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

                  1996: AGENCIES CONTINUE TO STRUGGLE



                               before the

                      INFORMATION, AND TECHNOLOGY

                                 of the

                              COMMITTEE ON
                           GOVERNMENT REFORM

                        HOUSE OF REPRESENTATIVES

                       ONE HUNDRED SIXTH CONGRESS

                             SECOND SESSION


                              JUNE 6, 2000


                           Serial No. 106-215


       Printed for the use of the Committee on Government Reform

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


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 For sale by the Superintendent of Documents, U.S. Government Printing 
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                     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
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
    Carolina                         ROD R. BLAGOJEVICH, Illinois
BOB BARR, Georgia                    DANNY K. DAVIS, Illinois
DAN MILLER, Florida                  JOHN F. TIERNEY, Massachusetts
ASA HUTCHINSON, Arkansas             JIM TURNER, Texas
LEE TERRY, Nebraska                  THOMAS H. ALLEN, Maine
JUDY BIGGERT, Illinois               HAROLD E. FORD, Jr., Tennessee
GREG WALDEN, Oregon                  JANICE D. SCHAKOWSKY, Illinois
DOUG OSE, California                             ------
PAUL RYAN, Wisconsin                 BERNARD SANDERS, Vermont 
HELEN CHENOWETH-HAGE, Idaho              (Independent)

                      Kevin Binger, Staff Director
                 Daniel R. Moll, Deputy Staff Director
           David A. Kass, Deputy Counsel and Parliamentarian
                    Lisa Smith Arafune, 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
                           Bryan Sisk, Clerk
                    Trey Henderson, Minority Counsel

                            C O N T E N T S

Hearing held on June 6, 2000.....................................     1
Statement of:
    Alderman, Karen C., Executive Director, Joint Financial 
      Management Improvement Program.............................    39
    Gotbaum, Joshua, Executive Associate Director and Controller, 
      Office of Management and Budget............................     3
    Holz, Arnold G., Chief Financial Officer, National 
      Aeronautics and Space Administration, accompanied by 
      Kenneth J. Winter, Deputy Chief Financial Officer..........    57
    Skelly, Thomas P., Director, Budget Service and Acting Chief 
      Financial Officer, Department of Education.................    49
    Steinhoff, Jeffrey C., Assistant Comptroller General, 
      Accounting and Information Management Programs, U.S. 
      General Accounting Office, accompanied by Gloria L. Jarmon, 
      Director of Health, Education and Human Services, 
      Accounting and Financial Management Issues.................    11
Letters, statements, etc., submitted for the record by:
    Alderman, Karen C., Executive Director, Joint Financial 
      Management Improvement Program, prepared statement of......    42
    Gotbaum, Joshua, Executive Associate Director and Controller, 
      Office of Management and Budget:
        Followup questions and responses.........................    91
        Information concerning FFMIA remediation plan status.....    69
        Prepared statement of....................................     6
    Holz, Arnold G., Chief Financial Officer, National 
      Aeronautics and Space Administration, accompanied by 
      Kenneth J. Winter, Deputy Chief Financial Officer, prepared 
      statement of...............................................    59
    Ose, Hon. Doug, a Representative in Congress from the State 
      of California, followup questions and responses............    83
    Skelly, Thomas P., Director, Budget Service and Acting Chief 
      Financial Officer, Department of Education, prepared 
      statement of...............................................    51
    Steinhoff, Jeffrey C., Assistant Comptroller General, 
      Accounting and Information Management Programs, U.S. 
      General Accounting Office, prepared statement of...........    14

                  1996: AGENCIES CONTINUE TO STRUGGLE


                         TUESDAY, JUNE 6, 2000

                  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 2247, Rayburn House Office Building, Hon. Stephen Horn 
(chairman of the subcommittee) presiding.
    Present: Representatives Horn and Ose.
    Staff present: J. Russell George, staff director and chief 
counsel; Louise DiBenedetto, professional staff member; Bonnie 
Heald, director of communications; Bryan Sisk, clerk; Elizabeth 
Seong and Michael Soon, interns; Trey Henderson, minority 
counsel; and Jean Gosa, minority clerk.
    Mr. Horn. A quorum about to be present, the Subcommittee on 
Government Management, Information, and Technology will come to 
    In 1990, Congress passed the Chief Financial Officers Act. 
This act established the foundation for a financial management 
structure in which Federal departments and agencies would be 
held accountable for providing reliable financial information 
to Congress and the American taxpayers. The act emphasized the 
need to improve financial management systems and controls to 
deter fraud, waste, and the misuse of government resources.
    Congress continued to buildupon this foundation with 
additional financial management legislation, including the 
Federal Financial Management Improvement Act of 1996. It has 
been nearly 4 years since this legislation became law. Today, 
we will discuss the progress Federal agencies have made in 
complying with the law. We will also discuss the significant 
challenges that are preventing many agencies from having 
management systems that provide reliable financial information 
on a day-to-day basis.
    As of today, we know that 20 of the 24 agencies and 
departments included in the Chief Financial Officers Act do not 
have financial management systems that comply with the Federal 
Financial Management Improvement Act. That number might rise to 
21 agencies when the Department of State finally issues its 
1999 financial audit report, which was due on March 31. That 
missed deadline is a separate problem, which we will also 
discuss today. Given the State Department's failure to issue a 
timely audit report and its failure to comply with the 
Financial Management Improvement Act in 1997 and 1998, it would 
be surprising to find that much had changed in 1999.
    During the subcommittee's hearing on the 1999 government- 
wide audits on March 31, the Comptroller General of the United 
States, Mr. David Walker, reported that ``agency financial 
systems overall are in poor condition and cannot provide 
reliable financial information for managing day-to-day 
government operations and holding managers accountable.''
    From the Comptroller General of the United States, Mr. 
Joshua Gotbaum, who is with us today from--he will be with us--
from the Office of Management and Budget, reported that the 
same financial management system challenges that confronted 
Federal departments and agencies 10 years ago still exist 
    The Federal Financial Management Improvement Act of 1996 
required that noncompliant agencies prepare remediation plans 
to bring their financial management systems into substantial 
compliance with the act within 3 years.
    Yet last October, the General Accounting Office reported 
that agencies had not submitted timely remediation plans and 
that most of the plans submitted did not comprehensively 
address financial management issues. That is simply 
unacceptable to Congress.
    We recognize that Federal departments and agencies face 
enormous challenges in correcting long-standing financial 
management systems problems. We also recognize that these 
challenges could take significant time and resources. However, 
we want to ensure that the intent of this act is taken 
seriously and that necessary changes are being made.
    I welcome all of you who are our panel today. It is one 
panel so we can have the discussion among ourselves in all 
    As you know--most of you have been here before--when we 
call on you in the order in which you are on the agenda, your 
full statement is put in the record, and we don't want you to 
read it to us. We have read it. What we want you to do is look 
us in the eye and summarize it for us in about 5, 6, 7 minutes.
    We are going to--as you know, we give the oath to all of 
you and the assistants who might advise you during the hearing. 
So if you will stand and raise your right hand and get your 
assistants also, the clerk will take their names to see that 
they have affirmed the oath.
    [Witnesses sworn.]
    Mr. Horn. We will note the seven witnesses and one helping 
behind the scenes. So please be seated.
    We will now start with Mr. Gotbaum--always good to see you, 
Josh. You are right on time--the Executive Associate Director 
with his limousine slowing down there at OMB, Executive 
Associate Director and Controller, Office of Management and 
Budget. That must take letterhead going this way to do all 
that. OK. You are going to give us a good summary and will tell 
us why the State Department takes so long to get things done.
    Mr. Gotbaum. And others.
    Mr. Horn. And others, that is right.


    Mr. Gotbaum. Mr. Chairman, thank you. Since I have 
submitted a statement for the record, I would like to make four 
points about the state of Federal financial systems and why I 
am grateful that this committee has undertaken this hearing.
    First, this matters intensely. Financial systems are at the 
heart of the reason why we are trying to reform financial 
management in the first place.
    Second, this is extremely difficult for the government to 
    Third, we are working on it very seriously. I will talk 
about how and where we have made progress and how and where we 
have not.
    Fourth, we need and appreciate both the patience and the 
pressure from Congress.
    I think it is important, Mr. Chairman, to put FFMIA and 
financial systems in the context of Federal management reforms 
generally. For 10 years Congress has, on a bipartisan basis 
with the administration, across administrations, been working 
to improve the way the Federal Government manages itself. This 
effort started with the CFO Act in 1990; and continued with the 
Government Performance and Results Act, which I consider to be 
one of the major government reform actions of the decade; GRMA 
in 1994 requiring financial statements; Clinger-Cohen, an 
essential improvement in the way we think about IT systems; 
and, finally, FFMIA. They have laid down a series of mandates.
    In response, we have, I want to be very clear, and I think 
it is important to say, we have come a very long way. It is 
also important to recognize we have even further to go. But to 
tick off briefly where we have come: we now have CFOs, we now 
have their staffs. We now have financial statements from 
agencies that we did not have before. We now have financial 
standards that we didn't have before.
    Ten years ago, the government couldn't have turned out an 
audit according to GAAP because there was no GAAP for it to 
have. We now have governmentwide financials, a long way from 
clean, but we have them. Agencies financials are improving. 
This is most important and this is why this hearing is so 
important to us: financial management systems such as they were 
10 years ago did not keep standard accounts, they couldn't 
communicate with each other, and they couldn't provide 
accurate, timely and reliable information.
    We now have done part of the job. We have GAAP-recognized 
standards, thanks to a lot of the folks to my left and the 
AICPA. We have established requirements for systems. We have 
revitalized JFMIP. I am very pleased Karen Alderman is here to 
testify, because JFMIP has been around a long time, Mr. 
Chairman, but what has happened in the last 2 or 3 years since 
Karen has taken over has been enormously helpful and important. 
So OMB has set up a system of testing of commercial systems and 
laid down a requirement that says that unless a system passes 
muster, agencies cannot buy it.
    So we have come a long way. We have an even longer way to 
    If I may, Mr. Chairman, I want to talk about what I think 
the real challenge is. We had systems. The Federal Government 
had dozens of systems, actually hundreds of financial systems. 
They were systems designed with old technology, they were 
designed for old purposes, and they were not designed to talk 
to each other and not designed to work with each other. They 
were designed for keeping track of cash or keeping track of 
budget requirements. They had no notions of accrual accounting 
in them.
    So the challenge here is that we need to upgrade, modify or 
scrap literally hundreds of systems while continuing to do the 
job of the government; and this is a very difficult, very long-
term challenge.
    FFMIAs requirements by themselves are really quite simple. 
They say you have to meet financial management systems 
requirements, you have got to meet accounting standards, now 
that we have them, and you have to use the Standard General 
Ledger. This is something which the agency had determined 
working with the auditor. Most agencies do not yet meet these 
tests. They don't meet the tests for reasons that I have 
discussed in the testimony, but I think two more are worth 
    One is the stove-piping nature of government. These were 
systems not designed to talk with each other; and the business 
of getting them to work with each other, is, frankly, 
difficult. Second, because we have been following the 
congressional mandate to improve management of Federal systems, 
we have been raising the bar, over the course of the past 
decade. We have been setting new, higher standards, and that is 
what we should do. But we ought to also recognize that has 
    I also think it is important to state for the record, Mr. 
Chairman, that although we are a long way from the promised 
land, agencies really are working at this and really are making 
progress. Agencies like VA, Interior, Education, and the Small 
Business Administration are in the process of figuring out what 
new systems they will need. GSA, Transportation, AID, HUD and 
Customs are in the process of installing new systems. And even 
by the tests of FFMIA, agencies like Justice, Labor and NASA 
meet the Standard General Ledger requirement. They don't meet 
the other two requirements. Commerce meets the standards 
requirements, and OPM and SSA report they meet the systems 
requirements. So agencies are making progress. We think this is 
a very hard job, but it is one that is ultimately 
    Since there has been an ongoing dialog between OMB and this 
committee over what is OMB doing in this process, I would like 
to talk about what we do.
    As you know, OMB is always, on the management side, doing a 
combination of threatening, cajoling, advising and laying down 
the law. In this area, we issued guidance shortly after FFMIA 
was passed in 1996 to help agencies and auditors.
    One of the things we learned over the last several years is 
that agencies and their auditors implement FFMIA in a variety 
of ways, so we are now in the process of revising our guidance 
to try to achieve greater consistency and try to focus on the 
real nub of FFMIA, which is to provide timely and reliable 
financial information. We are also working with JFMIP to issue 
a guide to help folks do this.
    Second, and I am going to defer to Karen Alderman, whose 
folks have done a really terrific job in this area, we have put 
in place a set of systems standards, standards on core 
financial systems and on other systems. These standards are not 
yet complete. We are now expanding this to property, grants and 
    Third, and this is the informal part of OMB, there is a 
process of consultation and support. We meet with agencies, we 
talk about their remediation plans, we talk about what they 
need. We work with the CFO Council and essentially try to do 
that special combination of pushing, cajoling and private 
criticism and public praise that OMB does.
    The last point, which I think is really quite important, is 
we work to bring this into the budget process, because one of 
the issues that comes to us when we talk to agencies about 
systems modernization is money. So what we have said formally 
and officially is we will support systems improvements in the 
budget process if they comply with Clinger-Cohen, they have the 
support of the agency head, there is a plan and an 
architecture, and it fits into FFMIA.
    When we do that, we do that both on the budget side and on 
the management side.
    Mr. Horn. Thank you. That has been very helpful.
    [The prepared statement of Mr. Gotbaum follows:]
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    Mr. Horn. Let us move now to the General Accounting Office, 
Jeffrey Steinhoff, the Assistant Comptroller General for 
Accounting and Information Management Programs, U.S. General 
Accounting Office.


