of Management and Budget and the Department of the 
Treasury, the Honorable G. Edward DeSeve, Deputy Director for 
Management, Office of Management and Budget. We wish him well 
as he moves to the private sector. This is his last day 
technically on the job for the executive branch. He has done a 
fine job in a very difficult circumstance.
    He is accompanied by Ms. Deidre A. Lee, the Administrator, 
Office of Federal Procurement Policy, Office of Management and 
Budget. The other key witness is Dr. Donald V. Hammond, the 
Fiscal Assistant Secretary of the Department of the Treasury.
    I now yield to the ranking Democrat, Mr. Turner of Texas, 
who will have some opening comments, and then to the gentleman 
from Virginia, Mr. Davis.
    Mr. Turner.
    [The prepared statement of Hon. Stephen Horn follows:]

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    [GRAPHIC] [TIFF OMITTED] T1840.002
    
    Mr. Turner. Thank you, Mr. Chairman. The second audit of 
the Federal Government's books submitted to us today reflects a 
significant effort by the administration and the General 
Accounting Office.
    I want to commend the people who are responsible for the 
second timely audit. It would not have been possible without 
the dedication and hard work of a number of employees at the 
General Accounting Office, the Department of the Treasury, and 
the Office of Management and Budget.
    The American taxpayers deserve to know when, where, and how 
their tax dollars are being spent. The President in the 
National Performance Review under Vice President Gore embraced 
this principle early in their first term. In September 1993, 
the National Performance Review recommended the preparation of 
an annual consolidated financial report and the establishment 
of comprehensive governmentwide accounting standards. These 
recommendations became law as part of the Government Management 
Reform Act passed by the Congress and signed by the President.
    Government financial audits highlight a number of serious 
financial management concerns and show the extent to which 
certain Federal agencies have experienced difficulty in keeping 
track of their property and equipment, which is significant, 
because without maintaining reliable inventories, it is 
impossible for agencies to make new purchases and purchase 
supplies in a cost-effective manner.
    As we have heard prior to today's testimony, the Department 
of Defense, Department of Agriculture, and the Department of 
Transportation have experienced similar property and equipment 
accounting problems.
    Another area of concern that has been revealed deals with 
the various agencies' abilities to gain a clear picture of the 
scope of their respective liabilities. Without a clear 
understanding of the scope of liabilities, agencies cannot 
adequately minimize costs to the taxpayers.
    For instance, the Departments of Defense and Energy have 
experienced difficulty in estimating among their overall 
potential liabilities their respective environmental 
liabilities. Initially, some of the largest credit agencies, 
such as the Departments of Agriculture and Veterans Affairs, 
still lack historical data on their credit programs, which is 
required by the Federal Credit Reform Act of 1990 and by 
Federal accounting standards since fiscal year 1992.
    Simply put, these audits impose new financial discipline on 
Federal agencies and provide new information relating to the 
cost of Federal programs. For these reasons, there should be 
bipartisan support for this audit effort and for the improved 
financial management that they have rendered.
    I notice that the majority staff has assigned grades to the 
various audits. I notice there are a lot of D's and F's on the 
report. I might offer a word of caution, because it is my 
opinion, Mr. Chairman, that the letter grades may be an 
oversimplified reflection of what is actually happening in 
these various audits.
    Clearly there have been improvements in the audited 
practices and performance of these agencies in the last 3 years 
that we have mandated to be performed. Agencies are showing 
definite improvement in audit results.
    Only 1 of the 24 major agencies had reliable financial 
statements, which we call a clean or unqualified opinion, in 
1993. However, by fiscal year 1997, 11 agencies received clean 
opinions, and this year the Office of Management and Budget 
anticipates that 13 agencies will receive clean opinions. 
Overall, we clearly have witnessed steady progress from our 
Federal agencies and improved audit results.
    I have a chart that I think illustrates this very clearly, 
which shows the results of the audits for the past several 
years. You will note on there that there has been steady 
progress. In 1993, as I said, only one agency received a clean 
audit. In 1996, we had six. By 1997, we had 11. In 1998 we had 
13.
    I am pleased to see progress. That does not indicate that 
there is not much work to be done, but I do want to underscore 
that the results of grading the agencies may not fairly reflect 
that there has been significant progress.
    I also found it interesting that the minority staff, Mr. 
Chairman, took the majority staff's grading approach and 
applied it to the Congress. I have another chart that shows 
these results. If we looked at the Congress itself and applied 
the same standards applied to our 24 Federal agencies, we would 
see that the Congress, measured by the three standards of the 
grading system, would receive a D-minus.
    I know the chairman is very much aware, as I am, that the 
Congress has made significant progress in the last several 
years in its auditing results. So while there is much work yet 
to be done, we should at least acknowledge, I think, the fact 
that there has been progress made, and we hope that progress 
will continue.
    Clearly we need to eliminate some of the obstacles that we 
will hear about today that would result in a clean opinion, and 
I hope all of us share, as I know the chairman does, the 
importance of the auditing work that is ongoing and the 
importance of approaching it in a bipartisan way.
    Thank you, Mr. Chairman.
    [The prepared statement of Hon. Jim Turner follows:]

    [GRAPHIC] [TIFF OMITTED] T1840.003
    
    [GRAPHIC] [TIFF OMITTED] T1840.004
    
    [GRAPHIC] [TIFF OMITTED] T1840.005
    
    [GRAPHIC] [TIFF OMITTED] T1840.006
    
    [GRAPHIC] [TIFF OMITTED] T1840.007
    
    Mr. Horn. I thank the gentleman, and appreciate his 
comments. I would merely say, with reference to Congress, after 
210 years the first audit in the history of the Congress was 
the one that the Speaker commissioned when we took over in 
1995, and every Member was sent a complete audit of the 
Congress for the first time in history.
    I now yield to the gentleman from Virginia, Mr. Davis.
    Mr. Davis. Thank you, Mr. Chairman. I am not sure whether 
to argue if the glass is half full or half empty. I count, from 
the material given to us, we have eight agencies that are in 
compliance. We have a number of incompletes.
    The ones that I have, for the record, in compliance are 
NASA, National Science Foundation, GSA, Labor, the Social 
Security Administration, FEMA, HUD, and the Nuclear Regulatory 
Commission. We have others that are qualified, and we have had 
no reports yet from Commerce, Education, EPA, Interior, Small 
Business Administration, State, and DOT. Hopefully some of 
these will bring themselves into compliance. That is eight.
    Even if we had 13 clean opinions, that would mean 11 are 
not clean opinions after several years of working with this. If 
these were my kids and that was their report card, they would 
be grounded and they would be getting some tutorial to try to 
bring them up to snuff, even though progress may be slightly in 
the positive direction.
    Also, if this was a taxpayer and they submitted records 
like this, it would be referred to the U.S. Attorney's Office. 
This is just unacceptable in many of these cases with what is 
coming forward.
    Let me just say, I look forward to the testimony today. For 
Ed DeSeve, I think this will be his last testimony before an 
agency. Ed, good luck in the private sector. I have enjoyed 
working with you on a number of projects, and I think I can 
safely say for all of us that you have left this city a lot 
better than you found it. When you leave government, that is as 
good as it gets, I think.
    And you have Dee Lee with you, and you have worked on a 
number of projects in my neighborhood, and Don Hammond, so I 
can't beat up on you too much.
    But Ed, we really appreciate the efforts that you have 
made. You have made a huge difference for the District of 
Columbia and the Federal Government. You will be missed in 
public service.
    Mr. Horn. I thank the gentleman very much.
    We will now start with the Comptroller General. We welcome 
you, and since we are an investigating committee, all the 
subcommittees of Government Reform have all witnesses sworn in, 
so Comptroller General and Mr. Dodaro, if you will rise.
    [Witnesses sworn.]
    Mr. Horn. The clerk will note both witnesses have affirmed 
the oath.
    Your statement is automatically put in the record, as will 
the other witnesses' statements, once we introduce you. Please 
feel free to proceed, whether you want to summarize it, whether 
you want to read it. I have read it all and it is a very 
thoughtful statement, as we would expect. We would welcome your 
comments.

   STATEMENTS OF DAVID M. WALKER, COMPTROLLER GENERAL OF THE 
 UNITED STATES, GENERAL ACCOUNTING OFFICE, ACCOMPANIED BY GENE 
 L. DODARO, ASSISTANT COMPTROLLER GENERAL, GENERAL ACCOUNTING 
                             OFFICE