    Mr. Steinhoff. Mr. Chairman, Mr. Ose, it is a pleasure to 
be here today to discuss the state of financial management 
systems. The bottom line, across the Federal Government efforts 
are under way to overhaul financial systems; and good progress 
is being made. At the same time, there is a long way to go, as 
major challenges remain.
    From the outset today, I want to dispel any notion that 
this is merely a compliance issue. The expectations of the CFO 
Act and FFMIA are integral to producing the relevant reliable 
and timely information needed to efficiently and effectively 
manage government operations day-to-day and to provide 
accountability. When Federal agencies can meet these 
expectations, they will have achieved what the Comptroller 
General has referred to as the end game.
    FFMIA bolstered the mandate of the CFO Act by focusing on 
the systems themselves, which is at the heart of what is wrong 
today. While clean audit opinions are an important measure of 
accountability, the end game is having systems in place that 
routinely provide needed financial information. Our study of 
world-class finance organizations--Boeing, Chase Manhattan, 
G.E., Hewlett Packard, Owens-Corning and Pfizer, and the States 
of Texas, Massachusetts and Virginia--found that they redefined 
the role of finance with a goal of adding value and providing 
meaningful information to decisionmakers while reducing routine 
backroom accounting costs.
    I want to read to you a message from the CFO at the 
Department of Energy. This is an agency that got a clean 
opinion, and this is an agency that also passed the FFMIA test. 
So energy is at that leading edge of doing well. This really 
captures the nexus of the challenge.
    This is from Michael Telson, the Energy CFO, ``the 
Department's financial management system needs to be upgraded 
to produce financial information faster and in an easily 
accessible manner to meet the changing needs of our program 
    That is what agencies really face today. Similar to results 
for fiscal year 1998, for fiscal year 1999, only three agencies 
were found to be compliant with FFMIA. I applaud them. My 
colleagues from NASA here today have worked real hard, as have 
the National Science Foundation and Energy.
    A number of agencies that attained clean audit opinions for 
fiscal year 1999 did so through heroic efforts that were 
outside the financial system, such as using statistical 
sampling to derive year-end balances. For example, the DOT IG 
reported, that manual and labor intensive efforts that DOT 
employed to attain its first clean audit opinion are expensive, 
prone to errors, and cannot be sustained. DOT worked very hard 
at this, I commend them for their result, but they had to hire 
additional contractors, they detailed employees, they paid 
overtime and compensatory time, and they had adjusting entries 
of $36 billion to get there.
    It is an important achievement, I applaud them, but, long-
term, they do not want to be spending their time and money on 
what I call cleaning up a backroom operation. They want to have 
this information readily come from their systems.
    As shown on the chart I brought today, over at your right, 
the IGs cited five basic reasons for noncompliance.
    First, non-integrated systems. I think this is the most 
problematic to achieving the end game. It was cited by 14 IGs; 
and for agencies such as DOD and IRS, it will take years and 
years of hard work to overcome this problem alone. It is a very 
complex issue.
    Second, inadequate reconciliation procedures were cited by 
14. In part, that is caused by having non-integrated systems; 
and, therefore, you have got to reconcile data.
    Third, systems that do not implement the Standard General 
Ledger, meaning it is very difficult to pull the consolidated 
statements together, and we don't have the kind of consistency 
    Mr. Horn. Excuse me, just for the record, because nobody 
will know what SGL is----
    Mr. Steinhoff. Standard General Ledger.
    Mr. Horn. Those in education, which your colleague is, you 
would think of student government loans.
    Mr. Steinhoff. I am sorry.
    Mr. Horn. That is why I am a nut on not having SGLs.
    Mr. Steinhoff. I have been an accountant too long.
    Fourth, a lack of adherence to accounting standards, 
including cost accounting. That was cited 15 times. Cost 
accounting is really at the heart of being able to implement 
GPRA in an effective manner.
    Finally, weak computer security, the reason cited most 
often, with 19 IGs reporting this issue.
    There are lots of efforts under way to upgrade financial 
systems, from reengineering basic processes to major redesigns 
of systems to the work of the JFMIP, which you will hear about 
today. These efforts must be sustained and will have to 
transcend this administration to remedy the underlying issues.
    We may be back in a few years to report that substantially 
more, perhaps all, of the 24 CFO Act agencies, have received a 
clean audit opinion. However, I feel much less confident in the 
short term that their systems will be in compliance with FFMIA 
and will meet the intended results of the CFO Act.
    Overhauling financial systems, as Mr. Gotbaum said, is much 
more difficult than devising and mastering a repeatable process 
for deriving year end numbers. This is heavy lifting, a tough 
job. Similar to my recent testimony before this subcommittee on 
DOD financial management, the successful Y2K experience shows 
that difficult challenges can be overcome. Government can get 
the job done through a disciplined process, in this case strict 
adherence to the Clinger-Cohen Act. There are no shortcuts, no 
free lunch. The past is littered with system failures, and 
Clinger-Cohen must be followed.
    Next, there must be top-level leadership, the tone and 
level of engagement at the top is critical to success. I think 
any agency that has had success will say that. In our work, 
looking at world-class finance organizations, that is what we 
    Finally, through a continuing strong congressional 
leadership and oversight, such as the work of this 
subcommittee. Only in this way will the Federal Government 
achieve the end game of the CFO Act.
    Mr. Chairman, this concludes my summary remarks. I would be 
pleased to answer any questions later that you or Mr. Ose might 
    Mr. Horn. And I am assuming Ms. Jarmon will be backup for 
you, because she is a very good witness. We have had her here 
before. We are glad to see you again.
    [The prepared statement of Mr. Steinhoff follows:]
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    Mr. Horn. We now go to Karen Alderman, Executive Director 
of the Joint Financial Management Improvement Program.


    Mrs. Alderman. Mr. Chairman, Mr. Ose, thank you for the 
opportunity to discuss the role of the Joint Financial 
Management Improvement Program in supporting the goals of the 
    The mission of JFMIP is to improve financial management 
practices in the government through a joint and cooperative 
effort. I am supported by the U.S. Department of Treasury, the 
General Accounting Office, the Office of Management and Budget, 
the Office of Personnel Management and all Federal agencies.
    The major JFMIP responsibilities with respect to Federal 
financial management systems includes issuing financial system 
requirements, testing and qualifying core financial software 
for agency use, and facilitating information exchange among all 
stakeholders, both public and private sectors.
    Regarding financial system requirements, JFMIP has been in 
the business of issuing financial management systems 
requirements documents since the 1980's. The framework for 
Federal financial management systems describes the Federal 
agency system architecture as including core financial system, 
managerial cost accounting, and 13 feeder systems.
    System requirement documents serve many roles. They 
facilitate the exchange of software for common administrative 
functions within the Federal Government; they help organize the 
private sector market by communicating mandatory functionality 
that commercial software must be able to provide to the Federal 
Government, as well as identifying value-added features desired 
by Federal agencies; they provide benchmarks for agency 
compliances under FFMIA and have served as a tool for oversight 
agencies to evaluate systems; and they also help agencies 
justify system improvements or replacements.
    Upon the passage of FFMIA in 1996, requirements documents 
existed only for the core financial system, and 6 of the 13 
subsidiary systems. Several of those documents needed to be 
updated for recent laws and regulatory revisions.
    Since 1998, JFMIP undertook efforts to bring all existing 
documents up to date and to develop documents for those 
functions where none had existed before. I brought a little 
color coded slide here for you that shows the progress in 2\1/
2\ years. The green are those documents that have been updated 
and reissued since 1998. The orange are those that are under 
way, including benefits, grants and property management 
systems; inventory system was issued in 1995; and those in 
blue, which includes acquisition, revenue, budget formulation 
and insurance claim systems, are yet to be worked on. But we 
have plans to address them starting by 2001.
    The second area I would like to highlight is the core 
financial system testing and qualification process. In 1998, 
the CFO Council and the JFMIP partnered to reengineer the core 
financial systems testing and qualification and procurement 
processes to improve the availability of commercial software 
and to improve the chances that agencies can successfully 
implement new systems.
    Prior to 1999, the testing of core financial systems 
software was accomplished in connection with the mandatory 
General Services Administration schedule for Federal financial 
management systems software. Information regarding the testing 
process was limited. The test addressed less than one-third of 
the existing requirements, and arrangements for software 
testing relied upon agency volunteers and other ad hoc 
    The CFO Council recommended, one, the establishment of a 
program management office under JFMIP with responsibility for 
developing tools and capabilities necessary to improve 
financial systems across the Federal Government; two, the 
separation of the test and qualification process from the 
procurement process to allow visibility of the testing; and, 
three, the establishment of an electronic knowledgebase to 
share information widely.
    October 1, 1999, marked the transition to the new process. 
The components of that new process included up-to-date core 
financial system requirements, complemented by the 
identification and prioritization of value-added features 
desired by Federal agencies; an open and comprehensive testing 
and qualification process that tests, in whole or in part, all 
testable mandatory requirements; the modification of OMB 
Circular A-127 ``Financial Management Systems'' to eliminate 
the mandatory FMSs schedule and to allow agencies to procure 
under any procurement vehicle, as long as agencies procure 
software for core financial systems that have been qualified by 
    The purpose of the testing was to reduce risk to the 
government, produce useful information, reduce agency test 
effort, and provide critical information to commercial business 
partners to allow them to be successful in providing core 
accounting software that meets Federal requirements.
    The JFMIP test is efficient. It is 166 test steps that test 
91 percent of the mandatory requirements fully or partially, 
and GAO helped us validate this test.
    As of May 2000, nine software products offered by seven 
vendors have received certificates of compliance.
    JFMIP maintains the current list of qualified software on 
the knowledgebase along with information about value-added 
features and our test methodologies.
    In addition, our testing process is designed to ensure that 
our commercial business partners update their products to meet 
new Federal requirements. When a software package passes, JFMIP 
issues that certificate for 3 years. If Federal requirements 
change during that 3-year period, we institute and implement an 
incremental test the vendor must pass in order to retain that 
certificate of compliance. In 2000, JFMIP will be administering 
the first incremental test to ensure that software can support 
the Federal Agencies' Centralized Trial-Balance System, FACTS 
II. Those in the business know that acronym. That is the 
reporting process for budget formulation data and budget 
execution data to the Office of Management and Budget and the 
    Other JFMIP efforts to improve financial management systems 
include improving the financial systems compliance review 
process, which Mr. Gotbaum mentioned; developing a road map 
that provides accessible information to help agencies manage 
full life cycle of financial management system planning, 
implementation and management; and, finally, building capacity 
within the Federal financial management work force to manage 
transition to the next generation of financial management 
    In summary, JFMIP is leveraging resources to provide system 
requirements, testing and tools, and, in doing so, demonstrates 
commitment among Federal stakeholders to address common system 
challenges in a cost-effective manner. In the short term, the 
payoff has been to reduce agencies' costs and risks in 
replacing systems. The longer term payoff will help in 
achieving the goals of the FFMIA.
    Thank you very much.
    Mr. Horn. Thank you.
    [The prepared statement of Mrs. Alderman follows:]
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    Mr. Horn. We now move the to the departments. We start with 
Mr. Thomas P. Skelly, the Director of Budget Service and Acting 
Chief Financial Officer for the Department of Education.


    Mr. Skelly. Thank you, Mr. Chairman and Mr. Ose.
    In sum, the Department of Education has not complied with 
the FFMIA. We have made significant progress, we believe, in 
addressing some of the requirements, but we are not in full 
compliance today. I would like to discuss several areas in 
which we have made progresses and a few challenges we have.
    One significant area of progress is that we have developed 
the remediation plan requirement by the act. We believe it is a 
good plan. GAO did a report and indicated that it thought if we 
implemented that plan fully, if we had good success, we would 
have a fairly good chance of complying with the act. We are 
about halfway through implementation of that plan, and we think 
we are on schedule.
    A second area of progress, critical part of the plan, was 
replacing our general ledger system. We had acquired a general 
ledger system back in 1995. It didn't work. We had implemented 
in 1998. It didn't do the things we thought it would do, it 
didn't produce integrated financial statements, it did not 
generate our statements at the end of the year.
    What we did in March following selection of a product that 
was on the JFMIP schedule was to go out and buy Oracle 
financial software. We think the Oracle package will do the job 
for us. We are in the design stage now. We think it will be 
late 2001 before we have implemented it fully. We are phasing 
it overtime, not trying to do it all at once, but we think we 
will meet that schedule.
    We did do extensive testing of the product beyond what 
JFMIP had done to make sure that it could do the end-of-year 
closeout for us and cover both our proprietary accounts and our 
budgetary accounts simultaneously.
    The third area of progress we have made is to do more 
timely reconciliations of our data. We are now doing interim 
statements, and we are also doing monthly reconciliations. 
Reconciliations and lack of those and the quality of data is 
the weakness that has been cited by our independent end 
auditors, Ernst & Young, by the GAO and the Inspector General. 
To help us expedite our reconciliation process, we acquired 
some software from a company called CheckFree. It is a software 
tool that banks use to help them do their reconciliation 
balances at the end of the day. It has greatly automated our 
process, and we are doing it much faster than we did before.
    Those are three areas of progress, the planned Oracle 
software acquisition and the more prompt reconciliations, but 
we do see challenges. Those challenges would include the time 
that we need to implement this new system, given the complexity 
of our appropriations.
    Our Department of Education has over 200 appropriations, it 
has 175 programs, we give out $75 billion per year in loans, 
grants, formula grants, discretionary grants. We have 
contracts. We have administrative funds. We have a lot of 
activity going on. We have several, 14 in fact, feeder systems. 
Those feeder systems, which took a while to get compliant with 
Y2K last year, are supposed to send in information to our 
accounting system so we can produce one set of accounting 
statements. We do think that is a challenge.
    A second challenge is that the standards keep changing. 
They should evolve over time. The world changes, people expect 
additional data. In 1997, the Department of Education did get a 
clean opinion. Only three statements were required in 1997. In 
1998 and 1999, five were required. We didn't get a clean 
opinion in 1999 and 1999. We did have to make some additional 
changes to create those new statements.
    Another example of standards changing is direct loans. The 
accounting standards we got on those run 57 pages.
    A third challenge that we have is just the competing times 
for our demand and attention. We have not just FFMIA, we have 
the Integrity Act passed earlier, the CFO Act, the GMRA, the 
Clinger-Cohen Act, and other acts and requirements, things we 
need to fulfill. We have to make choices about what we do. We 
have to require resources and apply those.
    At the Department of Education we are committed to our 
remediation plan that involves our successful implementation of 
Oracle financial software. We think that should lead to 
integrated financial statements, timely production of data. The 
new integrated systems plus our increased attention to 
reconciliation data quality should get us into compliance with 
FFMIA and address many of our other competing priorities at the 
same time.
    Mr. Chairman, I would be glad to answer your or Mr. Ose's 
    Mr. Horn. Well, appreciate that.
    [The prepared statement of Mr. Skelly follows:]
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    Mr. Horn. Next is the National Aeronautics and Space 
Administration, Arnold Holz, the Chief Financial Officer. We 
are glad to have you here again.