    Mr. Walker. Thank you, Mr. Chairman. It is a pleasure to be 
here today. I will summarize my statement, since the entire 
statement has been put into the record.
    I might note, Mr. Chairman, that you obviously don't grade 
on a curve, and that it is my understanding that if GAO had 
been applied to your ratings, that we might have gotten an A. 
At least that is my understanding. I think it is important that 
we lead by example, because after all, we are the agency that 
is overseeing others. I think it is important for us to do 
that.
    Mr. Chairman, members of the committee, I am pleased to be 
here today to discuss our report on the U.S. Government's 
financial statements for fiscal year 1998, and to underscore 
the importance of continually improving how Federal departments 
and agencies manage the finances of our National Government.
    The Federal Government has underway the implementation of 
important legislative reforms to promote greater accountability 
in managing the finances of our National Government. Timely, 
accurate, and useful information has not been available across 
government to assure financial accountability and to help 
continuously improve the economy, efficiency, and effectiveness 
of our government.
    It is essential to improve how Federal departments and 
agencies manage our finances in order to achieve better 
accountability at the Federal Government level.
    Fortunately, the President and the Office of Management and 
Budget have taken financial management in general and the 
annual audit in particular very seriously, and they have made 
it a priority. As a result, considerable effort is being made 
by agencies to achieve the mandate of achieving a clean 
financial statement opinion and eliminating material control 
weaknesses from their financial reporting. Steady improvements 
in financial accountability are occurring.
    However, several major agencies are not yet able to produce 
auditable financial statements on a consistent basis, and they 
have major obstacles to overcome. Similar challenges exist in 
producing reliable statements for the entire U.S. Government.
    The historic, longstanding inattention to financial 
management issues in the government, combined with the size and 
complexity of government operations, make corrective actions 
difficult, but imperative. Moreover, the pace of improvement 
will be greatly influenced by the progress government 
organizations are able to make in, first, modernizing their 
information systems and internal controls; second, revamping 
their human capital practices to enhance capacity; and third, 
implementing change management strategies to achieve the 
discipline needed to follow sound financial management and 
reporting practices.
    I might add a fourth, Mr. Chairman. It is absolutely 
critical that there be sustained attention and commitment at 
the very top of all the departments and agencies, as well as by 
the President and the Office of Management and Budget, to get 
this job done and to make continuous improvement.
    The executive branch recognizes the extent and severity of 
existing deficiencies. Addressing them will continue to require 
concerted improvement efforts across government. With concerted 
effort, the Federal Government can continue to make progress 
toward achieving accountability and generating reliable 
financial and management information on a regular basis.
    It is critically important, Mr. Chairman, that we have this 
information on a regular basis, not just at year end. I will 
come back to that later.
    The balance of my remarks, Mr. Chairman, will be focused on 
several points: first, outlining the findings of our report and 
the financial statements of the U.S. Government for fiscal year 
1998; underscoring the critical need to fully implement 
legislative reforms; emphasizing that unqualified or so-called 
``clean'' opinions must be accompanied by timely and reliable 
data, stronger controls, and better financial and management 
information systems that will help to continuously improve the 
economy, efficiency, and effectiveness of government.
    Stated differently, receiving a clean audit opinion is not 
an end in and of itself. It is an important and objective 
milestone which we must strive for. However, we need to make 
sure that the systems and controls are in place to assure 
timely, accurate, and useful information to make informed 
decisions, and to improve the economy, efficiency, and 
effectiveness of government on an ongoing basis.
    I would like to highlight the fact that human capital must 
absolutely become a more critical part of the management reform 
agenda in order to achieve the objectives of the Results Act 
and to move toward a more performance-based government. I would 
urge that the focus be on the term ``accountability,'' not 
accounting. We are called the General Accounting Office, but we 
are about accountability, and financial management is one 
element of accountability, but there are others that are 
important as well.
    With regard to results, Mr. Chairman, last year the GAO 
reported in the first ever report on the U.S. Government's 
financial statements for fiscal year 1997, that because of 
serious deficiencies in the government systems, recordkeeping, 
documentation, financial reporting and controls, amounts 
reported in the financial statements and related notes do not 
provide a reliable source of information for decisionmaking by 
the government or the public.
    These deficiencies also affect the reliability of the 
financial statements and the government's ability to measure 
the full cost and financial performance of programs and to 
manage related operations.
    Our report on the U.S. Government's financial statements 
for fiscal year 1998, which is being released today, has 
reached the same conclusion. Specifically, due to these 
deficiencies, we are unable to express an opinion on the 
financial statements of the U.S. Government.
    Major challenges include the Federal Government's inability 
to: 1) properly account for and report on billions of dollars 
of property, equipment, materials, and supplies, and certain 
stewardship assets; 2) properly estimate the cost of most major 
Federal credit programs and the related loans receivable and 
loan guarantee liabilities; 3) estimate and reliably report 
material amounts of environmental and disposal liabilities and 
related costs; 4) determine the proper amount of various 
reported liabilities, including post retirement health benefits 
for military employees, accounts payable, and other 
liabilities; 5) accurately report major portions of the net 
cost of government operations; 6) determine the full extent of 
improper payments that occur in major programs and that are 
estimated to involve billions of dollars annually; 7) ensure 
that all disbursements are properly recorded; and 8) properly 
prepare the Federal Government's financial statements, 
including balancing the statements, accounting for billions of 
dollars of transactions between governmental entities, in other 
words, intragovernmental transactions between one department 
and another, and properly and consistently compiling the 
information to present consolidated financial statements.
    Overall, we have found significant financial systems 
weaknesses and problems with fundamental recordkeeping and 
financial reporting, incomplete documentation, and weak 
internal controls, including computer controls. These 
deficiencies continue to prevent the government from accurately 
reporting a significant portion of its assets, liabilities, and 
costs, and affect the reliability of the financial statements 
and the government's ability to accurately measure the full 
cost and financial performance of programs and to manage its 
operations.
    Mr. Chairman, you noted earlier the current status of 
individual agency audit efforts, and Ranking Minority Member 
Turner also noted the progress made over the last several 
years, but we have still got a ways to go. I think it is 
important to note that a number of agencies still have not 
completed their required audits, and yet we are a number of 
months past the fiscal year end.
    This in and of itself serves to demonstrate the challenges 
and the complexities that these agencies face, and the 
underlying issues associated with the lack of adequate 
management information systems to prepare timely, accurate, and 
useful information for the audit, much less for day-to-day 
decisionmaking and ongoing operations.
    Producing audited financial statements by the March 1 
statutory deadline is still a challenge, but improvements were 
made this year by certain agencies; in particular, the 
Department of Health and Human Services. In addition, some 
agencies for the first time have received clean audit opinions 
or unqualified audit opinions. I might note, the Department of 
Housing and Urban Development, it is my understanding, has 
received a clean opinion.
    We have designated as high-risk certain agencies with the 
most serious challenges: Financial management at DOD, IRS, the 
Forest Service, and the FAA. All, however, have efforts 
underway to address these deficiencies. Importantly, the 
Customs Service was removed from our high-risk list due to 
their concerted efforts and demonstrated progress in achieving 
positive results.
    Audited financial statements are essential to providing an 
annual public scorecard on accountability. However, an 
unqualified or clean audit opinion, while certainly being 
important and an objective milestone, is not an end in and of 
itself.
    For some agencies, the preparation of financial statements 
requires considerable reliance on ad hoc programming and 
analysis of data produced by inadequate systems that are not 
integrated or reconciled, and often require significant audit 
adjustments. Some agencies undertake heroic efforts to obtain 
reliable year-end data that can be audited, but these efforts 
are not backed up by fundamental improvements in the underlying 
financial and management information systems and control 
mechanisms to support ongoing program management and 
accountability.
    As a result, these heroic efforts will not achieve the 
intended results of the CFO Act over the long-term; namely, the 
CFO Act is intended to enhance overall accountability, and 
assure that the financial and management information systems 
and controls are in place to continuously improve the economy, 
efficiency, and effectiveness of government.
    To do so, systems must provide timely, accurate, and useful 
information for informed decisionmaking. Improving financial 
and management information systems is essential.
    For fiscal year 1997, agency financial auditors reported 
that 20 of 24 major agencies' financial management systems did 
not comply with the act's requirements. Similar results are 
expected for fiscal year 1998. In addition, agencies face the 
year 2000--Y2K--computing challenge of assuring that their 
systems can function properly as we change to the new 
millennium.
    This task is appropriately taking priority, and will 
temporarily sidetrack agencies from much needed other 
improvements in their systems.
    Strengthening computer controls is vital as well. We 
continue to find serious and widespread computer security 
weaknesses that place enormous amounts of Federal assets at 
risk of fraud and abuse, financial information at risk of 
unauthorized modification or destruction, sensitive information 
at risk of inappropriate disclosure, and critical operations at 
risk of disruption.
    The GAO, as you know, Mr. Chairman, has done a tremendous 
amount of work with the Congress to provide leadership, along 
with working with the administration on the Y2K effort. It is 
very clear that computer security will be fast on its heels 
once we get past the new millennium.
    Human capital, Mr. Chairman, is an integral part of 
financial and information management reform, and indeed, any 
management initiative. It involves acquiring, developing, and 
retaining the human capital needed to achieve results.
    Enlightened leaders understand that effectively managing 
employees, otherwise known as human capital, is essential to 
maximizing the effectiveness of any organization's performance. 
Only when the right employees with the right skills are on 
board and are provided with the training, tools, structure, 
incentives, and accountability to work effectively, is 
organizational success possible.
    As it relates specifically to financial management, the CFO 
Act recognizes the importance of leadership in creating CFO 
positions throughout government and in establishing a goal of 
improving the qualifications of financial management personnel 
throughout government.
    While some attention to delineating critical core 
competences, needed skills, and appropriate training has 
occurred in the government, a great deal more needs to be done.
    We plan to give greater attention to recommending the ways 
that the government can improve the strategic approaches to 
human capital planning, the acquisition and development of 
staff with skills to meet critical needs, and the creation of 
performance-oriented organizational cultures, while protecting 
reasonable merit principles.
    Without a firm foundation of reliable, timely, accurate, 
and useful financial and management information, the many 
reforms underway across government to move to a performance-
based focus will never be successfully fulfilled. Only then can 
the government assure adequate accountability to taxpayers, 
manage for results, and help decisionmakers make timely and 
well-informed judgments.
    Experimentation is now underway across government to 
develop single accountability reports on individual departments 
and agencies. These reports will consolidate and integrate 
audited financial statements and reporting under the Results 
Act and other related laws, to show the degree to which an 
agency meets goals, at what cost, and will aid the reader in 
determining whether the agency is well run.
    I might note that the Social Security Administration is 
leading the way in this effort, and should be commended for it. 
Reliable accountability reports, including information on the 
full costs and results of carrying out Federal activities, will 
help to correct the problem of a lack of complete and reliable 
information that has been a source of concern for congressional 
and agency decisionmakers for decades, and it will greatly aid 
decisionmaking for our National Government.
    Reliable financial information also is essential for 
analyzing the government's financial condition and helping 
inform the budget deliberations by providing additional 
information beyond that provided in the budget.
    In closing, Mr. Chairman, I would like to commend you and 
the subcommittee for its diligent oversight and actions to 
improve financial management of our Federal Government. Your 
hearings have helped to underscore the critical importance of 
the issue, and to make progress at a more rapid pace.
    I look forward to working with you and the other members of 
this subcommittee as we strive to enhance accountability and to 
continuously improve the economy, the efficiency, and the 
effectiveness of the Federal Government. Thank you, Mr. 
Chairman.
    [The prepared statement of Mr. Walker follows:]