    Mr. Holz. Thank you, Mr. Chairman. Good morning, Mr. 
    Mr. Horn. I might say you are accompanied by Mr. Winter, 
the Deputy Chief Financial Officer.
    Mr. Holz. And very fortunate I am indeed.
    I am Arnold Holz, Chief Financial Officer at the National 
Aeronautics and Space Administration. I am here today to 
highlight the progress and challenges that NASA addressed in 
implementing the Federal Financial Management Improvement Act. 
I am pleased to report we are in compliance with the act.
    Achieving and maintaining compliance has been extremely 
challenging. In that regard, we continue to face major 
challenges. These include the need for strengthened systems and 
staff capabilities to efficiently sustain compliance and to 
provide required agency financial management information.
    NASA's efforts to achieve compliance with the Federal 
Management Improvement Act predate the act's enactment. For 
example, NASA began preparing agency-wide financial statements 
for fiscal year 1992, several years before required. We 
obtained our first of six consistent unqualified clean opinions 
for fiscal year 1994. NASA, like other agencies, encountered 
and addressed a variety of challenges in obtaining clean 
opinions and in achieving compliance with the act. The 
challenges included key cost accounting and property, plant and 
equipment complications.
    Our basic approach follows. We anticipated the challenges, 
and we started early. We evaluated and tested analytical and 
process alternatives. We implemented workable improvements. We 
coordinated improvements with our independent auditor, first 
the IG, and then later Arthur Anderson, and we disclosed 
related information in annual reports.
    We anticipate several ongoing challenges, two major future 
challenges focus on systems and staff. NASA's existing systems 
are decentralized and inefficient. They are not fully 
automated, they are not fully integrated, and they are not 
fully standardized. Recognizing these inefficiencies, NASA has 
initiated a new effort to implement a standard, efficient, 
integrated, agency-wide financial management system. Based on 
prior experience, the new system initiative is expected to be 
extremely challenging.
    NASA's staff is the critical element of our success. In 
that regard we have initiated a comprehensive staff development 
program to ensure that staff capabilities remain commensurate 
with the future challenges. Individuals are strongly encouraged 
to develop individual development plans, and resources have 
been made available for professional development activities 
such as classroom training, rotational assignments and other 
career-enhancing activities.
    NASA can point to success in achieving quality reporting, 
clean opinions and compliance with the Federal Financial 
Management Improvement Act. Such success was achieved by 
anticipating the challenges and assessing remedies and actively 
implementing required supplemental improvements. We plan to 
continue to pursue and achieve similar future financial 
management excellence.
    Mr. Chairman, that completes a summary of my more detailed 
statement. I would be pleased to respond to any questions of 
you or Mr. Ose.
    Mr. Horn. Thank you very much.
    [The prepared statement of Mr. Holz follows:]
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    Mr. Horn. I now yield to my colleague from California, Mr. 
Ose, for such time as he may consume to question the witnesses.
    Mr. Ose. Thank you, Mr. Chairman. I have a number of 
questions, and I am going to move through them as methodically 
as I can.
    Mr. Holz, you have achieved compliance with the FFMIA, and 
you have a clean opinion. What I am trying to understand 
clearly from an in-the-field perspective is how does compliance 
with FFMIA work hand in hand with achieving or receiving a 
clean audit opinion? Just give me some sense of that, if you 
would, please.
    Mr. Holz. Yes. I would like to use the word framework 
sometimes. Achieving a clean opinion requires that financial 
data must be presented fairly in accordance with generally 
accepted accounting principles. The act requires, among other 
things, adequate financial systems that produce timely, 
accurate, reliable financial data and adoption of Federal 
accounting standards. Compliance with these FFMIA requirements 
fully supports the preparation of financial statements that are 
accurate and reliable and consistent with Federal accounting 
standards, thereby facilitating the receipt of a clean opinion.
    Mr. Ose. I know that Mr. Skelly referenced this not only in 
his statement but also his written statement. NASA's books, if 
you will, you check them against the Treasury frequently, 
infrequently? On a periodic basis, how often do you reconcile?
    Mr. Winter. Monthly.
    Mr. Ose. How long did it take you to get to that? In other 
words, have you been doing that forever?
    Mr. Winter. Yes, we have been doing that for years. But the 
initial reconciliations were not as clean as the ones we are in 
    Mr. Ose. So it is an incremental process?
    Mr. Winter. Yes.
    Mr. Ose. Mr. Skelly, at the Department of Education in 
particular, the greatest challenges that you face are what? I 
read the part about the Treasury number and all that, but what 
is your biggest challenge there?
    Mr. Skelly. The biggest one is probably just the time, the 
time it will take us to try to get this new system, Oracle, up, 
while we are trying to do other things at the same time. We 
have, again, a very complex set of accounts. We have over 200 
individual appropriations that we have to track, a number of 
different programs. We have feeder systems, for example, that 
provide us data from the guaranteed student loan program or the 
direct student loan program, from our impact aid program. The 
data in all those systems is not necessarily good when we get 
it, so it requires going back to the folks who work with those 
systems and making sure we have the best data possible. It is 
not easy to just push one button and get all the data from the 
14 feeder systems and have it feed into the general ledger 
systems so we can produce our automated systems.
    Mr. Ose. We are going to have to break this down a little 
bit, because you are going to have to speak--you are going to 
have to lower your intellectual level when you speak to me. 
Break it down into smaller words, if you would.
    What I understand you to be saying is that DOE has a 
system, Oracle, that it has purchased to replace a similar 
system that it purchased in 1995 and that the pieces of your 
books that feed into that don't necessarily have the same 
architecture in their systems.
    Mr. Skelly. That is true.
    Mr. Ose. OK. Now, what is it that DOE is doing to reconcile 
that specific issue? In other words, are you going backward 
down the chain to standardize the systems, or are attempts 
being made in a different manner to make sure that the things 
recognize them?
    Mr. Skelly. We are trying to do some of both--from the 
bottom up and from the top down. It is a coincidence, almost, 
that the Oracle software is the same computer platform that is 
used already for our student financial aid programs.
    Mr. Ose. That is good planning. That is not a coincidence.
    Mr. Skelly. That is a very long story. But it is also the 
software that was used for some of our financial data that is 
in our grants payments system. So you have two of these feeder 
systems using the same software, so it will make it relatively 
easy, we hope, to have standardized accounting coding when we 
do tie all of the systems together.
    Mr. Ose. In terms of--if full compliance has a value of 
one, how far along are you--0.5, 0.7?
    Mr. Skelly. There are three key elements that the act 
requires. One is that we comply with Federal financial 
management systems requirements, a second is we have to meet 
all the Federal accounting standards, and a third is that the 
U.S. general ledger at the transaction level is something we 
comply with. I think we are halfway there.
    Mr. Ose. On an overall basis?
    Mr. Skelly. On an overall basis.
    Mr. Ose. Let me shift, if I may, to Mr. Gotbaum. I want to 
talk for a minute about the remediation plans. The act itself 
is very specific about when a remediation plan is supposed to 
be delivered and the like, and we do have some apparent 
problems by virtue of the reports we have received on the 
opinions in different agencies.
    In terms of the remediation plans, it is my understanding 
that only 3 of the 21 agencies met the deadline in September 
for submitting their plans. What I am curious about is what is 
OMB's approach to addressing that problem so that such 
remediation plans are submitted timely?
    Mr. Gotbaum. Mr. Ose, if I communicated that in my 
statement, that is not true, and it is a disservice to the 
    Mr. Ose. Go ahead.
    Mr. Gotbaum. Most agencies do not comply with FFMIA. If 
they don't, as the law says, the agency head is required to 
develop a remediation plan and submit it to us. All of the 
agencies that do not comply with FFMIA have submitted to OMB 
remediation plans. Some of those remediation plans are 
documents that I would be comfortable showing before this 
committee; and some of those remediation plans, frankly, need a 
little remediation. But just to be clear, every agency is 
complying with the procedural requirement of the law that if 
they are out of compliance, they submit to us a plan.
    Just to finish the point, some of those plans talk about 
compliance within 3 years, and some of those plans are honest 
and say this is going to take longer than that. For example, 
the Department of Defense, which we all recognize is our 
largest management challenge, it makes no bones about it. They 
say we are working to integrate our systems and we are working 
to get rid of legacy systems and both modernize and consolidate 
at the same time; and they, to my view commendably and 
honestly, say we are working on this as fast as we can; it is 
going to take longer than 3 years.
    So we have in-house at OMB remediation plans from all but 
five agencies. Those are five agencies that say that they are 
in compliance with FFMIA.
    Mr. Ose. Let me rephrase my question. You have got 
remediation plans submitted from all the agencies. The act 
talks about a specific time line during which those plans 
should be submitted. If I could be more specific, how many of 
the agencies have submitted their remediation plans on time?
    Mr. Gotbaum. My understanding, Mr. Ose, is that for those 
agencies that are required to have submitted their plans by now 
have done so. Because the law, as you know, has this 
architecture where the agencies develop a remediation plan and 
submit it after they receive their audits. For example, for 
fiscal year 1999 there are agencies for which the deadline has 
not yet come; and we have not yet received plans for those 
agencies. Based on fiscal year 1998, everybody who owed one 
sent us one.
    Mr. Ose. I am trying to get to the September deadline. If I 
understand correctly, and then I appreciate the clarification, 
for the deadline that passed September 30, 1999, of the 21 
agencies that were supposed to submit remediation plans, only 3 
did on time. You may have received them since. I am trying to 
make sure I understand that.
    Mr. Gotbaum. Mr. Ose, I don't want to mislead you. Maybe 
the best thing, if I may, is to task us to list agency by 
agency when a report is due, and whether we have received it. 
Because since the act talks about submitting a remediation plan 
after you receive your audit and the audit is due March 1, we 
are right now in the 4-month window between March 1 and the 
time when we expect to receive fiscal year 1999 remediation 
plans. Mr. Horn will be amused to note, for example, that the 
Department of State, which has yet to produce an audit, has 
produced a remediation plan. So in general we have received 
    If I may, with the forbearance of the committee, let me 
submit for the record a list agency by agency of when the 
effective deadline is and whether we have received it. Would 
that be helpful?
    Mr. Ose. If you could do that, for instance, by year, like 
1998, 1999, that way we could get some sense of progression, if 
you will.
    Mr. Horn. Without objection, that presentation will be put 
in the record at this point.
    [The information referred to follows:]
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    Mr. Ose. Mr. Steinhoff, let me try it with you here on 
this. In terms of this process on the remediation plans that 
have been submitted, are we complying in a timely fashion? And 
if we are not, what additional efforts do you believe OMB could 
be doing to ensure that such plans are adequately designed and 
timely submitted?
    Mr. Steinhoff. With respect to whether they are on time or 
not, we did look at the fiscal year 1997 submissions. We are 
now looking at the fiscal year 1998 submissions and will be 
reporting according to the act by October 1 of this year.
    There were several that did not in the past submit 
remediation plans on time, State being one, I believe it is now 
in, but State did not file a remediation plan until recently. 
Three others for which management did not agree with the 
auditor FEMA, SSA and OPM--did not in fact file remediation 
plans, to my knowledge.
    These plans are important. I worked very closely with 
Senator Brown and his staff when he was fashioning this bill. 
He was a CPA as well as a lawyer, and he knew the importance of 
the underlying systems. And he knew, getting back to one of 
your previous questions, that you could attain a clean audit 
opinion by going through heroic efforts, such as ad hoc 
procedures, to compile numbers, but not have good underlying 
systems, which is the end game, which is what business expects 
and what world-class organizations want to have on a day-to-day 
basis. So he put in place this mechanism to report back on the 
underlying systems.
    It was expected that the remediation plans be very 
important, and it is key that people get behind those plans and 
do a couple of things: One, make a determination whether or not 
the agency involved really has the capacity to carry out the 
plan. Do they have the qualified people? Do they have a 
disciplined process in place? Are they making sure they go from 
A to B before they go to C? Are they following Clinger-Cohen? 
Two, it is very important that milestone dates be provided. And 
perhaps rather than once-a-year reporting, in this case about 
1-year lag time, you would have periodic reporting, perhaps 
once a quarter, where agencies are showing how they are meeting 
certain milestones.
    Developing systems is difficult work, as I mentioned 
before, heavy lifting. The experiences of the past have not 
always been good.
    People do go in optimistic. I am wishing Mr. Skelly well, 
but the previous team at Education also thought they were going 
to get to the end game back in 1995, and they didn't. It is a 
tough job; and it is very, very key that these issues be really 
kept at the forefront, that people focused on progress on a 
regular basis, and that there be clear accountability for 
    Mr. Ose. I want to diverge a little bit from my questions 
here, Mr. Chairman, if I may.
    I think the point Mr. Steinhoff is making is particularly 
apt as you look at his first point in terms of an agency's 
ability to comply, without being judgmental about their 
intention but the ability. If I could read between the lines, 
one of the difficulties we have, it seems, is that we have 
people who while seeking the objective may not have, for 
instance, the training they may need in this particular area 
and then we get caught in this little box.
    If I could, I would like to suggest perhaps some future 
point maybe we want to look at the training that we provide 
within our auditor corps as just a standard operating question.
    Mr. Horn. I think that's an excellent idea.
    Mr. Ose. Let me go on, if I can.
    Mr. Gotbaum, going back to the 3-year time line, the act 
requires the substantial--the act requires that if an agency 
cannot be in substantial compliance within 3 years from the 
date of a determination, then that agency must specify its most 
feasible date by which compliance can be met.
    My question is: What agency currently is identified as 
having the latest compliance date and what is that date?
    Mr. Gotbaum. I think, Mr. Ose, the agency that all folks 
agree is the furthest from this goal, including that agency 
itself, is the Department of Defense. And as I mentioned in my 
oral testimony, they honestly cannot give us a date that passes 
muster with them, much less with me or Jeff Steinhoff, as to 
when they can do this. What they have done is they have said, 
``Here is our plan for consolidation of systems and for 
modernization of systems for the next 3 to 5 years,'' and they 
have laid that out before us.
    That's a case where we actually meet with them, how often, 
once a quarter at this point?
    Mr. Steinhoff. Probably every 2 months.
    Mr. Gotbaum. OK. We and GAO meet with them, in effect, to 
say how is it going? But they make no bones about the fact that 
they have so many systems, such a large consolidation job, that 
they can't do this within the 3-year timeframe. There is always 
a judgment, sir, you make about how you use a deadline.
    Our view, and it is controvertible, is that we use a 
deadline to encourage, to nudge, to make sure that people, in 
fact, are doing what they need to do. So what we have said to 
the Department of Defense and to other agencies on their 
remediation plans is tell us what you think is realistic and 
work at it.
    We have discovered, even with agencies that are really good 
that it takes time. For example, Arnie Holz and the folks at 
NASA, who are very good, and who have done a terrific job, in 
the process of their systems modernization had to start over 
again once, at least once.
    So what we find is that it is important, that there be 
continuing pressure and oversight from you as well as from us. 
That's the reason why we think this hearing is so important. It 
is very hard to get a time line on a plan that you can 
absolutely rely on when you are talking about installing a 
    So what we do is we say: give us the plan and report to us 
periodically about it.
    We think that's the most effective way to get progress.
    Mr. Ose. If I could just offer one observation. NASA has a 
system that--excuse me, their system reports really are a 
function of, by the testimony, a nonintegrated financial 
system, much as you have just described. Yet, they are in 
    Now, the question I have is, are the programs so big at 
some of these other agencies that we can't get there or do we 
want to take Mr. Holz' team and bring them over here and set 
them to work on that?
    Mr. Gotbaum. Actually, you should know, Mr. Ose, what the 
folks at the Department of Agriculture did on this. It is very 
commendable, because as I am sure you know there is a history 
in the Federal Government of ``not invented here'' so that each 
agency thinks their problem is unique. But very commendably the 
CFO of the Department of Agriculture, Sally Thompson, saw a 
team in the Internal Revenue Service that had just implemented 
a new system. Obviously, the IRS has its own problems and its 
own challenges, but they had implemented one system that works 
over there and she moved them lock, stock and barrel over to 
the Department of Agriculture to install their system.
    Mr. Ose. Did it work?
    Mr. Gotbaum. It is being implemented. So it is too soon to 
say. It is too soon to say. They are working on it.
    I think the fairest thing to say, Mr. Ose, is that since 
organizations outside government have, in fact, implemented 
financial systems. This was Jeff Steinhoff's point about world 
class finance. Organizations outside government have 
implemented financial systems that are integrated and do 
provide data reliably. It can be done.
    In the Federal Government, because of our tradition of 
stove-piping and decentralization, it is harder. In the same 
way that over the past 10 years we got financial systems where 
they didn't exist before and now we have clean audits in half 
the agencies, we can do this; we can get there.
    That's why, as I said in my testimony, what this requires 
from you all is a combination of both patience and pressure. 
This is not a case in which an agency is going to be able to, 
in most cases, check the box and convince either us or you that 
they are doing the right job or they are not doing the right 
job. This is a case where time after time, periodically, you 
need to call folks forward as we do, and say what have you 
done? Because some of those times it will be like NASA where 
they comply with FFMIA but still have a ways to go. Other times 
they will be like Education, where they do not comply with 
FFMIA but, again, they are trying to install a new system.
    We have no guarantees and there are no guarantees that the 
system that NASA is putting in now or the system that Education 
is putting in now will at the end of the day work the way we 
want it. This is not like Windows 95 where you just put it in 
the machine and boot it up.
    So what we think is important is that they work at it 
seriously, and in most cases they are. It is important that 
they know that we are watching and that you are watching and 
that, as Jeff Steinhoff suggested, that they report on it 
periodically so that the pressure stays on.
    Mr. Ose. Let me, if I could then, hijack your point then 
and go to Mr. Holz and make the point that while NASA doesn't 
have a single integrated financial management system, you are 
in compliance with the act and, as I understand it, you have a 
clean opinion.
    Now, I am tempted to ask, how could this happen?
    Mr. Holz. That's a good question. Each year, as part of its 
process, as part of its ongoing process, NASA has to match up 
its systems and processes and its policies against criteria 
that are established. I guess pursuant to the act and with OMB 
the auditing standards, we have to apply against those 
criterion to determine whether we are substantially in 
compliance or not. The mechanism provides for substantially in 
    We are substantially in compliance so we meet that test. 
About you are--and we do have good policies and procedures and 
we have put in compensating controls and processes to make sure 
that our nonintegrated systems can provide the information 
    NASA has all kinds of systems providing all kinds of data 
at many different levels and details to support management but 
it is not integrated and it is not standard across the agency.
    Again, the point is that we meet the test against criteria 
for substantial compliance. Do we want a fully integrated 
financial management system that applies standard processes in 
software and transactions across the agency in an efficient, 
timely fashion? You bet we do.
    Now, to get that is, in itself, a very significant 
challenge from several perspectives. One, it is a very 
difficult management challenge because it requires change. You 
are talking about changed management. It is not, as my 
colleague here mentioned, it is not just a matter of pushing a 
button. You cannot understand--no, you can understand, you need 
to understand the difficulty that changed management requires 
as you move from typical legacy systems, which were entrenched 
in everybody's mind, and move to a more state-of-the-art with 
all of its complexity in order to get the benefits that you 
    So let's see, where was I going? One was the management 
challenge and the other--I think the other, frankly, has to do 
with the Federal Government is evolving rather rapidly in the 
ability to acquire appropriate, adequate systems that work. You 
couple together the currentness of the emerging technology 
that's coming available through new software products, along 
with the changed management, to fit yourself back into that 
software in your business processes, you couple that together 
and that is an extremely serious, difficult challenge to 
overcome. As good as we are at NASA, as good as we are at NASA, 
I don't want to underestimate the complexity of that challenge.
    Now we are going to work that management challenge because 
we want an integrated system that provides more timely data. 
But in terms of your question about compliance, that's how we 
got there. It is a question of matching up against criteria 
provided in the act and in the auditing standards that allow 
for substantial requirements--substantial compliance.
    If that language was not there, we would have difficulty 
with it. But we are able to achieve the annual audited 
financial requirements. We are able to track our transactions 
back through a standard general ledger process. Our systems are 
nonintegrated but we have compensating controls in place.
    We have good, strong, financial management policies which 
we follow and enforce, and if you will let me have one more 
minute here, I want to go back to a word that I think Jeff 
Gotbaum used in the beginning when he enumerated about four 
    Jeff, was the first word ``intensity?'' I wrote it down, 
and I think it was intensity. If not, intensity is important 
because you need an intense and concentrated, clear focus on 
what you are trying to accomplish.
    The other thing is, that Jeff mentioned, was difficult. It 
is difficult. It can't be business as usual. To get clean 
opinions takes a lot of hard work by a lot of smart people, and 
you have to work at it every day. You have to work at it every 
day, whether you have good modern systems or whether you don't.
    So, geez, I have given you a long answer to your question. 
Well, I am fired up. I love this work. I have been doing it all 
my life.
    Mr. Ose. Your answer actually begs a question that we all 
have, is that when do you expect NASA to have a single 
integrated financial management system?
    Mr. Holz. Well, Jeff mentioned we started down this road 
before and frankly we were unsuccessful because the software 
that we had acquired couldn't measure up and do the job. So we 
are in the process of getting out of that and we are 
revectoring into a new initiative where we are going to use the 
JFMIP schedules and processes.
    I made a mistake once before about saying when we were 
going to do it and I am not going to do that again. The lessons 
learned, we are going to crawl before we walk. We are going to 
test and proof before we buy. We are going to run prototypes. 
We are going to get down to a software that's going to work for 
this agency. Core financial is the primary No. 1 thing we are 
going to do. The other functions are going to be discrete 
activities that will tag along. We are going to take this 
overly complicated process and make it as clear, focused and 
simple as possible and we are going to push until we get it, 
but basically we are going to buy software that works. And if 
it doesn't, we are going to mitigate our risk by keeping it 
incrementally small until we prove it and then we are going to 
roll it out across the agency.
    We have 10 centers, 10 different cultures at work here, and 
the challenge will be to hold all that together. But we are 
going to do it based on proven software and techniques, not 
unproven. A little different than what we did before.
    Mr. Ose. I can understand your reluctance about the date. 
Let's explore this a little bit further.
    Of the 10 centers that you have, how many centers per year 
are you bringing into the fold, so to speak, for standardizing 
the approaches?
    Mr. Holz. The first thing we want to understand, simply, 
and understand I am going with you here because I believe in 
what we are doing and yet I am very concerned about the 
challenge and I want this to be a success story in the end. My 
good colleague here, he talked a little bit about he was 
getting into things like conversion issues, cleaning up data, 
turning on new systems. When you do that, experience would tell 
me you have a good year or two of shake-out.
    Mr. Ose. Per center or overall?
    Mr. Holz. Per implementation.
    Mr. Ose. All right.
    Mr. Holz. A lot of that depends on--I mean, if you have a 
very small organization, one location, you are in control of 
everything and it is very neatly packaged, I would say a year 
to 18 months before you are done, before you get through a 
complete cycle, shake out all the difficulties and then have a 
good closing procedures.
    You multiply that times 10 complex arrangements, you better 
know the results of the first 1 before you start down the other 
9 because you could create utter chaos and loss of control. One 
thing we are not going to do is lose control.
    So we are going to do it in a pilot center. We are going to 
make sure that we know we have this thing adequately under 
control, and then based on what we learned from that first 
conversion and implementation at that pilot we will then build 
that experience into our scheduling and process.
    Mr. Ose. Is the pilot conversion underway?
    Mr. Holz. No, because we are in acquisition right now. We 
are beginning to go down the acquisition process.
    Mr. Ose. Have you started the testing of the acquired model 
    Mr. Holz. Our process will be to down select from a number 
of--I don't know if my terminology is right here. I am not a 
procurement person so I will do the best I can, but we are in 
the process of going from the several that are on the schedule 
down to three, and then we will dig further into those three 
and go to two and then we will configure, test and prove the 
two and then we will get to one. When we get to the one, that's 
the one we will pilot.
    So the process is----
    Mr. Ose. When do you think you will get to the one?
    Mr. Holz. October. We will probably have a contract by 
November, right around the end of October.
    Mr. Ose. Of this calendar year?
    Mr. Holz. Yes, sir. Once we know that one, that's the one 
that's going to be standard throughout the agency.
    Mr. Ose. Then from there you roll it out to one of the 
centers to test?
    Mr. Holz. We will start at one center and then we will get 
into implementation at that center and then, based on what we 
learn from that, we will establish a roll-out schedule for the 
rest of the agency. It is not going to take forever but I am 
not going to tell you it is 2 years either because I just don't 
know yet.
    This is not to be fooled with. You are talking about the 
fundamental internal accounting controls that affect 
disbursements and moneys pursuant to appropriations. You have 
to be very careful that you don't lose the integrity of your 
system. You can easily do that if you make it too big too fast.
    Mr. Ose. If I understand----
    Mr. Holz. That's just my perspective here based on some 
years of having done this effort.
    Mr. Ose. I am trying to synthesize your comments into one 
timeframe, if I can, and that is that commencing in October or 
November the selected system will be rolled out to a center, 1 
of your 10 centers; that it will take somewhere between 12 and 
18 months to fully implement that and take it through a cycle 
and test it; and that subsequent to that opinion on the results 
of that pilot, it would then be spread to the other 9 sites?
    Mr. Holz. I don't think it will be as serial as you 
described it, but you have the general--you have the drift of 
it but I don't think it is going to be as serial. In other 
words, we are not going to wait until the end to make the 
decision about No. 2 but we will be enough into it that we will 
have the comfort level that yes, A, this is the package; B, it 
is implemented within a reasonable timeframe; and, C, that we 
will not put the agency at total risk by doing it. We will have 
a sensible plan organized to a rollout that makes sense as fast 
as we possibly can achieve but with good information to back 
that up.
    In the meantime, we will continue to press forward with 
unending intensity to maintain our clean opinions and keep our 
compensating processes in place as we migrate from an older, 
inefficient way to a much newer and better way.
    Mr. Ose. I want to compliment NASA on the approach. I mean, 
I just--I would tell you that if I couldn't close my books on a 
monthly basis, I went back to a weekly basis and I will 
guarantee you every business has that. There were times when I 
couldn't close them on a weekly basis and I had to go to a 
daily basis just to correct the thing. So I appreciate the--and 
mine was a very small business, so I appreciate the difficulty 
that you are facing and the serious effort that you are putting 
into it.
    I want to go back for a minute, Mr. Gotbaum. The comment 