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    Mr. Horn. We thank you for that very fine statement.
    What we are going to do now is alternate between Members 
here of 5 minutes each, and as chairman, I will yield my first 
5 minutes to the gentleman from Virginia, Mr. Davis.
    Mr. Davis. Thank you, Mr. Chairman.
    Mr. Walker, you talked about a clean audit opinion, while 
certainly important and almost a starting point, is not an end 
in itself. Could you just briefly elaborate on that?
    Mr. Walker. Obviously, a clean audit opinion or an 
unqualified opinion is generally recognized and is an objective 
measure. It is one that we should strive for, and ultimately 
should hope to achieve clean audit opinions on all agencies and 
departments, as well as at the overall Federal Government 
level.
    However, it is possible to achieve a clean or unqualified 
audit opinion and still have fundamental problems with regard 
to the financial and management information systems, and have 
material control weaknesses that subject the agency to 
potential fraud, waste, abuse, and mismanagement.
    As a result, while we want to get the clean audit opinion, 
we want to make sure that structural improvements are made, 
too, at the same time.
    Mr. Davis. Without a clean audit opinion, though, it is 
much more difficult to get at the core issues, isn't it?
    Mr. Walker. I would say that one of the benefits of 
striving for a clean audit opinion is it focuses you on these 
underlying issues. However, it is possible and, in fact, it has 
already occurred, as evidenced by the summary sheet; some 
agencies that have clean audit opinions have not dealt with the 
underlying problems and need to deal with the underlying 
problems, because it is possible, through heroic efforts, to do 
a tremendous amount of work as of the beginning of the year and 
the end of the year to get a clean audit opinion, but yet the 
agencies don't have the systems to make ongoing management 
decisions.
    Mr. Davis. Now, to make the governmentwide financial 
statements balance, Treasury recorded a net $24 billion item 
which it labeled unreconciled transactions. If this number is a 
net number, what is the gross number or real amount of the 
difference?
    Mr. Walker. We can't tell you that, Congressman. If we knew 
what the gross number was, I think we would be able to make 
more progress in allocating it properly. That is the net number 
and it is one of the reasons that we can't express an opinion.
    Mr. Davis. But it could literally----
    Mr. Walker. Gene.
    Mr. Dodaro. We do know, for example, Mr. Davis, that in 
just the intergovernmental accounts or transactions that 
occurred, there was a net difference of about $250 billion. So 
we don't know exactly what the total gross differences are, but 
there are a number of problems that occur. One is the fact that 
Treasury records do not agree with the agency records in all 
cases, and there are a lot of unreconciled transactions. That 
is No. 1.
    No. 2 are these intergovernmental transactions. The 
government does a tremendous amount of business among agencies. 
Agencies cannot eliminate all of those transactions when it 
comes to the Treasury level. Treasury thus has difficulty 
reconciling those transactions. So the amounts that are out of 
balance also includes adjustments to the agency statements that 
come in. It is not yet clear that the data that are on these 
agency individual statements is the same data that Treasury is 
using to roll into the governmentwide statements.
    Progress has been made this past year in providing greater 
certification that that has happened, but that is why the 
process of compiling these statements is still a problem.
    Mr. Davis. If the taxpayers sent this kind of form up to 
the IRS, what would be the reaction, do you think?
    Mr. Walker. The IRS would probably be less lenient.
    At the same point in time, one has to recognize----
    Mr. Davis. It would spark an investigation if you sent 
these kinds of records up, wouldn't it, if you were a normal 
taxpayer, a corporate business?
    Mr. Walker. I couldn't tell you that, Congressman.
    Mr. Davis. You don't think it would; they would say, this 
is fine, if the numbers don't add up?
    Mr. Walker. I didn't say it was fine. They would be very 
concerned about it, there is no question about it. We have to 
keep in mind----
    Mr. Davis. Very concerned? It could in fact be a referral, 
couldn't it?
    Mr. Walker. It could. I think we have to keep in mind that 
unlike the private sector, where audits have been in existence 
for decades, and even, frankly, in the State and local 
government sector where audits have been in existence for a 
couple of decades, the Federal Government rightly or wrongly is 
a laggard in this regard. We are a fairly new player to having 
audited financial statements.
    I think that we should have had better financial and 
management information systems all along. But the fact that we 
are now having this audit demonstrates a lot of the challenges 
that existed before that had not been brought to light.
    Mr. Davis. I understand that the Department of Defense 
Inspector General reported that the Department of Defense made 
over $1.5 trillion in adjustments to its financial records in 
an attempt to prepare financial statements.
    Is that possible? Is that number accurate?
    Mr. Walker. My understanding is that is correct.
    Mr. Davis. What does this tell us about the state of 
confusion over there?
    Mr. Walker. I would say that the Defense Department 
probably represents the single largest challenge in the area of 
financial management. It probably represents also----
    Mr. Davis. It is probably half the spending of all the 
agencies, right?
    Mr. Walker. It is half of discretionary spending, I think. 
As you know, mandatory spending keeps going up every year. 
Mandatory spending is about 70 percent of the Federal budget. 
It is a major challenge, and it is not only a challenge with 
regard to financial management, Congressman, it is also a 
challenge with regard to virtually every other area of 
management: strategic planning, human capital, information 
technology, et cetera.
    Mr. Davis. Let me ask just one last question. You talked 
about human capital, effectively managing employees, and the 
challenge in an information age.
    There is a worldwide and certainly a national and regional 
shortage of finding qualified people to do things. We see this 
every day in the private sector, where they are bidding up 
people. Of course, in private companies you have stock options 
and a whole host of what we call golden handcuffs to hold onto 
people and retain them.
    The government does not have that available. Are current 
government compensation levels adequate to attract key managers 
in these areas? Or is that just something maybe you are not--
you haven't focused on?
    Mr. Walker. I was in charge of Arthur Andersen's global 
human capital practice, so compensation is something I know a 
little bit about. Obviously, the Federal Government is not and 
never will be competitive with the private sector with regard 
to compensation. We rely to a great extent on getting 
individuals who are dedicated to public service to come here.
    There are, however, real, serious issues we need to look at 
in the compensation area in the Federal Government, especially 
for certain critical skills where there is a tremendous 
imbalance. I think there is a need for comprehensive human 
capital reform in the Federal Government, and compensation is 
one of the areas we need to look at.
    Mr. Davis. I would just note that I agree with that. We had 
FEPCA a few years ago, the Federal Employees Pay Comparability 
Act. Every year the administration has come in well under the 
numbers that would have been recommended in keeping that up. It 
seems in some of these very critical areas we are losing 
people. In procurement we are losing people. We are losing 
people in key management positions, where they can walk across 
the street and get significantly more money, compensation, and 
a career path, and the Federal Government today just doesn't 
offer the same kind of opportunities.
    Maybe we are asking our agencies to do things that, under 
the current compensation formulas, are very, very difficult to 
do. I would just leave that parting thought with you.
    Thank you very much, Mr. Chairman.
    Mr. Horn. I completely agree with the gentleman from 
Virginia. We are delighted to have a number of dedicated public 
servants before us today, both you in the legislative branch 
and those that are to come in the executive branch.
    I yield 5 minutes to the gentleman from Texas, Mr. Turner.
    Mr. Turner. One of the things that I would like for you to 
explain to put everything in context, I know when you do these 
audits and come up with less than perfect opinions, that it 
could mean that there was a lack of documentation and evidence 
furnished by the respective agency, or it could be that there 
is something there that would show us that there is some fraud 
or waste and abuse.
    Could you give me an example of something that is found in 
these audits that would clearly show us that there is fraud or 
waste or abuse in that agency, as compared to something that is 
found that we really don't know until we look deeper?
    Mr. Walker. I will start, and then ask Mr. Dodaro if he 
wants to add to it.
    I think the absence of effective internal controls is--
where you have material control weaknesses over disbursements, 
for example--represents an area where you clearly have an 
opportunity for waste, fraud, abuse, or mismanagement.
    One area where progress has been made in this regard is 
Medicare, where they have estimated for the last several years 
the amount of improper payments.
    A lot of reasons can lead to an improper payment. Part of 
this was because of the focus that was placed on this issue as 
a result of the audit of HCFA and HHS. The amount of improper 
payments, fortunately, has come down from about $20 billion a 
couple of years ago to I think about $12.6 billion this year.
    So HCFA is making progress, but a lot of the reasons 
improper payments are possible is because of the lack of 
adequate internal controls. But again, one of the benefits of 
this audit is that agencies are now focused on it, and they are 
trying to make progress.
    Gene.
    Mr. Dodaro. I think the area of improper payments that the 
Comptroller General was just noting is probably one of the most 
vivid examples where the financial audits have served to 
quantify how much money is going out of those programs that 
should not be.
    The area of Medicare is a clear example. The reason is it 
ranges from inadvertent error to fraud and abuse. We know in 
the Medicare area that there is a significant amount of fraud 
and abuse of that system.
    Other areas have been rent subsidies for the Housing and 
Urban Development program, the Supplemental Social Security 
program, the SSI program. They have been able to quantify 
overpayments, so that has been very effective.
    Also in the computer security area, we know, for example, 
the SSA IG found employees stealing, identity fraud, that led 
to the creation of false Social Security forms and subsequent 
issues. We also know at DOD that they and we have found in a 
number of cases where embezzlements have occurred.
    The other area is in safeguarding assets. The Federal 
Government has a tremendous amount of inventory, property, and 
sometimes those assets are not properly safeguarded and could 
be subject to theft or unnecessary deterioration.
    So it is a combination. We certainly have those items that 
you mentioned. There is an awful lot of documentation that is 
not there so that leaves a lot of questions unresolved. So it 
is a combination of both issues.
    Mr. Turner. Mr. Walker, are you satisfied that once these 
audits are done, that the agencies actually take the results of 
them seriously and begin to try to resolve the problems that 
the audits reveal?
    Mr. Walker. It is clear to me that by the President making 
financial management a priority and setting goals for having 
clean audit opinions for all the agencies, as well as the 
Federal Government, and with the Office of Management and 
Budget's followup, that they are taking it a lot more seriously 
today than they were several years ago. Progress is being made.
    However, we have a ways to go. One of the challenges we 
face is that agencies have to deal with new reporting standards 
and new accounting standards that have become effective. Some 
have a difficult time being able to deal with that because of 
some of the inherent weaknesses in their financial and 
information systems.
    Mr. Turner. One of the things that disturbs me the most 
about the results that we are looking at today is the seven 
agencies that have failed to complete their audit by the March 
1st deadline.
    I guess I could reserve this question also for Mr. DeSeve, 
but I would like to know why these agencies did not meet the 
statutory deadline.
    Mr. Walker. I think it is best to direct that question to 
Mr. DeSeve. It is my understanding that several of these 
agencies had difficulty in dealing with some of the new 
accounting standards and the new reporting requirements that 
were effective for this year. That could be one of the reasons. 
But I would suggest that you ask him about that.
    I think it is a problem, however, that here we are, March 
31st, and the fiscal year end was September 30, and we are 1 
month past the deadline for the agencies to present their 
audited financial statements, and they still haven't done that. 
That shouldn't happen. If that was the case in the private 
sector, you would have serious problems with getting credit and 
your stock price would probably be adversely affected.
    Mr. Turner. I look forward to hearing those explanations. 
Obviously, some of the reasons may be understandable, but when 
we talk about--one significant portion of this audit is to 
determine whether the agency has complied with Federal laws and 
regulations, and obviously one of them is this deadline of 
March 1st to complete this audit. I would hope the agencies 
would take that seriously.
    One other question that I would have for you. When we look 
at the intergovernmental transfer issue, which you threw out a 
big number a moment ago, I think it would be helpful if you 
would just explain to us what an intergovernmental transfer is, 
give us an example of one, and then from that example, explain 
how that cannot be properly accounted for and why we have that 
kind of problem.
    Mr. Dodaro. A good example would be the Internal Revenue 
Service purchases a lot of goods from the Government Printing 
Office for the tax forms that are sent to the public. The IRS 
records may indicate an amount that they owe the Government 
Printing Office.
    Part of the problem is rooted in the fact that years ago 
agencies were having difficulty with one another actually 
recouping the amounts that were owed them, so the Treasury set 
up a process--and Mr. Hammond can explain this because they are 
trying to fix this right now, where in this case, GPO could go 
to Treasury and say the IRS owes us a certain amount of money 
for these tax forms that we have printed and mailed directly to 
the public, for postage, et cetera, and take the money out of 
IRS's account at the Treasury, because the Treasury maintains 
fund balances. The agencies do not have, by and large, cash 
accounts where they write checks. It is all done through 
central banking functions, pretty much, by and large, except 
for some defense activities.
    In this case, the IRS accounting records may show a 
different payable that would be different than what would be on 
the GPO's books. When those records then go up to the Treasury 
Department, they are unable to reconcile them. On one hand the 
IRS would show a payable to GPO, GPO's records might show not a 
com- pensating receivable, and then you wouldn't be able to 
eliminate that.
    Those types of transactions go on all across the 
government. For example, Social Security Administration 
performs a lot of services for HCFA in the Medicare area, in 
actually issuing Medicare cards. Then Social Security charges 
HCFA. HCFA basically then pays them.
    We have situations where the General Services 
Administration operates a lot of government buildings and 
actually charges the agencies rent. So the rent that is on the 
GSA books might not necessarily correlate to the amounts that 
the agencies say that they owe GSA.
    A lot of agencies buy equipment from the Federal prison 
system. It just goes on and on throughout the government. There 
are estimates of several hundreds of billions of dollars of 
buying and selling that goes on among the agencies.
    Right now there is not an identification in the systems, 
and this goes back to a systems problem, that would allow 
Treasury to properly consolidate that the way you would in the 
private sector if you had a large holding company with several 
subsidiaries, and you need to be able to consolidate.
    Mr. Horn. I thank the gentleman.
    Let me ask a few more questions, and then we will go to our 
next witnesses. I believe--can you stay with us, Comptroller 
General?
    Mr. Walker. Yes, we can, Mr. Chairman.
    Mr. Horn. Let me get into the trust funds for a minute. 
Comptroller General, your General Accounting Office's report 
states that the trust fund investments and liabilities, which 
amounted to $1.8 trillion as of September 30, 1998, are netted 
out to zero in the statements.
    Could you explain to me what that means and what is the 
significance of those amounts being, in essence, eliminated?
    Mr. Walker. Basically, it represents a practice that is 
consistent with what would happen in the private sector. Let's 
take Social Security as an example. Under current law for trust 
funds, to the extent that you end up having excess receipts 
over disbursements in a given year, the excess must be invested 
in U.S. Government securities. That, obviously, represents an 
obligation of the U.S. Government.
    So, you have a situation where, on one hand, you have a 
budget account known as the trust fund that has obligations of 
the U.S. Government. That is a receivable. On the other hand, 
you have the U.S. Government, the operating entity, that owes 
money to the trust fund, which is a liability or a commitment 
to that trust fund.
    Intergovernmental transactions get eliminated in 
consolidated financial statements. So as a result, the only 
debt that you have in these consolidated financial statements 
is debt held by the public, which is third-party debt.
    One point I would like to make on this, Mr. Chairman, if I 
can, is our report was issued today. Yesterday the trustees' 
report for Social Security and Medicare was released.
    Some of the information which I think is important that it 
receive more prominent disclosure in the annual consolidated 
financial statement audit is stewardship information with 
regard to Social Security and Medicare.
    The fact is, the information that we have in the 1998 audit 
is based on last year's trustees' report, because this had not 
been released, and yet they are coming out one day apart.
    I think one of the things that really needs to be 
considered is whether the consolidated financial statement 
audit might come possibly a couple of weeks later, such that 
significant information like this could be incorporated into 
the consolidated financial statements, so we don't end up 
confusing the public by, in a matter of days, talking about 
different numbers or different dates on programs as important 
as Social Security and Medicare.
    Mr. Horn. Having heard your answer to that, I guess I would 
ask this: ``Does it provide us with the proof, when you take a 
look at the Federal Government as a whole, that is, the 
consolidated financial statement, that indeed there is no money 
set aside to pay for those future costs of programs supported 
by those trust funds?'' How does that work?
    Mr. Walker. Basically, under current law, the trust funds 
are invested in government securities. Those government 
securities are backed by the full faith and credit of the U.S. 
Government. They are guaranteed as to principal and interest. 
In effect, they represent a first call on general revenues in 
the future. They do not represent what you and I would normally 
refer to as a normal trust fund that is a separate and distinct 
legal entity with hard assets in it, that are invested in the 
markets, that are subject to fiduciary responsibilities, so the 
Federal trust funds are a claim on future general revenues.
    Mr. Horn. One of the things that concerns me is the money 
that comes in from FICA, Social Security, and Medicare. Is it 
sort of just dumped in a general pot? It doesn't come in and go 
to a FICA trust account, Social Security, or Medicare. It 
simply goes into the nearest bank designated by the Department 
of the Treasury, and there is a group in the IRS, sort of an 
office of estimates, where they somehow just speculate as to 
what amount of that money really ought to go into the ``Social 
Security trust fund,'' because there really isn't much of a 
trust fund.
    I just wonder what you as a new Comptroller General think 
you ought to look at with regard to this--how they do it? Let's 
take Social Security. Where the employer is responsible for 
half the payments, the employee is responsible for half of the 
payments. The employer is really taking both payments of the 15 
percent and sending a check for maybe two times the number of 
employees, maybe times 2,000 or 200,000, to the Internal 
Revenue Service. And yet, we really aren't sure that every 
check that said, well, this is my FICA contribution on the 
quarterly reports, we don't know if it is ever in the right 
place.
    Mr. Walker. There are some challenges here, Mr. Chairman, 
that I think both the executive branch and we need to keep our 
eye on.
    For one thing, the information that is reported as far as 
revenues that are received, as you properly point out, are 
really handled by the Treasury and the IRS. The amounts used by 
Social Security for benefit payments are different and, 
therefore, there can be circumstances in which individuals are 
getting paid for benefits that the government never, ever 
collected the taxes on the underlying wages.
    This is one of the areas that we pointed out in our report 
that needs to be focused on to a greater extent. I would ask 
Gene to speak on that.
    Mr. Dodaro. Yes. The issue of allocation to the trust fund 
is one that we have focused a lot on in doing the audit of the 
consolidated statements, and we have been working with other 
auditors.
    It is a fairly complicated process, and part of the reason 
that there are estimates and allocations made emanates from the 
fact that the IRS believes it would create an undue burden on 
taxpayers to have them identify all the different types of 
taxes at the time the taxes are deposited.
    Right now the only basic separation are among income and 
payroll taxes, because they are withheld at source, by and 
large, and are deposited by companies into financial 
institutions and then flow to Treasury. So there is a category 
they check, we sent in $100 million this month. Of the $100 
million, $70 million was for income taxes that we withheld for 
individuals, as well as Social Security withholdings and 
Medicare withholdings, and $30 billion was for excise taxes 
that we owe.
    Then that--because that money is not identified at that 
point in time--is the only information comes in when the tax 
return is filed by that company. Then the IRS uses that 
information on these tax returns from the companies to 
determine how much is apportioned to the trust funds, and then 
it goes back and double checks the estimates, and makes any 
sort of adjustments at the end of the year.
    As you point out, the adjustments are given by the Office 
of Tax Assessment at the Treasury Department. They give the 
amount of allocations on how to distribute the revenues to the 
Treasury Financial Management Service, and they make the 
allocations to the trust funds during the year in terms of the 
appropriate securities that should be credited to the trust 
funds.
    The excise taxes are a little bit different, since they are 
supposed to be allocated based on collections, rather than 
assessments. We have pointed that out as a problem in the past, 
and the IRS has come up with a new approach on how to handle 
that. But we strive to look at this issue from the inception 
from the revenue coming to the government, how it is allocated 
through this process to the individual trust funds, and to make 
sure they are properly credited.
    So we are trying to cover that and every year we get a 
little bit better at making sure we have the total picture 
covered. But that is one area we think is very important, Mr. 
Chairman, and we have been focusing a lot of attention on that.
    Mr. Horn. Well, what you are saying is of the 15 major 
trust funds, you would like to see all of them in a real, true 
trust fund relationship where money is earmarked if it is to go 
into the trust fund and you don't have an office of estimates 
on this or tax assessments?
    Mr. Dodaro. We think with modern computer systems now that 
it would be very beneficial to have the information in 
electronic form, if most taxpayers could submit it, a break-out 
of the specific taxes at the time those taxes are actually 
deposited by the organizations into the Treasury accounts. We 
have pointed that out in every audit we have done of the IRS. 
We have had this area on the radar screen with them for a while 
now. Unfortunately, they have been sidetracked because of their 
preparations for the year 2000 problem. They have also had, as 
you know, some major systems failures over the past few years. 
Treasury has a new electronic tax deposit system now that has a 
lot greater capability and we plan to work with Treasury to try 
to identify a way to do this that doesn't impose any undue 
burden on the taxpayers. But that is the only way to really 
make sure that you track it as it is being deposited into the 
Treasury account, and then it can flow through the process 
without an estimation approach.
    Mr. Horn. What would be the impact on the Presidents? 
Regardless of party, we know that Presidents have dipped into 
the general revenue of the Treasury, much of which was being 
sent to be in Social Security or Medicare.
    What would be the economic impact and the political impact 
if what you say and what a lot of us up here say, we ought to 
isolate these funds so that they are clearly set aside and we 
can say to the American people on the unfunded liabilities that 
we have the proper amount in there to cover the unfunded 
liabilities? Is there any danger in that in terms of future 
Presidents, current Presidents, it doesn't matter what party 
they are in; they have all dipped into the Treasury funds to 
some extent, to show that we have less of a deficit, shall we 
say? If we isolated that off, would that be part of the 
national debt deficit, or would it just be on its own and 
sitting out there, to be invested, obviously?
    Mr. Walker. There is a difference obviously between the 
economic, the investment and the accounting aspects of this 
issue. It is a very, very complicated issue. We have stated on 
the record that we believe that reducing, from an economic 
standpoint, debt held by the public is a good thing to do 
because it ends up helping build future economic capacity. We 
have also stated that obviously, with regard to Social 
Security, a lot of the current unified budget surplus, in fact 
all of it this year, is coming from Social Security. I think it 
is a separate issue as to what the investment policy ought to 
be, but the only kind of debt that is going to be appearing on 
the consolidated financial statements of the U.S. Government 
under current accounting principles is debt held by the public.
    We do, however, believe that it is important to more 
prominently disclose in the consolidated financial statements 
of the Federal Government, information with regard to Social 
Security and Medicare because every American cares about those 
programs. This audit report is not just for the Congress and 
not just for the Federal Government, it is for the American 
people too.
    Mr. Horn. All right. I now yield 5 minutes to the gentleman 
from Texas, and after that we will call up the Treasury witness 
and the OMB witnesses, and then you will be sitting with them, 
and we can in any case get back to more questions for 
everybody.
    The gentleman from Texas.
    Mr. Turner. Mr. Chairman, I yield back my time. I don't 
believe I have any further questions.
    Mr. Horn. OK. Mr. Turner is going to yield his time until a 
future occasion after the Treasury and OMB have testified. So 
if we can have those witnesses come forward. The Honorable G. 
Edward DeSeve, the Deputy Director for Management, Office of 
Management and Budget, accompanied by Administrator Deidre A. 
Lee, head of the Office of Federal Procurement Policy, Office 
of Management and Budget; and Mr. Donald V. Hammond, Fiscal 
Assistant Secretary of the Department of the Treasury.
    [Witnesses sworn.]
    Mr. Horn. I would like to note that all three witnesses 
have affirmed the oath.
    We will begin with the distinguished gentleman. This is the 
last day of government service for this round, and Mr. DeSeve, 
we are glad to have you here. We wish you well. You have done a 
fine job for the administration and for the people. So we hope 
you will do as very fine a job in the private sector.