was made that, my recollection, it is just tickling my brain, 
is that in most cases agencies are working seriously to meet 
FFMIA requirements, which says that there are some that are 
    My question is: Which agencies are not--were you referring 
to by exclusion as having not being--how do you even say this? 
Which agencies were you referring to as working--or not working 
seriously to meet the FFMIA requirements? It is the ``in most 
cases'' thing.
    Mr. Gotbaum. Mr. Ose, the last time I testified before Mr. 
Horn I mentioned that one of the things that we at OMB tried 
not to do was to hold examples of public criticism out. What we 
find is that for our function, which we know is different from 
your function, the process of public criticism by OMB is, less 
effective than the process of private criticism.
    So if I could----
    Mr. Ose. Let me rephrase the question. Which agencies would 
you suggest that Mr. Horn and myself and other members of this 
committee particularly focus our interest on?
    Mr. Gotbaum. I am not sure, Mr. Ose, I can answer the 
question in that way. What I would like to do, if I could, is 
when we come back to you on who has provided what remediation 
plans on a timely basis, I think you can get a sense then of 
who is paying attention to this and who is paying less 
    Mr. Ose. Before you leave that point, I want to make sure I 
understand. When are we going to have that report or that 
information back?
    Mr. Gotbaum. I am going to try to do that one quickly.
    Mr. Ose. Does that mean next week, a month?
    Mr. Gotbaum. Yes.
    Mr. Ose. OK.
    Mr. Gotbaum. But I want to make the basic point, which is 
that we don't find that most agencies don't care about this, 
and I don't want to leave the committee with that impression. 
Most agencies are working very, very hard to do this.
    Now, part of the reason they are working very, very hard to 
do this, interestingly enough, is because of the pressure 
provided by you for clean opinions.
    Mr. Ose. My question is, when you said most agencies are 
working very, very hard, it means that some aren't. So you are 
going to report that back to us some time in the next----
    Mr. Gotbaum. We will report back to you which agencies have 
turned in remediation plans on a timely basis and which ones 
    But the point, Mr. Ose, that I want to make is that we find 
that most agencies really are devoting very substantial 
resources to modernizing their financial systems right now. 
There are some, and we should be honest, you are our committee, 
that during the Y2K effort put a lot of other IT work aside, 
because if they blew Y2K they were going to shut their agencies 
down. So there are agencies which are now moving from the 
efforts on Y2K to upgrading and improving financial systems. 
There are a fair number of them in that situation.
    The point that I want to make is that there is no neat 
touchstone. There is no neat box that you can check or not 
check that says whether an agency does or does not have 
    Just to give you some for instances: the Department of 
Labor, which is not FFMIA compliant, is working hard now on 
installing and improving a new H.R. and personnel system. That 
is the Department of Labor. It cares for them intensely, etc.
    This is something which matters to us and which Arnie would 
tell you as a member of the CFO Council that the CFOs say. I 
don't think I could say publicly or privately, and I don't 
believe that that is a statement that modernizing their core 
system is less important. I don't think that. I think what that 
statement is that working on their core system and installing a 
new personnel system is the right balance of priorities for 
    So, Mr. Ose, I want to be quite clear that what we get from 
agency after agency after agency--and we meet with all of them 
that are not compliant--is that they are, in fact, working on 
this. I think if you asked GAO this question they would confirm 
that we get modernization or improvement efforts in every 
agency we talk about. Whether those efforts are going to fill 
the bill in the timeframe is unclear. That's a different story. 
That's the reason why I think it is important that we recognize 
the need for pressure on your part and the need for the fact 
that this is going to take years.
    Mr. Ose. I appreciate the clarity with which you are 
covering the subject. I can assure you that there are at least 
two members of this committee who wish to be very clear that we 
are going to get these books in order so that they can get 
clean opinions. If that's the pressure you wish to have us 
bring to bear, I can guarantee you it is going to be there.
    Mr. Gotbaum. That's just fine.
    Mr. Ose. Now, if I may, I just want to come back that I 
look forward to your report in terms of that information that 
we just talked about.
    Now, Ms. Alderman, I want to ask you a couple of questions 
having to do with JFMIP. Can you elaborate on what the role of 
the program is in terms of improving the Federal financial 
management systems? What is the objective here?
    Ms. Alderman. There are two principal roles with respect to 
financial systems today. The first is, in statute and OMB 
policy, we are responsible for issuing the system requirements 
documents. These documents, once issued, represent the baseline 
requirements for a function that all Federal agencies must meet 
and they capture laws, governmentwide regulations and so forth.
    That is the one and the longer standing responsibility of 
    Commercial providers of services look at these documents to 
understand what the Federal agencies need as a baseline. 
Getting these documents up to snuff, getting them modernized to 
reflect current requirements, has been a very strong push in 
the last 2 years because there are so many agencies that now 
have to replace their systems. Getting requirements out in 
front of this wave has been a major undertaking and one that 
has been participated in by the Federal agencies in leadership 
positions who need to benefit by these documents. That's item 
No. 1.
    The second area has been the requirements testing and 
qualification process for core financial systems. Federal 
agencies that bought systems from the mandatory schedule prior 
to 1999 did not really know, in any depth, how those softwares 
were tested. They held assumptions that those products that 
were on the GSA schedule met the JFMIP requirements. We did 
update those core financial system requirements in 1999 ahead 
of the new testing process. Of the 251 mandatory requirements 
about 20 percent of the baseline changed to either new or 
changed requirements. That is indicative of the amount of 
legislative changes, changes in reporting requirements, and 
changes due to new accounting standards since 1995.
    So the testing process now is totally in the open domain. 
It was developed through a consultative process. We put the 
test out there with the expected results and all the test setup 
data. It is an open book test for vendors. Agencies know how 
the test is conducted. They can see the results of the test for 
vendors who pass the test.
    I will tell you that all the vendors whose products have 
received certificates of compliance were on the old schedule; 
but not the same versions of the software. I will tell you that 
every vendor had to make significant improvements in their 
software to pass the test.
    So this is an example of really quality assuring at a 
baseline level the products that Federal agencies use. So that 
is item No. 2.
    Those two items for core financial systems are not 
sufficient. They are necessary for success but they are 
certainly not sufficient. All those products that have passed 
the test, that means they have baseline functionality. They can 
do Federal reporting. They can do the proprietary and budgetary 
accounting correctly. They can compute prompt pay correctly; 
these types of things are federally unique requirements.
    That doesn't mean that the architectures are all the same, 
the IT architectures. It doesn't mean that the value added 
features are all the same. It doesn't mean that the user 
interfaces, or how difficult they are to use, are all the same. 
It just gives a list that Federal agencies can use to do gap 
analysis and make the best choice. It is a prequalified set of 
products to meet their agency needs.
    It is the beginning of a process, not the end, for 
    Mr. Ose. You have just touched on something that I have 
actually been reading quite a bit about and that's the IT 
architectures of the different systems. I am diverging a little 
bit from my questions here so we are going to make this up as 
we go, but you brought it up, not me.
    Ms. Alderman. I probably got myself in trouble, too.
    Mr. Ose. How large of an issue does the IT architecture 
question pose for the different agencies? That is, when we go 
to the approved systems and this agency goes with this system 
and that agency goes with that system, in terms of the overall 
level of communication, how large of an issue is this?
    Ms. Alderman. OK. I would first make a disclaimer that I am 
not a computer scientist.
    Mr. Ose. Ms. Alderman, you brought this issue up.
    Ms. Alderman. But I will tell you that these products that 
we have evaluated have--for one thing, the old installed base 
that Federal agencies have are mainframe. Every single product 
that we have qualified to date has either been a client server 
or a Web-enabled product. So the skill sets from the old 
systems to the new systems are different.
    No. 2, some of these systems are more scalable than others. 
Some of the products are well designed for a small agency with 
few simultaneous users. Others, if you try to do that, the 
system does not have adequate processing time. They are too 
slow. So those are different types of issues.
    So we know that agencies have to do a careful review of 
whether product X fits on their platform, their data bases, and 
are scalable to their needs.
    Now, JFMIP can't do that for them. We cannot prequalify 
that for them, but we tell them they really have to focus there 
because if they don't they will have something that doesn't 
respond timely; doesn't meet their operational requirements for 
    Mr. Ose. You talked about a Web-enabled system. I want to 
make sure I understand what that is. I have some sense, but 
give us some sense of what you mean when you say a Web-enabled 
    Ms. Alderman. What that means is the system may be designed 
to be centrally managed and accessed through browsers as 
opposed to hosted on a desktop. The client server sends and is 
operated from there.
    Mr. Ose. You would have an intranet, if you will?
    Ms. Alderman. It relies on a certain type of communications 
infrastructure and it does pose other issues in agencies who 
implement them, such as security.
    Mr. Ose. Security. I have that question down here. So we 
will get to that one.
    Mr. Horn. Could I interject a question at this point?
    Mr. Ose. Certainly.
    Mr. Horn. I ask the question to what degree are people 
getting things off the shelf and making them work?
    Did you learn anything from that that you might want to use 
at NASA, Mr. Holz? I am just curious.
    Mr. Holz. Well----
    Mr. Horn. Like the checkoff?
    Mr. Holz. The real benefit to the software vendors because 
they are making a significant--is that better? Sorry. Thank 
    The real benefit to these software vendors is, and to the 
government, is to not only have standard practices in the 
agencies but to use software consistently--you want to go out 
and buy a license. You don't want to be changing code. If you 
get down into software and start customizing it to meet fairly 
unique requirements you are going to run into trouble because 
you will be into a development process pretty quick, faster 
than you can probably know it, and you want to avoid that if 
you can.
    So under the initiative that we are doing we are looking at 
best practices, best business practices, and then we are going 
to retrofit ourselves into those best practices and we will 
only look for the software to solve those kind of problems for 
    If there is some kind of a unique thing to NASA that we 
have to do, we will do it outside the realm of that. We are not 
going to go in and change software.
    Is that partially responsive, or no?
    Mr. Horn. Does the CFO Council get into this when you have 
monthly meetings?
    Mr. Holz. I would like to defer more to Josh on that 
subject. I know we have committees that are looking at 
    Mr. Gotbaum. Yes, the CFO Council has a couple of 
committees. The systems committee is the one which deals with 
this most frequently. As you know, Mr. Chairman, the way the 
CFO Council works generically is when there are issues that 
CFOs recognize are common issues, we spin off some project or 
effort, etc., to do so.
    This may be doing a disservice or paying a compliment to 
JFMIP, but I view the project management office at JFMIP and 
their work over the last 3 years as a collaborative effort with 
the systems committee of the CFO Council: to elevate, first of 
all, by putting up a set of standards, which they are doing. 
Second, by setting up common testing procedures of commercial 
systems, which they are doing; and then the third part, which 
they don't advertise quite as broadly but which in my view is 
at least as important, is they provide an informal ``nerve 
net'' among agencies about experience across agencies. And so 
when an agency is saying I am thinking about doing something, 
the JFMIP staff knows, ``Yes, I had tried that and it didn't 
work;'' or, ``Yes, the following two agencies have had 
experience with that vendor and you have to watch out for X, Y, 
and Z.'' So there is information sharing and a collaborative 
process and it works throughout the JFMIP. Since we want to 
give some credit where I think it is appropriate to note that 
the systems committee of the CFO Council, which has been very 
active in JFMIP's actions for all of the last 3 years.
    Mr. Horn. I thank the gentleman.
    Mr. Ose. I want to thank Chairman Horn.
    Mr. Horn. Keep going.
    Mr. Ose. All right.
    Ms. Alderman, Mr. Gotbaum just referenced the communication 
between the CFOs about the systems being tried in their 
respective agencies under the JFMIP. In your opinion, has a 
sufficient sustained commitment been made at the agency level 
to implement these initiatives? I mean, are we actually making 
progress here?
    Ms. Alderman. The agencies have, part of what they do in 
terms of disclosing to the commercial sector their plans, they 
tell us what their plans are for replacements are and we post 
that up on the knowledgebase. In the next 5 years, 13 out of 
the 24 CFO agencies plan to replace their core financial 
systems. Seventeen agencies indicate they plan to replace 
feeder systems; very significant. We meet----
    Mr. Gotbaum. And some of those that are, ``not planning 
to'' are already in the process of doing so.
    Ms. Alderman. Some of them are in the implementation--yes. 
Some of the additional ones have already made procurements in 
the last year.
    These are ones who have not yet made them.
    We meet with what we call a ``super user group.'' We invite 
all the agencies in who are replacing their systems. We go 
through all the information so that there is full understanding 
of how we test; plus a discussion of the other needs that they 
    We are developing a road map, what we call an 
implementation road map, and that is collecting the information 
and making it easily available to CFO agencies on all the 
processes and considerations that they need to understand to be 
    So we are trying, through a supportive effort. By the way, 
the Federal agencies pay for our existence, for the most part, 
through a portion of their charge card refunds. So we are a 
joint investment, if you will, on behalf of the Federal 
agencies to collect this information and make it readily 
available to them. So there is a lot of interest and a lot of 
demand; probably more demand than we can supply given our 
current resources. But they are truly interested and they want 
to succeed. But they have terrific challenges: new technology 
base, new products, new requirements and a staff that probably 
hasn't been trained up on all these combination of techniques. 
Thirteen percent of the current installed base is commercial-