STATEMENTS OF G. EDWARD DeSEVE, DEPUTY DIRECTOR FOR MANAGEMENT, 
OFFICE OF MANAGEMENT AND BUDGET, ACCOMPANIED BY DEIDRE A. LEE, 
ADMINISTRATOR, OFFICE OF FEDERAL PROCUREMENT POLICY, OFFICE OF 
MANAGEMENT AND BUDGET; AND DONALD V. HAMMOND, FISCAL ASSISTANT 
             SECRETARY, DEPARTMENT OF THE TREASURY

    Mr. DeSeve. Thank you very much, Mr. Chairman, members of 
the subcommittee. I am here today to discuss the progress made 
during the last year in financial management, and particularly 
as reflected in the financial report of the U.S. Government. I 
am also here to describe the challenges that still face us.
    In his transmittal of the audit report, audit of the 
financial report, Comptroller David Walker said, ``These 
financial reporting requirements are prompting steady 
improvements in financial accountability and there has been 
good progress toward meeting legislative objectives. At the 
same time, major departments are not yet able to produce 
auditable financial statements consistently.''
    The requirement for a governmentwide financial report began 
with fiscal year 1997 and a similar requirement extending 
coverage of the Chief Financial Officers Act to all major 
agencies that was contained in the Government Management Reform 
Act. Chart one shows the progress under these statutes over the 
last 6 years. It is very similar to the chart that Mr. Turner 
showed you earlier, although not quite as colorful as his 
chart.
    In addition, the GAO report--actually, I want to stop for a 
second and congratulate the Department of Housing and Urban 
Development, the Federal Emergency Management Agency, and the 
National Science Foundation who, for the first time, received 
unqualified opinions on their financial statements.
    In addition, the GAO report of the financial report of the 
U.S. Government for fiscal year 1998 stated that ``Action is 
now underway across the government to address pervasive, 
generally long-standing problems discussed in this report.''
    Chart two depicts our expectations. Mr. Turner asked, what 
progress do you expect to continue? What you see is what we 
anticipate for 1998. The blanks are disclaimers for qualified 
opinions. What we see in 1999 is that we expect 20 of 24, and 
then finally 23 of 24 in the year 2000. The lone exception will 
be the Defense Department, which does not expect a clean 
opinion at this point until beyond the year 2000.
    While agencies have made substantial progress, challenges 
remain. Recognizing these challenges, President Clinton issued 
a memorandum to all agency heads on May 26, 1998, directing 
agencies to develop corrective action plans for addressing 
these challenges and to submit quarterly reports of progress. 
Agencies submitted these plans and reports to OMB. They formed 
the basis for discussion between senior agency officials, 
including the Inspectors General, and senior executives from 
OMB, Treasury, and GAO on the process the agencies were 
employing to meet planned goals and their prospects for 
success. The team's assessment is that while the challenges 
facing certain agencies are daunting, the commitment of the 
agencies is reassuring.
    Chart three, please. I would like to show you these 
challenges by functional area and by department for those 
agencies that do not have clean opinions. The departmental 
challenge is primarily in the Department of Defense, with the 
Department of Agriculture and a couple of others having some 
challenges. But the functional area that faces us with the most 
difficult problems is the one that we talked about earlier, 
intragovernmental payments. The Defense Department has taken 
significant steps to deal with its problem. The department 
believes that lasting effective solutions to its difficulties 
in producing reliable information in the form of audited 
financial statements requires a Defensewide management 
information overhaul, and they have embarked on such an effort. 
Over the last few years the department has streamlined its 
numerous incompatible finance and accounting systems by 
eliminating over 200 systems that did not collect information 
needed to comply with current accounting standards.
    More recently, the department has been developing a 
blueprint for financial management reform and in the fall 
released the first comprehensive financial management 
improvement plan. We and GAO, and Treasury and the department 
Inspectors General have worked with them to review and refine 
that plan.
    IRS revenue collection and public debt receive clean 
opinions is my next headline. In addition to the progress 
previously referred to in terms of the number of unqualified 
agency financial statements, for fiscal year 1998, the GAO 
reported on the results of the audits in the Internal Revenue 
Service and the Bureau of Public Debt. The Internal Revenue 
Service's statement of custodial activities, which the chairman 
referred to earlier, received an unqualified opinion. The 
schedule of public debt reflected a similar unqualified 
opinion. The amount of money that the IRS covered was about 
$1.8 trillion and over $5.5 trillion of public debt was 
similarly included.
    GAO also points out in addition to the qualification in 
opinions a series of areas that need ongoing attention. These 
are the management internal control weaknesses that the 
Comptroller General talked about earlier.
    The administration for the past several years has been 
putting out a report on priority management objectives. I would 
like to get the next chart, please. These priority management 
objectives are chosen, as the President said in his budget, to 
reflect ``areas in need of real change that will receive 
ongoing attention for the administration.'' We didn't put these 
out in response to last year's report or the report of the year 
before. We put them out because they are things that the 
administration wants to get done. You can see that heading the 
list is managing the year 2000 problem, followed closely by 
improving the results orientation of program management. That 
is PGPRA.
    Next, audited financial statements, improving financial 
management information. These are things that were formally 
committed to, were managed with a monthly planning process in 
response to these.
    I don't need to tell you, Mr. Chairman, where we are in 
Y2K. We last night gave you the results of the flash reports 
from the precincts, the flash reports from the agencies that 
show that more than 92 percent of the financial systems are 
compliant. We expect that the committee will want a full review 
of that, and we will be happy to provide that information as it 
comes in.
    We agree with the Comptroller General that protecting 
critical infrastructure and particularly computer security is 
the next Y2K challenge. In fact, we are using the techniques 
that we have developed in Y2K to begin that process. The 
President issued PDD-63 last year, requiring agencies to 
prepare plans and requiring a national plan for computer 
security to be prepared. Sector groups, going out into the 
private sector, led by Federal agencies, just as we are doing 
in Y2K, will be mobilized in the computer security area.
    Another area that the Comptroller General pointed out in 
his report is better managing financial portfolios. We agree 
that loan portfolios in particular need to have improved 
management. Working with this committee, the Debt Collection 
Improvement Act has given us some new tools, and my formal 
statement gives you the ways that we are implementing those 
tools.
    Next, verifying that the right person is getting the right 
benefit. We also agree with the Comptroller General that for 
fiscal year 1997 we had a 14 percent error rate in the Medicare 
program. Unacceptable. Totally unacceptable. The current error 
rate of about 7 percent is similarly unacceptable, but it is 
half the previous rate, and that is because we have been trying 
to manage that problem that was identified through auditing.
    Throughout the government, there are a series of report 
cross-cutting groups that are working together to set 
standards. The Federal Accounting Standards Advisory Board, the 
Joint Financial Management Improvement Project and the Chief 
Financial Officers Council, as well as the Chief Information 
Officers Council are bringing agencies together to prepare 
standards that give us the ability to tackle some of the 
challenges that don't exist just in one agency. One agency 
doesn't have an intragovernmental payment problem. It takes at 
least two to have such a problem.
    In summary, Mr. Chairman, I would like to again quote the 
Comptroller General by saying,

    The executive branch recognizes the extent and severity of 
the financial management deficiencies and that addressing them 
will require concerted improvements across government. The 
administration has set goals for individual agencies as well as 
government as a whole to complete timely audits and receive 
unqualified opinions. With concerted effort the Federal 
Government as a whole can continue to make progress toward 
generating reliable information on a regular basis.

    Mr. Chairman, and members of the subcommittee, the 
administration has demonstrated from the President on down that 
it recognizes the need for continued concerted action to 
continue to make progress. Given where we were in 1993 and the 
obstacles we face, the progress we have made to date is 
extraordinary. Notwithstanding the formidable nature of the 
remaining challenges we set a high bar for ourselves and will 
redouble our efforts to improve the reliability of financial 
information provided by agencies and the government.
    Thank you very much, Mr. Chairman.
    [The prepared statement of Mr. DeSeve follows:]