off-the-shelf. That's not what they have to choose from in the 
    Mr. Ose. In terms of our effort to, frankly, make this a 
success, are there suggestions you would make about--specific 
suggestions you would make about improvements we could make?
    I would be happy to let you think about that and get back 
to us.
    Mr. Chairman, at this point if you would entertain a 
question to be responded to later.
    Mr. Horn. Without objection, it will be inserted at this 
point in the record.
    [The information referred to follows:]
    [GRAPHIC] [TIFF OMITTED] T1731.053
    Ms. Alderman. Will do.
    Mr. Ose. Thank you. I want to go back to something that Ms. 
Alderman hinted at in terms of the security of the systems, in 
particular as it relates to, for instance, the Web-based 
    Mr. Steinhoff, on your poster here you have 19 of 20 
agencies--excuse me, auditors finding in 19 of 20 agencies some 
degree of weaknesses in computer security.
    Is this particular--I am forgetting why I wrote this 
question down. Just a minute here.
    Is this the most significant problem you have identified--I 
mean, you talk about five primary reasons agencies are not in 
compliance. Is this the most significant?
    Mr. Steinhoff. This is the most prevalent problem. It is 
very important. Beginning in 1997, again in 1999, GAO 
designated computer security as a high risk area--the recent 
Melissa and ``I love you'' viruses, the threat of cyber 
warfare, the ability to literally go into any system unimpeded; 
we have been able to actually penetrate major systems in which 
we could have destroyed all of the data or taken all the data 
or changed all the data. This is a serious issue. It is going 
to continue to be serious for a long time. As we move to an 
ever more interconnected society and a global society, it is a 
world-class challenge.
    In terms of FFMIA and getting to the end game I spoke of 
earlier, this is a critical issue. The other critical issue is 
having integrated systems that are actually at the fiber of the 
management process of an agency.
    When agencies will actually be at the end state, actually 
be there, is when the systems are viewed as being seamless, 
When they have knowledge management whereby information is 
provided to the manager on a day-to-day basis and used to 
manage, and when financial data isn't viewed as something 
special or outside the purview of the general manager but is 
viewed as something on your desktop every day.
    For example, the government is the lender of last resort in 
a number of cases. We are filling in holes. In theory, our 
managers should have better information, and we have to really 
assure that all the information is protected, and that's where 
computer security comes in.
    Mr. Ose. Is it your suggestion that the challenge lies 
perhaps not in the integration but the interconnectivity?
    Mr. Steinhoff. That's part of it. It is both integration 
and interconnectivity. Both of those are very important 
challenges, and I think that in some cases--I know I am going a 
little off of your computer security question but it gets to 
some of your earlier issues. In looking at what we are doing 
today, there is another very fundamental part of it, and that 
is reengineering the basic processes.
    Mr. Holz spoke about trying to take an off-the-shelf 
package and use it. In the past, what government has oftentimes 
done is taken an off-the-shelf package and redesigned it, which 
hasn't proved to be very effective. These normally die their 
own deaths over lingering periods of time.
    What we have to do is, in many cases, reengineer basic 
    Your question before about systems architectures, it is 
very important that the financial system be developed within 
the confines of that architecture and that agencies, in fact, 
have one in place. Many agencies don't, and you end up with 
stovepipes at the end.
    So this is really what Clinger-Cohen was getting to, and 
why it is just very critical that people follow Clinger-Cohen 
and actually take the extremely cautious, judicious way that 
Mr. Holz says he is going now, based on experience of going 
another way before, and assuring that you have gone from A to B 
before you attempt to go to C.
    It is not that the government hasn't spent a lot of money 
over many years on systems. They have. We should, in theory, be 
there many times over but we are not, and we have to learn from 
that experience.
    In designing systems, computer security must be built in. 
Oftentimes a vendor won't sell you computer security, and it is 
an issue not just in government but in the private sector.
    Mr. Ose. Mr. Gotbaum, this kind of begs a question from 
OMB's standpoint. What is OMB or the administration suggesting 
to the agencies regarding addressing the security issue?
    Mr. Gotbaum. Actually, Mr. Ose, a string of measures. In 
the same way that we put out guidance for financial systems 
that is part of FFMIA, we publish general guidance on computer 
security. There are a couple of steps. This guidance comes out 
    We are in the process of revising it again, not 
surprisingly, in light of what we have learned over the last 
several months. But what we say to agencies is, you need to, 
address computer security at the start when you develop 
systems. This is consistent with Clinger-Cohen.
    Second, when you come forward and ask for money for IT 
systems, you need to show us how your IT system complies with 
all of the various requirements: Clinger-Cohen, your security 
requirements, etc. So what we have done is said to the 
agencies, in effect, you need to meet the following general 
test, which is you need to plan your IT systems in advance. You 
need to use commercial systems as much as possible. You need to 
make them as modular as possible.
    Arnie Holz' point about crawling before you can run is 
something that----
    Mr. Ose. Walk.
    Mr. Gotbaum [continuing]. We are strongly in favor of.
    Mr. Ose. Walk.
    Mr. Gotbaum. Yes, walk before you run. And sometimes in the 
Federal Government we have tried to fly before we could crawl.
    Mr. Ose. That's NASA.
    Mr. Holz. We do good at that, though.
    Mr. Gotbaum. So what we have said in guidance is these are 
the general rules. You need to, as part of your IT planning, 
which is part of your budgeting, come forward and tell us that 
you have done this and tell us how you have done it. So that's 
the process we followed both for FFMIA compliance and for 
computer security.
    Mr. Ose. So it is an integral part of what the system 
architecture ends up having?
    Mr. Gotbaum. Yes, right, and our review is part of our 
general review of their systems proposals and their budget 
    Mr. Ose. All right. I have two more questions and then, Mr. 
Skelly, I want to come back to your challenge with the various 
programs that you have.
    Mr. Gotbaum, the March 1st audit report deadline of this 
year was not met by a couple agencies and, frankly, it seems to 
be a rather blatant noncompliance. What are we doing--excuse 
me. What is OMB doing to ensure that agencies comply with the 
March 1st reporting deadline for fiscal year 2000?
    Mr. Gotbaum. This year we are doing more of what we have 
done over the past year. Any agency that was late or had less 
than a clean opinion, we sat down with them months in advance 
of the deadline and said what are you doing? We sat down with 
the agency. We sat down with their auditor, and for those 
meetings we brought in GAO and Treasury.
    So for agencies which were characterized as agencies with 
challenges, we sit down with them and say, ``Walk us through 
what your plans are, walk us through how you intend to deal 
with them, etc.'' So beginning last fall, we had a series of 
meetings with all of the agencies that had had difficulties in 
the year before.
    We are doing that again except we are starting it earlier.
    In addition, as we get closer to the deadline when we hear 
from agencies that they are either slipping or having 
difficulties or both. The audit process is not automated. 
That's part of the reason why we think FFMIA is so important, 
because most agency audits now are not automated. They are done 
by a combination of automated systems and a lot of hand labor. 
This is what Jeff Steinhoff was talking about.
    As a result, because this is something that agencies have 
only been doing for a couple of years, this is something which 
the agencies and their auditors are still learning. Therefore, 
in more than a few cases, in fact in at least half a dozen 
cases, some time in the month of February or March, we would 
get a phone call from an agency saying ``We just discovered a 
problem,'' and they were not dissembling. They were not hiding 
something that they had known about for months. As they had 
gone through reconciliations, they discovered their accounts 
couldn't reconcile. So what we do at that point is we sit down, 
we work with them, we work with GAO, we work with their 
auditors and we try to resolve each of those issues.
    I think it is important, as we recognize what we haven't 
done, to also recognize what we have. For fiscal year 1998, we 
had, I think, 15 timely audits. This year, for fiscal year 
1999, we had 19. We would have had 20 except DOT was so 
interested in making sure that GAO agreed with it that they 
held off a couple of days to convince GAO. So I would say this 
year we had 20. And I am hopeful that next year we can, in 
fact, get everyone.
    Mr. Ose. The other question I have, Mr. Chairman, if I 
could take a little liberty here, is I want to come back to the 
Department of Education and the reason I want to come back to 
the Department of Education is that it handles so many 
critically important aspects of, frankly, training the next 
generation, if you will.
    I want to visit with Mr. Skelly about the specific 
challenges. I know you have a huge number of programs. You have 
the student loans, the guarantees. You have this, that and the 
other thing.
    Are there specific things you can share with us as to how 
we can help DOE, frankly, deal with this problem?
    I mean, we have to have a clean opinion. We have to close 
these books and they have to reconcile. How do we help--I mean, 
what can we provide DOE to get to that end game?
    Mr. Skelly. It is a difficult task to manage all of these 
activities and to do it well. It is important that we get our 
administrative funds that we need to implement some of these 
changes so that we can devote resources to our systems 
enhancements, but--and training of staff, recruitment of staff, 
retention of staff, who can do a good job on them, who can 
learn about the programs, learn about the systems requirements, 
the changing audit standards, keep up-to-date on all of those 
things and do a good job.
    I think that's the most important thing that Congress can 
do in supporting us, as OMB has, in requesting sufficient funds 
to administer the activities.
    I don't think you can just eliminate some of the 
requirements for separate programs. I think the education 
programs we have for the most part address clear national 
priorities. They are important investments in school children 
and in college students and in people with disabilities and 
others who benefit from the programs.
    I wouldn't want to suggest that the easiest way to comply 
with all the accounting rules and standards is to eliminate 
those programs.
    They each--each of the 175 programs serves a different 
    Mr. Ose. Before we leave that, are any of the 175, in terms 
of their specific function, able to close their books?
    Mr. Skelly. We could probably do that. We have the greatest 
difficulty. At least in the 1999 audit, Ernst & Young, our 
independent auditors, had the most problem, and I think GAO 
would echo this, with what we call our guaranteed student loan 
program, our Federal family education loan program. It is the 
program that has the most significant accounting issues because 
under another piece of legislation called the Credit Reform Act 
we have to account for that program based on each year's cohort 
of loans, each year's loans that we set up.
    The act only passed in 1990 and it was in effect for fiscal 
year 1992. So we have two separate sets of rules for how we 
account for guaranteed student loans, for those loans made 
prior to 1992 and for those loans made after 1992. We have to 
account for each year after 1992 separately.
    We get to lump all the pre-1992 money together. But one of 
our most significant issues in the audit this year was how we 
dealt with the pre-1992 student loans in our 1999 audit, a full 
7 years later; but loans were made prior to 1992. Students are 
still repaying those loans, in most cases, because if they go 
to school for 3 to 5 years and then they are earning payment 
for even 10 to 25 years, we are tracking these loans for a long 
    There are problems. There have been problems in the past 
with defaults on those loans and we have to account for that 
separately. We have greatly reduced the default rate from over 
22 percent down to 8 percent in the first 2 years' repayment. 
That has significantly eased the problems in how we do 
    We still have to track the inflow of funds from default 
repayments and make sure we put them into the right account. 
Are these repayments part of the pre-1992 loans or are these 
repayments part of the post-1992 loans? If they are post-1992 
are they 1992, 1993, 1994, 1995? Which year do we put them?
    What we call splitting that data up is what has been one of 
our difficult issues. It is one of our most difficult audit 
challenges for fiscal year 2000 also.
    Mr. Ose. So on the student loan program--I have to question 
the uniqueness of the challenge that you are defining because I 
frankly happen to think there is a substantial body of 
expertise that has faced up to this issue of loans issued at 
varying dates and their degree to which they repay.
    Now the thing that has ensued since 1992 may be a little 
different but the fact of the challenge in repayment or the 
default rate or what have you, I don't think that's 
particularly unique.
    That's the student loan program. Are there other programs 
within DOE that you are able to frankly close? Not close in the 
sense of eliminate but close the books in terms of a given 
    Mr. Skelly. We have two student loan programs. The 
guaranteed student loan program makes approximately $20 billion 
in loans each year. We have another program called the direct 
student loan program that makes only $10 billion in loans each 
year. It is still a very large program.
    In the direct student loan program, we have had a clean 
audit opinion. It is a program again run by the Federal 
Government. We make the loans. We use private sector 
contractors to make and service all of those loans, but we are 
more in control of the data because we are the big, large bank.
    In the guaranteed student loan program, we use 
intermediaries or third parties to help us. Guarantee agencies 
and lenders send us information, and some of our most 
significant problems have been in the data that we get from 
guarantee agencies, the information we get from lenders. 
Because it is a more complicated program, with more actors 
involved, it is more difficult to get all the data that we need 
and, thus, more difficult to do the accounting.
    But the direct student loan program, we do a good job. 
Again, we have more control over it but we have done very well 
    Mr. Ose. Mr. Chairman, you have been very, very generous 
with time this morning. I do have one question. I want to ask 
Mr. Gotbaum and the others whether there is any legislative 
action that we can take to further refine or modify the 
requirements at FFMIA, but knowing you as I do I am confident 
you have questions. I apologize for monopolizing the time.
    Mr. Horn. I just have one or two. You are doing great. I am 
training him. Since the Republican Party, and I was part of it, 
said chairs can only serve 6 years, I want you next.
    OK. Let me ask you on this, Mr. Skelly, has the Secretary 
ever asked the authorizing committees or the Appropriations 
Committees or has this come under the Banking Committee, and is 
there a way simply to work it out and simplify it?
    Have you ever asked OMB for the language?
    Mr. Skelly. There is a long history where the 
administration requested in 1993 to go to a direct student loan 
program for all the loans that we make. That was rejected by 
    Mr. Horn. Well, I remember voting for the direct student 
loan. I was for that as a university president and I was also 
for it as a Member of Congress.
    Mr. Skelly. Many university presidents and many Members of 
Congress do support the direct student loan program. It has 
been a very, we think, big success. It has saved a lot of money 
over time. More importantly, it has improved services to 
schools and to students, both the ones who get the direct 
student loans but also the ones who have received guaranteed 
student loans because the competition of the direct student 
loan program has spurred the guaranteed student loan program 
into all kinds of innovations; things we did where we made our 
services Web enabled so that students could get access to their 
records. They could file their application form over the Web. 
We have greatly simplified a lot of the loan requirements. So 
it is--and speeded up the process of their getting a loan.
    So, again, there was a proposal not based on accounting 
concerns but just based on the idea of what was the best way to 
serve the public and provide loans to students who need them 
back in 1993, but there has been no real proposal since then to 
do that. We think both programs work well simultaneously. There 
is room for both.
    Again, it is a huge, huge industry. A lot of college 
students and their families need help in attending college and 
helping to pay for it. So we wouldn't try to get rid of the 
other program. It is complicated. There are always people 
suggesting ways to make it simpler, and that the banks and 
guarantee agencies that participate in the program have also 
helped do that. It is not all the government doing it. Both 
sides have helped to make the programs better.
    Mr. Horn. My point was, if it is a real burden to the 
Department of Education, you ought to just get some things 
amended up here. If it isn't, why struggle with it?
    Mr. Skelly. I think we are going to struggle with it, but 
it is kind of the thing where the driver here of how we do 
things is not just the accounting. We are not doing accounting 
for accounting's sake. We are delivering these services. We are 
performing functions that are necessary in the national 
interest. We want to do those the best we can and we hope to 
get all of the accounting requirements fulfilled at the same 
    Mr. Horn. I have one last question that will involve OMB, 
GAO and anyone else who wants to get into it. I remember very 
well when Commissioner Rossotti came by and said, ``I have this 
great training program and people are stealing my people.'' So 
I was curious on the incentives to get the team to move from 
IRS where they have had great improvement on fiscal matters 
over to Agriculture, I am curious can they negotiate the 
schedule for, say, senior civil servants or just the regular 
civil servant grade? How does one swipe a lot of people from 
others that are good?
    Mr. Gotbaum. I am not sure that I should answer this 
question on the record in any case, but----
    Mr. Horn. I am looking at you.
    Mr. Gotbaum. I am not sure how Sally did it. I am happy to 
ask Agriculture to do a write-up on it, because this is 
something of which they are very proud and which is important, 
because it is a case in which a Federal agency recognized that 
there was expertise outside the Federal agency. They needed to 
get this experience and went out and got it. With your 
permission, Mr. Chairman, let me put that in the list of things 
that I need to respond in writing to.
    [The information referred to follows:]
    [GRAPHIC] [TIFF OMITTED] T1731.054
    Mr. Horn. It is an interesting route to go. I think of it 
in the hospital analogy, where the heart specialist at one of 
the very distinguished hospitals in America, that happens to be 
in Long Beach, arrived in town and just took the whole group. I 
asked the other night, when I was sitting with a lot of 
doctors, I said, ``is that group still at this other 
hospital?'' And they said ``yup, they still are.'' If you offer 
people a chance to do good things, maybe that is all it takes. 
So I was curious about that, because I remembered that.
    Mr. Rossetti, as you know, has done rather well in getting 
the books balanced over there.
    Mr. Gotbaum. Although he has a few more things to do.
    Mr. Horn. That is true. I said it would take him 10 years, 
and I would hope he would be here under five Presidents to get 
the job done.
    Well, any other comments?
    Mr. Ose. I do have one other, Mr. Chairman, if I may. This 
legislation, FFMIA was passed 4 years ago, and I want to ask 
Mr. Gotbaum, and then have the others, to the extent they have 
any comments, chime in whether there is any legislative action 
that this subcommittee or the Congress could take to either 
further refine or modify the requirements of the act, the 
purpose being to improve it further?
    Mr. Gotbaum. Mr. Ose, I am stating a view that I have not 
vetted through the CFO council.
    Mr. Ose. You are way out there, man.
    Mr. Gotbaum. This is, in our view, very good, quite general 
legislation. What FFMIA says is, basically you need to get your 
systems, so they meet systems standards, they meet accounting 
standards and they use the standard general ledger. It is not, 
in my view, an overly prescriptive piece of legislation.
    So I, frankly, think the major task is for us to implement 
it. I would say, and as I mentioned in my testimony, that the 
3-year time horizon is one, in most instances, that we think is 
optimistic. But the law then provides, that if you are going to 
go beyond 3 years, you need to talk with the Director of OMB, 
and you need to explain why it is OK to go beyond 3 years, and 
you need to have your auditor comment on the remediation 
    To be quite honest, I think this is a case of a law which 
is a very sensible law, which is hard to implement, and we need 
to go about the task of implementing it. As I mentioned, and I 
believe this very sincerely, I think the attention of the 
Congress on how agencies improve their financial management 
matters a great deal. In the same way that you keep track of 
GPRA implementation and the way you keep track of whether we do 
or do not have clean opinions, I would argue it would be useful 
to keep on keeping track of this.
    It might also be useful to, at some point, for some 
agencies, hold some kind of joint hearing and review with the 
authorizers and the appropriators how individual agencies are 
doing. One of the issues the agencies raise to us that we work 
on actually quite hard is making choices among priorities. 
Because we are in a balanced budget world, we have to make 
choices, and you have to make choices.
    So it is helpful to agencies if appropriators and their 
authorizers know that it is not just the agency that cares 
about modernizing its financial system, but that you and your 
committee do as well.
    Mr. Horn. That is well said. Does the gentleman from 
California have any other questions?
    Mr. Ose. I suspect others might have some perspective here.
    Mr. Steinhoff. I agree there is no need to change the law 
now, but we have to take the law that is there and really take 
it to the next level. If you look at the successes in Y2K, 
there were several very important components to that. One was 
the tone at the top. It would be very important that you would 
have not just chief financial officers, as Mr. Holz has come 
today and Mr. Skelly, to talk about the importance of this, 
because they are convinced this is important. But it is 
important that the department head be asked these questions.
    We saw in Y2K that entities like DOD turned around when the 
responsibility got to the higher levels. When the Deputy 
Secretary, John Hamre took control, it went from a program in 
peril to one that was completely changed and reformed and got 
them to the end zone. So you have to have that proper tone at 
the top. Our work with world-class corporate and finance State 
organizations, found that that tone at the top was there. The 
chief executive officer was engaged in these issues and looked 
at it as providing value to the business, looked at it as being 
an investment. It has to be viewed that way.
    FFMIA has an annual reporting mechanism. Administratively, 
that reporting mechanism can be expanded upon to have, let's 
say, quarterly reporting, back to milestones. I would not want 
this to turn into a process-driven endeavor. I want to make 
that real clear. It should not be viewed as process-driven or 
``gotcha,'' but there should be basic accountability. Many 
people go in very optimistically when they are designing 
systems, but it doesn't always quite work out the same way.
    The chairman mentioned IRS. I am not saying that you would 
have to do something of this grand scale every time, but IRS 
had a very major and very expensive systems disaster, $3.4 to 
$4 billion, and reforming its system is really at the lifeblood 
of carrying out its mission.
    Basically, today, every time the IRS asks for money out of 
its special fund for tax systems modernization, it must present 
a plan. GAO must look at that plan and say whether IRS is in a 
position to effectively spend that money. If we find a systems 
architecture is not there, or the proper planning has not yet 
been completed, we will say funding should be conditional on X, 
Y and Z. The Congress has limited funding in some cases. This 
has all been done very collaboratively with the IRS in a 
constructive way. They don't want to move ahead when they are 
not in a position to move ahead.
    So I think there can be a lot more rigor placed on systems 
development. I think it would be very much worthwhile for the 
Congress to know whether or not agencies are in a position to 
properly carry out Clinger-Cohen. There are measures of this. 
The Software Engineering Institute has a variety of tools that 
can be used to determine whether an agency is in a position to 
design software or to manage a contractor that is designing 
software. All too often agencies get into these major projects 
that go on for years and years and years, and then finally 
someone plugs in the cord of the system in and it explodes. 
Agencies have to make sure this money is well spent. Following 
the disciplined rigors of Clinger-Cohen is very important here.
    Finally, a very important component of the success we saw 
in Y2K was the independent validation and verification and the 
fact that things were tested on an end-to-end basis to see did 
they really work end to end and to break down some of the stove 
pipes. The IGs played a very important role in Y2K, I can see 
them playing a very important role in addressing the financial 
systems issue, which really gets to the heart of the challenge 
and the CFO Act and FFMIA. Without this, the government is not 
going to move toward a performance-based government because it 
will not have the data. It is that important.
    Those are my pearls of wisdom for today. It has been a 
pleasure to be here.
    Mr. Horn. Anybody else have a word on this?
    Mr. Skelly. You asked would we like any changes. I have not 
vetted this one through Josh or the CFO council either, but one 
additional month, instead of having to do these things by March 
1, would really help us. We, in the Department of Education, 
did meet the March 1 deadline this year. We are glad we did, 
but we paid a pretty big price for it. The reason we have a 
difficulty is the loan programs we have to work with require us 
to go back and use economic assumptions that are part of the 
President's budget to discount those loans. The same people who 
are doing the work on the budget, which has to come out the 
first week in February, also have to do a lot of work to help 
produce the statements and work with the auditors. Another 
month would certainly have helped us a lot, and it sounds like 
it would have helped a couple of the other agencies.
    Mr. Ose. Mr. Skelly, I don't want to deflate your balloon, 
but I would suggest that we go a different direction. We are 
not going to relax the standards. You will have to vet that 
there, but that is not going to be very receptive. It is not 
going to be received well on this side, to relax the standards.
    Mr. Skelly. It is worth a shot.
    Mr. Horn. That is right. We opened it up. You are right to 
move in.
    Any comments, Mr. Holz?
    Mr. Holz. I would like to add to the comments that came 
from the other end of the table about the support of the heads 
of the agencies. I can assure you, I have never run into a guy 
that is more aggressive about excellence in financial 
management than one Daniel S. Golden, and his support made him 
an absolute champion of this process. He wants audited 
financial statements, he wants clean opinions, he has some 
corporate experience, so he knows about that.
    The whole accountability reporting process that we do, he 
owns it. There is no doubt about it. It just makes my job that 
much easier, because my chores and challenges and direction are 
very, very clear. When you have that kind of support and 
understanding of the products from the top down, it is an 
extremely beneficial tool to have and it works very well for us 
in the area of statements and systems and standards.
    Mr. Horn. Well, I agree with you. He has the highest regard 
up here on the Hill, more probably than any other Cabinet 
    Mr. Holz. I appreciate that.
    Mr. Horn. He is not only a visionary, but he is a practical 
visionary, and we see it almost every day. He has had to suffer 
more cuts than anybody else, and he took it smiling and did 
something about it.
    Mr. Holz. I was a little interested in Mr. Ose's comments 
when he was talking about closing the books and being in 
business, how to do that. Having been in business for many 
years as an auditor, I have provided those kinds of services to 
people, and it is very difficult sometimes. I think we have all 
talked about that here today. We just need to keep pressing 
forward and get it down.
    Mr. Ose. I would say I pulled my hair out doing it, but I 
don't want to----
    Mr. Holz. I won't take it personally.
    Mr. Horn. We thank you all for coming. I now want to thank 
the staff. Russell George is right behind me, the staff 
director and chief counsel for the subcommittee, and then 
Louise DiBenedetto is right to my left and your right, and 
sadly for us, this is her last hearing. She is on the nice 
detailee program of the General Accounting Office as a 
professional staff member, and she will be going back there, 
but only after we unlock the door and get all these documents 
that we have suggested some of you file today and do a report. 
Then we will release her for GAO. But she has a superb 
operation and is excellent. So we thank you, Louise, for all 
you have done to be helpful here.
    So we think that is good for people, even in our 
legislative branch, which GAO is, and we certainly would 
welcome people from the executive branch to spend some time on 
the Hill. You think they would go back with a different 
perspective. I can think of a lot of cases where people went 
from here to there and there to here, and it worked out, and 
some it never worked out.
    I will never forget one, he is inscribed in my brain 
forever. He was up here as a very fine legislative assistant on 
the Senate side, went down to your shop, my friend, and known 
as then BOB, and he started saying, you know, what are those 
idiots on the Hill doing? That was not exactly the right way to 
move in to the executive branch. I thought, boy, good-bye.
    Mr. Gotbaum. Thank God that was a previous administration.
    Mr. Horn. You are right, it was. We also want to thank 
Bonnie Heald, our director of communications. I saw her here. 
There she is. Bryan Sisk is our clerk on the administrative 
matters, and then Elizabeth Seong is an intern. Where is she? 
She is probably waiting for me to take her to lunch. Michael 
Soon, the same condition, an intern, and Will Ackerly, intern. 
Will, where are you? Put your hand up. Thank you. And then the 
minority staff, Trey Henderson, counsel, and Jean Gosa, the 
minority clerk here. And then, of course, our faithful 
reporters, Bob Cochran and Mindi Colchico.
    So, with that, we thank you all, and we are adjourned.
    [Whereupon, at 12:12 p.m., the subcommittee was adjourned.]
    [Additional information submitted for the hearing record