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    Mr. Horn. We thank you. We now go to Mr. Hammond, the 
Fiscal Assistant Secretary of the Department of the Treasury. 
You are a career member as I recall, is that correct?
    Mr. Hammond. That is correct, Mr. Chairman.
    Mr. Horn. How many years have you had with the Treasury?
    Mr. Hammond. Fifteen.
    Mr. Horn. Well, you are going on 30 then, right?
    Mr. Hammond. We are off to a good start.
    Mr. Horn. I knew Bill Parsons, who was about 30 years ahead 
of you and one of the great fiscal assistant secretaries and 
management secretaries down there. So welcome.
    Mr. Hammond. Thank you very much. Mr. Chairman and members 
of the subcommittee, I appreciate the opportunity to appear 
today to discuss matters involving the second annual financial 
report of the U.S. Government. First, I would like to take this 
opportunity to thank the chairman, the ranking member, and 
other members of the subcommittee for your continued support 
and encouragement to improve financial accountability and 
reporting in the Federal Government. Last year was the first 
year in its history in which the government prepared 
comprehensive financial statements covering all of its diverse 
activities. While a great deal of work has been done and 
progress made over the last year, there are still significant 
challenges and obstacles that must be overcome to enhance and 
improve the reliability of the accrual-based financial 
information presented for the U.S. Government.
    The Government Management Reform Act of 1994 requires that 
not later than March 31 of each year, the Secretary of the 
Treasury, in coordination with the Director of the Office of 
Management and Budget, shall prepare and submit to the 
President and the Congress audited financial statements for the 
preceding fiscal year, covering all of the accounts and 
associated activities of the executive branch. This is the 
second time such audited financial statements have been 
prepared on a governmentwide basis. The financial report of the 
U.S. Government for fiscal year 1998 provides the President, 
the Congress, and the American people with information about 
the government's assets and liabilities, its cost of 
operations, and its sources of financing. The financial report 
is prepared on the accrual basis of accounting as prescribed by 
Federal accounting standards. These differ from the cash basis 
of accounting used in the preparation and reporting of budget 
results. Each method is a useful tool in its own right for 
looking at the government's operations for different purposes.
    Since the passage of the Government MRA, we have been 
working very closely in cooperation with OMB, GAO, and the 
Federal program agencies to create the standards and systems 
necessary to create and implement an entirely new system of 
identifying and tracking all of the operations of the U.S. 
Government.
    This past year, Treasury focused much of our attention on 
three important areas: first, increasing the consistency of 
information reported to us by program agencies; second, 
identifying and reducing inaccurate eliminations of 
intragovernmental transactions; and third, assisting agencies 
in reconciling their fund balances with Treasury records. I 
will briefly summarize our efforts in each of these three 
areas.
    It is essential that the information used by Treasury to 
prepare the governmentwide statements be consistent with the 
information contained in the respective agency-level financial 
statements. The agency-level financial statements are 
separately audited and the audit of the governmentwide 
financial statements relies heavily on those audits. 
Consistency problems need to be addressed by the agencies 
working in very close cooperation with OMB, Treasury and the 
GAO.
    This past year, Treasury initiated actions to provide 
agencies with ongoing support, guidance and training. We issued 
written guidance to program agencies in an effort to improve 
consistency. Treasury has also conducted both formal and 
informal training with agencies directed at the specific 
consistency problems associated with their respective financial 
systems.
    As a result of our close work with the agencies this year, 
we achieved a 20 percent increase in consistent reporting; 25 
of the 32 entities so reported this year. We will continue to 
work with the program agencies on this important issue and, 
based on our experiences this past year, we are very optimistic 
that future reporting will improve. Both last year's and this 
year's audits of the financial statements disclosed 
transactions between agencies for governmentwide reporting. If 
these transactions are not properly eliminated, total 
government assets, liabilities, revenues and expenses will be 
misstated by the amount of those transactions.
    Treasury, OMB, and GAO have been actively working together 
in a governmentwide task force to find methods and solutions 
for the elimination problem. The task force has looked for 
solutions that not only help the agencies identify and 
reconcile transactions among themselves, but also improvements 
to the Treasury's process of creating the governmentwide 
financial statements. After careful analysis, the task force 
identified several detailed categories which can be summarized 
in two broad categories of intragovernmental transactions: 
Investment and loan transactions and all other activity between 
the agencies.
    During fiscal year 1998, we focused most of our attention 
on resolving the intragovernmental issues for investment and 
loan transactions. These investment and loan transactions are 
primarily the types of transactions discussed earlier occurring 
between the trust funds and various government agencies, and at 
least at one endpoint involves the Treasury Department. They 
involve trillions of dollars on an annual basis. In December, 
Treasury, after consultation with the agencies, issued 
elimination guidance for the preparation of the fiscal year 
1998 statements. As a result of these efforts, significant 
progress, as detailed in my written statement, was made in 
fiscal year 1998 in reconciling these intragovern-mental 
investment and loan transactions. We plan to make even more 
progress in fiscal year 1999.
    In addition to assisting the agencies with other 
transactions, Treasury provided two digit identification codes, 
the use of which is absolutely critical to the ability to 
eliminate and reconcile the purchase and sale and other 
activity between the agencies. In fiscal year 1998, 24 of the 
32 agencies required to use these partner codes were able to 
identify 80 percent or more of the dollar value of their 
transactions. That is good progress. We are not there yet, and 
we need to do considerably more to deal with this issue.
    The third issue has to do with our activity of reconciling 
fund balances. Since Treasury acts as a banker for the 
government, as agencies request payments to be made or receive 
funding, their account balance with the Treasury will change. 
This fund balance amount is an agency-level asset account that 
reflects the agency's available budget spending authority. Both 
the agency and Treasury independently track the account 
balance. Treasury notifies agencies of discrepancies in their 
fund balances as determined from our records, and agencies are 
then responsible for resolving these differences. We have made 
significant efforts to assist agencies in reconciling their 
fund balance amounts with the amounts reported by us, including 
surveys of their information needs, the issuance of standard 
operating procedures, training, improved communication between 
us and the agencies, and the provision of technical assistance. 
We are expecting continued and significant improvements in 
agencies' abilities to reconcile fund balances again for this 
year.
    However, we are facing many challenges as we go forward. As 
Secretary Rubin stated, ``A great deal of work has been done, 
but the development of this new method of reporting is an 
immense task and a great deal of additional effort will be 
necessary to create and implement an entirely new system of 
reporting on the operations of the U.S. Government.''
    We at Treasury are committed to this effort, and we have 
both short-term and long-term actions underway to address them.
    In the short term, we will continue to make those changes 
necessary to continue to improve the preparation of the 
financial report. In the long term, we are embarking on a 
project to make fundamental changes in the way we do business. 
Our most significant short-term challenges are in three 
specific areas. First, we need to continue to make substantial 
progress in eliminating intragovernmental transactions. Second, 
additional improvements are needed to make data reported to 
Treasury for the financial report consistent with the agency's 
audited financial statements. And third, we need to enhance the 
process of identifying the data needed to do a complete 
reconciliation of the budget results reported on the cash basis 
with the financial statements' results of operations.
    Regarding the elimination of intragovernmental 
transactions, Treasury intends to put in place additional 
procedures and processes to ensure that progress in eliminating 
transactions in the investment and loan category continue, but 
most of our efforts this year will be spent working with OMB 
and the program agencies to identify and put in place processes 
to effect the other types of intragovernmental transactions. We 
feel confident that by continuing our focus on attention in 
these areas we can again make more progress.
    With respect to ensuring consistency of reporting, this 
year's report, or this year's process has identified areas 
where we can continue to improve and make reporting less 
burdensome on the government agencies. We have also identified 
several problems agencies had in verifying their financial 
statements with the detailed information sent to us. These 
problems relate to the need for additional information, 
formatting issues, and the reporting of changes in opening 
balances. Building from this base, we will take further steps 
to again show improvements in consistency next year.
    Finally, regarding reconciliation of the budget results 
with the financial statements results of operations, a team of 
Treasury staff with assistance from private contractors will 
develop the necessary information requirements and procedures 
to accomplish this reconciliation. Our plans are to ask for the 
necessary information in next year's report process, and our 
goal is to make significant strides in identifying all of the 
information necessary to complete such a reconciliation next 
year.
    While making short-term changes to improve the financial 
statements process is important, we have also committed and 
recently initiated a major project to fundamentally rethink and 
redesign our central accounting system and processes. We will 
be working with OMB, GAO, the program agencies, and the Federal 
Reserve System in developing new processes that will provide 
more timely, accurate, accessible accounting information, 
follow established accounting standards, and support the 
control of resources and management decisionmaking. Goals of 
the new processes include reducing the reporting and 
reconciliation burden on program agencies.
    We also intend to develop processes that maximize data 
accuracy at the time of collection and capture information once 
at the earliest time possible to meet multiple reporting 
requirements. Improving financial management and accountability 
is a Treasury priority. We have taken and will continue to take 
actions to correct weaknesses and problems in the preparation 
of our governmentwide financial statements. We are working hard 
to resolve these problems, but much work remains to be done. 
Treasury will also continue its leadership role in providing 
guidance, assistance and support to the agencies in their 
ongoing efforts to improve their accounting practices and 
financial management systems.
    Thank you very much, Mr. Chairman. That concludes my 
remarks this morning.
    [The prepared statement of Mr. Hammond follows:]

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    Mr. Horn. We thank you. We would now like the Comptroller 
General, Mr. Walker, and the Assistant Comptroller General to 
come forward and join the panel, so that we will have the 
concluding questions over the next 20 minutes.
    The gentleman from Texas, Mr. Turner, will begin.
    Mr. Turner. Mr. DeSeve, you heard me earlier ask the 
question about the seven agencies that failed to meet the March 
1st deadline for failing to meet the financial statements 
requirements. Could you give the reasons that they failed to do 
so?
    Mr. DeSeve. Yes, sir, I think I can. Let me first describe 
the process that we use throughout the year. We meet with the 
agencies, their Inspectors General and their financial staffs 
in their agencies and spend a considerable amount of time 
talking with them about the very specific problems that they 
are having. And then literally weekly and sometimes daily, we 
talk to them about what the status of their audit reports are.
    We are finding two major problems this year. One is a new 
set of auditing standards and financial statements that the 
agencies did not have to deal with before, particularly the 
statement of budgetary results. It is a new one, and it is 
giving some of them problems. As a result, whenever you have a 
problem in this circumstance, you will have an independent 
auditor or sometimes an outside auditor and an Inspector 
General and the financial folks who together have to agree that 
the information that is put together is, in fact, correct. So 
getting agreement on these new statements is a big challenge 
for some.
    Of the seven, we expect that five will have clean opinions, 
and that relates to the second issue. Some of them are the 
heroic efforts that the Comptroller General talked about where 
they are in the midst of doing special studies on things like 
loan portfolios that have taken them beyond the deadline. We 
expect them to be clean, but not timely. We, like you, share 
the desire to have them be both clean and timely and we have 
been encouraging them in that direction.
    Mr. Turner. So it is not a lack of sensitivity to meeting 
the March 1st deadline, and you feel every agency is working 
diligently to get the work done?
    Mr. DeSeve. Yes, sir. It is not unwillingness, it is 
inability to in this case.
    Mr. Turner. One of the things that Mr. Hammond mentioned in 
his written statement, you were referring to the progress that 
the Treasury has made in reconciling intragovernmental 
investment and loan transactions. I was noticing in your 
written statement you said with regard to that, specifically 
for investments and Federal debt securities, the difference 
last year was $3.1 billion. The difference this year was $3.9 
million for interest receivable and interest payable, the 
difference last year was $3.2 billion, the difference this year 
was $855 million. For interest revenue and interest expense, 
the difference last year was $8.5 billion; the difference this 
year was $214 million. And for loan receivables and amounts due 
the Treasury, the difference last year was $7 billion. The 
difference this year is $353 million.
    That seems to be significant progress. What accounts for 
the dramatic reduction, and do you feel you are going to even 
move beyond the progress you have made?
    Mr. Hammond. We do feel that that is significant progress, 
but obviously those numbers need to come down to zero.
    What accounts for that progress this year are two things. 
First, we learned a lot from last year's process and were able 
to build in enhancements in this year's process that allowed us 
to plan for those types of transactions. We focused a lot of 
time and attention on the investment and loan accounts.
    In addition, Treasury has the advantage of being at one end 
of pretty much every one of those transactions. As a result, 
because of the clean opinion we received on the statement of 
the public debt, we have great confidence in the numbers that 
we produce and are, therefore, able to go back and work with 
the individual agencies, note differences, and be able to work 
to resolve them. The progress you see there really reflects 
that close cooperation with the agencies who hold the trust 
funds for their program needs, and to be able to walk through 
the appropriate transactions.
    The differences that remain typically result from timing 
differences on behalf of the agencies, as well as circumstances 
where they may be doing certain technical adjustments to 
interest accounts such as accruing interest receivables or 
amortizing discount and premium over different periods or using 
different accounting methods. We need to get a consistency of 
approach between the agencies and we think those numbers will 
then go to zero.
    Mr. Turner. You know, it is really hard to imagine what it 
must have been like before the Chief Financial Officers Act was 
passed in 1990 and the Government Management Reform Act passed 
in 1994, because prior to that, we wouldn't even be here having 
this discussion today. I want to commend the chairman on his 
diligence in making sure that both of those pieces of notable 
legislation are working by continuing to hold the agencies 
accountable for the implementation of both of those Federal 
statutes.
    One of the things that struck me about your testimony, Mr. 
Hammond, was your reference to the goals that the Treasury has 
for reducing the reporting and reconciliation burden on 
agencies. It seems to me that with these new laws and 
requirements for reporting, there are probably many a Chief 
Financial Officer who is feeling a tremendous burden of all of 
the various reporting that takes place. It would be helpful, I 
think, to give us an example of some of the burden you are 
talking about and what you are thinking about doing that would 
reduce the burden of all of this multitude of activities that 
they are charged with performing.
    Mr. Hammond. I would be happy to. I think that is in fact a 
very significant area of stress for a number of agencies of all 
of the various reporting requirements. As we look at the 
compilation of the governmentwide financial statements, 
fundamentally what we have done is we have tried to accomplish 
the production of these statements by using information that 
comes from systems that weren't designed to produce the 
information needed for an accrual-based financial report. The 
result is that we ask agencies to take budget information, 
present it to us in a different format, and then provide it to 
us in a way that then has to be reconciled back to the 
information they are using to present their own financial 
statements, as well as the information that they are doing for 
their budgetary reporting. Given the short-term horizon and the 
need to produce these statements, it is the best we can do in 
the short term and we continue to work around the edges to 
enhance that. But fundamentally, the systems needed to supply 
information to produce these systems shouldn't be the type of 
situation where you have system A coming in, system B coming 
in, system C, and creating the need for all of these 
reconciliations as you move along. They should, in fact, come 
from a common source of information, and then simply present 
that same information in different formats. That, in essence, 
is the principal goal or one of the principal goals of our 
longer-term effort to redesign the central accounting system.
    Mr. DeSeve. Mr. Turner, may I add to that and make a small 
commercial here. The Comptroller General earlier referred to 
accountability reports of the Social Security Administration, 
the Veterans' Administration, and others have produced those. 
Those are an attempt to consolidate information from GPRA, 
FFMRA, FFMIA, the GMRA, the CFO Act and even some other 
statutes, and potentially the IG semi-annual reports into a 
single location in a readable form so people can actually use 
them as a corporate annual report is used.
    Right now there are pilots under the Government Management 
Reform Act for accountability reports. We would like to work 
with the committee to propose extending those pilots, and 
encouraging agencies, if not making those kinds of reports 
mandatory for agencies, because we think it will give them the 
ability to have a single report that contains lots of different 
information. I would think we could even add some Clinger-Cohen 
information to it as well.
    Mr. Turner. Thank you.
    Mr. Walker. Mr. Chairman, we have supported these pilot 
projects and we believe that the idea of expanded 
accountability reports where you end up getting valuable 
information on a consolidated basis in plain English with 
charts and graphs is a good idea.
    Mr. Horn. I want to pick up on that, Comptroller General. 
On page 10 of your statement you refer to the Brown Act which 
was Senator Brown from Colorado, now retired, and who really 
knew a lot about this type of audit and accounting, and that is 
the Federal Financial Management Improvement Act of 1996. And 
then you also note the difference in conformity here between 
1997 and 1998, and that similar results are expected for fiscal 
year 1998.
    I would just ask this question. Are some of the problems 
with these agencies that they don't have a full-time Chief 
Financial Officer where either the Assistant Secretary for 
Management or somebody else there has said, ``I am the Chief 
Financial Officer?'' That bothers me. I know the people that 
work in OMB. Mr. Hammond, these are 18 hour-a-day jobs, often 7 
days a week. It just seems to me when they bury the CFO under 
some of these other agency rubrics like Assistant Secretary for 
Management, I realize they might not want to give up all that 
power they have as Assistant Secretary for Management, but 
somebody has to focus strictly on the financial aspects, and 
that is why Congress put into the law Chief Financial Officer 
with a direct reporting relationship to the appropriate 
executive, the Deputy Secretary or the Secretary. I just wonder 
what your thinking is on that.
    Mr. Walker. Well, I think there is little question that--
given the challenges that we face in the financial management 
area, and given the fact that the objective is not just to get 
a clean opinion, but to have underlying financial management 
information systems that will be continuously improved to 
improve economy, efficiency, and effectiveness--the CFO for any 
major department or agency is a full-time job. I might ask if 
Ed has any comments.
    Mr. Horn. Does anybody else want to comment on that?
    Mr. DeSeve. We would be delighted to, Mr. Chairman. We have 
seen different organizational structures in different agencies. 
The Justice Department has the Assistant Secretary for 
Management structure, the Department of Housing and Urban 
Development has the stand-alone CFO structure. The act permits 
either, as you know, as long as the reporting requirement is 
clear.
    I think the decision made by the reporting agency to give 
the appropriate amount of responsibility is even more 
important. We strongly support budget authority in the hands of 
the CFO. There is still at least one agency and there may be 
two where budget authority is not in the hands of the CFO. We 
have been very active in trying to move them in that direction.
    We also find though that the role of the career Deputy CFO 
is terribly important. When we and the CFO counsel merged the 
two groups--the groups of Deputies and the CFOs--into a single 
body, it became much more apparent to us that that career 
Deputy in many cases was the go-to guy, go-to gal in lots of 
places. Where we had career CFOs who would come and go over a 2 
or 3-year period, the Deputies were the continuity. So it is 
the strength of the organization up and down the organization. 
My own preference would be in most cases, in most departments 
to see a single CFO in those departments. It has always been my 
preference, and that person should be at least at the Assistant 
Secretary level. There may be some departments where the Under 
Secretary level could be an appropriate focus for the CFO 
organization.
    Mr. Horn. I am certainly not against a Deputy CFO, and it 
ought to be a career person, without question. We want a strong 
CFO in that agency and we want to see a different result next 
year.
    Now, you are not going to be here next year. You might be 
on contract, but----
    Mr. DeSeve. Mr. Chairman----
    Mr. Horn. You may be working as a contractor.
    Mr. DeSeve. I have been working in-house and out-house for 
many years.
    Mr. Horn. I don't want to followup on the in-house and the 
out-house.
    Mr. DeSeve. I realize we are on TV, so we both have to be 
circumspect about that. But I think the desire that I have and 
that the administration has is that the Chief Financial Officer 
responsibilities are well done in each agency and we have tried 
to make that case time and time again to some of the agencies.
    Mr. Walker. Mr. Chairman, I think one other thing has to be 
emphasized in addition to the importance of the CFO. There has 
to be an active partnership between the CFOs and the CIOs in 
this regard, because we are looking to a move toward integrated 
systems that will provide key financial and other management 
information. The CIO job is a big job too. Eventually we are 
going to have to end up looking to something else, and that is 
CHCO, chief human capital officer, because people are the most 
valuable asset we have, and we don't pay enough attention to 
it.
    Mr. Horn. Let me move to one that everybody has mentioned 
at one time or another, and that is the computer security 
control weaknesses that have been found and reported across the 
government, and there are various instances where auditors were 
unable to gain authorized access or penetrate the systems. 
These weaknesses affect the integrity and reliability of the 
government's financial and programmatic information. I guess I 
would ask all of you how pervasive are these weaknesses, and 
are you able to penetrate a lot of these systems, and what are 
the agencies and OMB needing to do to correct these weaknesses? 
Mr. DeSeve.
    Mr. DeSeve. I think the statutory framework that we have at 
this point is probably a pretty good one. I am satisfied that 
from the Computer Security Act of 1987 to the Paperwork 
Reduction Act of 1995 and on to Clinger-Cohen, we have the laws 
in place. What we have had to do is increase awareness within 
the departments and agencies, especially when they were 
overtaken with the idea of Y2K. Y2K in some ways is a security 
problem. It is a problem that we created for ourselves, it is 
not an external problem. The Defense Department, working with 
the rest of the intelligence community, has engaged, and Gene 
can tell you more about this than I can in some ways, has 
engaged in a very major review of the external threats to the 
Federal Government from cyber terrorism. We would be happy to 
get you a briefing on cyber terrorism. It is very real, it is 
something we are very concerned about, and with the National 
Security Agency and DOD, they have been building a set of 
scanning systems and deflection systems. Much of that 
information is classified, but again we would be happy to get 
you a briefing on it.
    Mr. Horn. Comptroller General, do you want to comment on 
that?
    Mr. Walker. Mr. Chairman, we are doing a lot of work in 
this area, because obviously there are many aspects that are 
troubling when you deal with computer security. It is not just 
getting accurate, timely and useful financial information, it 
also involves issues that deal with national security, defense, 
as well as economic security, as well as personal privacy. We 
spent a fair amount of time in this area already. We anticipate 
that this area will be our No. 1 area of focus in the 
information management area after we get past Y2K. Gene might 
have some comments on anything in specific that he might think 
might be appropriate here.
    Mr. Dodaro. Basically, this is a serious pervasive problem 
across government we have computer systems that are more 
integrated, more accessible. We have seen examples in just the 
last day or two of how vulnerable computer systems are through 
the introduction of some of these viruses. There are two types 
of problems. One is vulnerability of people outside the 
agencies being able to hack into the systems, and there are 
vulnerabilities there. There are also vulnerabilities of 
authorized users within the systems that have too much access, 
and both problems are plaguing the Federal Government. We 
raised this as a high-risk area across the government in 
February 1997. As Mr. DeSeve pointed out, in October of that 
year the President's Commission on Critical Infrastructure 
Protection said, this is not only a problem for the Federal 
Government, it is a problem across all sectors. They have taken 
some initiatives to address this issue. We suggested the CIOs 
made computer security a priority. They have done that. GAO has 
gone out and studied best practices in the private sector. We 
have issued those. The CIO counsel has endorsed those best 
practices and are in the process of putting them in place. We 
think each agency needs a comprehensive risk assessment 
approach and followup process. Also, there needs to be 
coordinated efforts at the governmentwide level of OMB, the 
National Security Council and others, and we have made those 
recommendations. They are beginning to do that, but there is a 
long way to go. I do think there is a need to reexamine the 
basic statutory framework, and the Computer Security Act was 
issued in 1987. It has been a long time since that has been 
looked at. We are in the process of thinking about ways to 
strengthen those requirements.
    Mr. Horn. Thank you very much.
    I yield to the gentleman from Texas, Mr. Turner.
    Mr. Turner. Mr. Chairman, I have only a brief remark. I 
just really think it would be appropriate for us to acknowledge 
the good work that Mr. DeSeve has given to the administration 
since its inception in his role at the Office of Management and 
Budget. His service to the administration has been commendable, 
and his willingness to endure the vigorous oversight of this 
Congress also is to be commended. We wish you well in your 
transition to the private sector, and we appreciate the 
contributions that you have made to us all.
    Mr. DeSeve. Thank you.
    Mr. Turner. I know there are many people listening today 
who are probably in the same position I am in. I am beginning 
to start my work and fill out my tax return, and I had it all 
spread out on the kitchen table the other night. And you know 
the way it always is, you always find something you know you 
have to go retrieve before you can actually do it. So I am at 
that stage now.
    There is one question that was on my mind as I began my tax 
return preparation, and I know it is going to be on the minds 
of a lot of taxpayers, and I am sure, Mr. DeSeve, you can 
answer this question as one of your final responses to this 
subcommittee.
    I noted that this year I have to make out my check to pay 
my taxes to the U.S. Treasury instead of the Internal Revenue 
Service, and I wish you would explain to us why we are changing 
who we pay our taxes to, and perhaps that will relieve the 
minds of a lot of us taxpayers.
    Mr. DeSeve. I am really going to let Mr. Hammond from the 
Treasury Department handle the question. I think the vigorous 
oversight of this committee has talked to Commissioner Rossotti 
and other folks in the IRS about the major restructuring that 
is going on there. I think that we will see over the next 
several years perhaps not a kinder, gentler IRS, but one that 
is more customer-oriented and one that understands better how 
to deal in an electronic age with taxpayers, where they live, 
and in the kinds of organizations in which they find 
themselves.
    But I am going to kick the question on IRS versus the 
Treasury to Mr. Hammond. You are sending the check to Mr. 
Hammond.
    Mr. Hammond. Hopefully not personally.
    Mr. DeSeve. Of course not personally.
    Mr. Horn. Is your fax machine going to be jammed?
    Mr. Hammond. That's right. No. I think there are two 
reasons, actually. One is that the payee information of the 
U.S. Treasury better indicates that the taxpayer is, in fact, 
not supporting the operations of the Internal Revenue Service 
by their payment, but is, in fact, making a tax payment on 
behalf of the entire government. In addition, I think it also 
helps deal with some of the characterizations, when the address 
``Internal Revenue Service'' lent itself in some cases to 
people putting IRS on check payee information which, in some 
cases I believe was eligible to be forged or manipulated, and 
so I think there is also a corrective action attached to this.
    Mr. Dodaro. Mr. Chairman, I might add that our audits of 
IRS, as this committee has heard, that last point that Mr. 
Hammond raises is a valid one. A lot of people would change the 
IRS abbreviation. Even though the instructions would say 
``Internal Revenue Service,'' to spell it out, if they put an I 
in there, they changed the I to an M, and then it became 
``Mrs.'', and put a name on. That issue has been a problem in 
the past with people basically taking some of those checks and 
falsifying them. So we are pleased to see that change.
    Mr. Turner. Well, I thought somebody was going to tell me 
that we had eliminated an intragovernmental----
    Mr. Dodaro. That is one of the few where everything is 
working well.
    Mr. Turner. What I think I learned is that we are just 
paying our taxes to a friendlier payee.
    Mr. Walker. The amount doesn't change, though.
    Mr. Turner. Right.
    Thank you, Mr. Chairman. It has been a pleasure to have all 
of our witnesses before us today.
    Mr. Horn. Well, I agree with you on that, and I must say I 
have suggested this in the past, but I don't get too many 
followings in the House on this. All Members of Congress should 
sit in the House of Representatives on April 15th with no tax 
advisors and make out their own 1040 Form, and file that one 
with a check. I think we would reform the tax laws so fast we 
wouldn't know what hit us. But you know, we are all getting a 
little comfortable with the Beardsley Rommel idea of 
withholding its source which, if we had to pay one big check at 
the end of the year with no withholding, that too would create 
a tax revolution. But apparently those ideas aren't acceptable 
to a majority here.
    Let me just mention a few comments that I want to get out 
of you and your thoughts. One of our problems in these various 
financial statements that are before us involve the nuclear 
cleanup liability. Comptroller General, in your testimony you 
say the executive branch has significantly underestimated the 
future costs that will be needed to clean up environmental 
contamination and the disposal of hazardous waste.
    What is the amount that GAO has picked on this particular 
area?
    Mr. Walker. Mr. Chairman, it is difficult for us to 
estimate what the exact amount is. That is one of the reasons 
that this is a problem area. But we know that it is in the tens 
of billions of dollars range.
    Mr. Horn. Would it be more than $100 billion? Because we 
are talking nuclear reactor waste, we are talking nuclear 
submarines being chopped up and their waste, and as I 
understand it, a lot of this occurs in the State of Washington, 
and we know nationwide we have this in the nongovernmental 
sector, hospitals, nuclear waste piled up waiting for disposal.
    Mr. Walker. It could be, but it is probably not, because 
there have been increases that have occurred over the last 
several years to increase the estimate of that liability, and I 
think as you know, Mr. Chairman, there is a range of issues 
here. It is not only with regard to the defense industry, for 
example, the decommissioning of nuclear subs, but it is also in 
the utility sector, the energy field with regard to nuclear 
power plants. It is a very serious issue, especially in light 
of base closings and other things where you have things that 
aren't nuclear, that there can be environmental issues 
associated with that as well that aren't nuclear related.
    Mr. Horn. Well, I think we had the problem throughout the 
executive branch. One, the Department of Defense has a strong 
program in terms of cleaning up the environment on bases that 
have been closed. But I must say, I don't see much action in 
that area, and I think there should be a lot more. And we also 
have the problems in other agencies on their own assets that 
they really can't account for them and put a dollar figure on 
them, which is very hard. What is the dollar figure on 
Yellowstone? It is priceless. You don't have--$100,000 or $100 
million wouldn't be relevant. How are we going to handle 
objects like that?
    Mr. Walker. Well, I think that is why we have to look at 
what is meaningful financial information to the Congress, to 
the President, and to the American public, and to the extent 
that it provides meaningful financial information, then we 
ought to express it in dollar amounts. To the extent that it 
really doesn't and it is more of a stewardship responsibility, 
there needs to be accountability--the numbers don't necessarily 
mean anything. We have to keep in mind what the purposes of 
these financial statements are and who the users are when we 
are thinking about things like heritage assets, such as 
monuments, national parks, even weapons systems. It is 
appropriate to have some accountability for the cost of weapons 
systems, but how significant is it to know what the discounted 
amortized cost of a B-2 bomber is? What are we going to be able 
to do with it? I doubt that we are going to have an alternative 
use for it.
    Mr. Horn. Of all of the agencies that the General 
Accounting Office looked at, which agencies have the worst 
inventory records on their supplies and all the rest?
    Mr. Walker. DOD.
    Mr. Horn. And that is known as the Department of Defense?
    Mr. Walker. That is correct, the Defense Department.
    Mr. Horn. And they tell us they are low on munitions. So do 
they just not have a system that tells us where they have in 
warehouses all over the world, or what?
    Mr. Walker. They have real challenges with regard to the 
inventory area. Our high-risk report noted that there was about 
$22 billion, is that correct? It was about $22 billion worth of 
inventory items that they may have, they just don't know where 
they are. Now, obviously that creates difficulty in trying to 
decide how to utilize inventory when you need it, whether you 
ought to order any additional materials to replace it, how you 
can effectively secure it, a range of issues. And a lot of this 
is normal inventory items rather than major weapons systems.
    Mr. DeSeve. Let me take the department's part in this in 
two ways. One, the department had systems for logistics and 
inventory that were controlled at various levels, they weren't 
necessarily centralized, and they didn't talk to their 
financial systems. Why? Never asked them to. We have never 
asked these questions before. So the department feels that it 
has good controls; they are not perfect controls, but good 
controls over its inventory and over its property. It has never 
had to do valuation before. The challenge of valuing 
Yellowstone is similar to the challenge of valuing Fort Ord or 
valuing some of the other properties that the department 
operates. So the valuation challenge remains and they are in 
the process of solving that problem.
    But second, I think we have to be careful not to mix apples 
and oranges here in the sense of a field commander knowing 
where his inventory is, being able to get a logistics system to 
get him that information or get him that material quickly is 
one test. Having that under control, under good asset control, 
having a central agency or a subordinate--a superior officer 
being able to see several inventories is also very important. 
But the department I think would tell you that they believe 
they have adequate controls in lots of different places. GAO 
would suggest that controls could be better, the efficiency of 
the department and its effectiveness would be improved by 
having better visibility of these assets. I agree with both 
things.
    Mr. Walker. Mr. Chairman, if I could add on that, I think 
DOD, the Department of Defense is a good example. As I look at 
government, there are two dimensions--the business of 
government and the mission of government. Missions vary, 
depending upon what department and agency you are dealing with. 
But all aspects of government need to run from an economical 
and an efficient basis. If you look at DOD from an 
effectiveness standpoint, some of the logistical issues that Ed 
is talking about are clearly an ``A'' on effectiveness. We are 
No. 1 militarily, we have proved it time and time again. On the 
other hand, from the standpoint of economy and efficiency, at 
best they are a ``D.'' We need to place a lot more time and 
attention on getting that grade up and freeing up billions of 
dollars for readiness, to close the delta on the needs versus 
wants versus affordability issue on critical weapons systems. 
Part of DOD's problem is that they have so many silos and mini 
silos and so many different systems nobody talks to each other. 
That is a management problem which can affect effectiveness as 
well. Fortunately, it hasn't to a great extent.
    Mr. Horn. I agree with you on that.
    Mr. Dodaro. Mr. Chairman, I might add, on the inventory 
area, the DOD inventory area, we at GAO have had that as one of 
our high-risk areas since 1990. There are problems in terms of 
keeping accurate inventories, and in some cases this is a 
contributing factor to over-purchasing in order to make sure 
everything is on hand. We are working with the department to 
try to improve their inventory-taking procedures to make sure 
that they have accurate perpetual inventories. They have so 
much inventory it is very difficult to use conventional end-of-
the-year, wall-to-wall, inventory-taking type techniques. So 
they need to improve that.
    The one positive thing I would say is that for the first 
time this past year, the logistical community and the 
acquisition community have engaged with GAO, the IGs, in 
undertaking efforts to work with the financial management 
community to support and fix some of these systems. Eighty 
percent of all of the information to prepare DOD's financial 
statements comes from outside the financial services arena, and 
in many cases their logistical records and some of the 
documentation and support of logistical records is not there as 
well.
    Mr. Horn. I thank you.
    I want to wind this up now. We might send a few questions 
to each of you for the record, and without objection, the 
question and answers will be put in at this point.
    Let me first thank the staff that has worked on this 
hearing. J. Russell George, the staff director, chief counsel 
for the Government Management, Information, and Technology 
Subcommittee; Bonnie Heald, the director of communications, 
professional staff member; to my immediate left, the person 
that has had the most work on this particular subject is Larry 
Malenich, the detailee from the General Accounting Office; and 
Mason Alinger, the clerk for our subcommittee; and then our 
faithful interns, Paul Wicker, Kacey Baker, Richard Lukas; and 
for the minority we have Faith Weiss and Jean Gosa. Faith is 
the counsel, Jean is the clerk for the minority. Willie Green 
is staff assistant; and our two court reporters, Lee Dotson and 
Julie Bryan.
    Let me just say in closing a few words. The financial story 
that we have portrayed over the last 2 hours probably is 
disconcerting to various taxpayers in the Nation, and I think 
we should all share with them, while progress has been made 
over 5 years. When we passed the act in the 103d Congress, we 
gave the executive branch 5 years to prepare for the first 
balance sheet in the history of the country. Well, progress is 
coming, but we sure have a lot more to do, and I will look to 
the Comptroller General, the Director of the Budget, and the 
Secretary of the Treasury working together, despite two 
branches of the Constitution being involved. I think our work 
has just begun in a lot of ways and we have a long way to go.
    In terms of the ongoing series of financial oversight by 
this subcommittee, we have already held hearings on the 
Internal Revenue Service, on the Federal Aviation 
Administration, on the Department of Justice, and on the Health 
Care Financing Administration. We will be going into this with 
other agencies, and health care financing in particular is one 
that concerns us, just as it concerns the administration. We 
would rather have all of that money that sometimes is 
overpayments or sometimes fraud, waste, and abuse in the 
program helping people, rather than sort of a loss to the 
Nation.
    We will continue our oversight on the financial 
accountability of the Department of Defense next month. We have 
them scheduled for then. Clearly, we need strong leadership in 
this area, and often, as we all know, financial accountability 
sort of wears people out and they sort of start dozing and 
their eyes droop and all of that. But it is very important. 
This is the taxpayers' money, and we want to make sure it is 
put to good use.
    I want to thank you again for coming and testifying and 
wish you all well. With that, we are adjourned.
    [Whereupon, at 12 p.m., the subcommittee was adjourned.]

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