[Senate Hearing 106-972]
[From the U.S. Government Publishing Office]



                                                        S. Hrg. 106-972

              FINANCIAL MANAGEMENT ACCOUNTABILITY AT USDA

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

                                HEARING

                               before the

                       SUBCOMMITTEE ON RESEARCH,
                   NUTRITION AND GENERAL LEGISLATION,
                                 OF THE
                       COMMITTEE ON AGRICULTURE,
                        NUTRITION, AND FORESTRY
                          UNITED STATES SENATE


                       ONE HUNDRED SIXTH CONGRESS

                             SECOND SESSION

                                   ON

              FINANCIAL MANAGEMENT ACCOUNTABILITY AT USDA

                               __________

                           SEPTEMBER 27, 2000

                               __________

                       Printed for the use of the
           Committee on Agriculture, Nutrition, and Forestry


                   U.S. GOVERNMENT PRINTING OFFICE
71-410                     WASHINGTON : 2001


_______________________________________________________________________
            For sale by the U.S. Government Printing Office
Superintendent of Documents, Congressional Sales Office, Washington, DC 
                                 20402


           COMMITTEE ON AGRICULTURE, NUTRITION, AND FORESTRY



                  RICHARD G. LUGAR, Indiana, Chairman

JESSE HELMS, North Carolina          TOM HARKIN, Iowa
THAD COCHRAN, Mississippi            PATRICK J. LEAHY, Vermont
MITCH McCONNELL, Kentucky            KENT CONRAD, North Dakota
PAT ROBERTS, Kansas                  THOMAS A. DASCHLE, South Dakota
PETER G. FITZGERALD, Illinois        MAX BAUCUS, Montana
CHARLES E. GRASSLEY, Iowa            J. ROBERT KERREY, Nebraska
LARRY E. CRAIG, Idaho                TIM JOHNSON, South Dakota
RICK SANTORUM, Pennsylvania          BLANCHE L. LINCOLN, Arkansas
GORDON SMITH, Oregon                 ZELL MILLIER, Georgia

                       Keith Luse, Staff Director

                    David L. Johnson, Chief Counsel

                      Robert E. Sturm, Chief Clerk

            Mark Halverson, Staff Director for the Minority

                                  (ii)

  
                            C O N T E N T S

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                                                                   Page

Hearing:

Wednesday, September 27, 2000, Financial Management 
  Accountability at USDA.........................................     1

Appendix:
Wednesday, September 27, 2000....................................    37

                              ----------                              

                     Wednesday, September 27, 2000
                    STATEMENTS PRESENTED BY SENATORS

Fitzgerald, Hon. Peter G., a U.S. Senator from Illinois, 
  Chairman, Subcommittee on Research, Nutrition and General 
  Legislation, of the Committee on Agriculture, Nutrition and 
  Forestry.......................................................     1
                              ----------                              

                               WITNESSES
                                PANEL I

Calbom, Linda, Director, Financial Management and Assurance, U.S. 
  General Accounting Office, Washington, DC......................    12
Thompson, Sally, Chief Financial Officer, U.S. Department of 
  Agriculture, Washington, DC....................................     6
Viadero, Roger C., Inspector General, U.S. Department of 
  Agriculture, Washington, DC....................................     3

                                PANEL II

Schatz, Thomas, President, Citizens Against Government Waste, 
  Washington, DC.................................................    30
McTigue, Hon. Maurice P., Distinguished Visiting Scholar, 
  Mercatus Center, George Mason University, Arlington, VA........    25
                              ----------                              

                                APPENDIX

Prepared Statements:
    Fitzgerald, Hon. Peter.......................................    38
    Calbom, Linda M..............................................    68
    McTigue, Maurice P...........................................    88
    Schatz, Thomas A.............................................    83
    Thompson, Sally..............................................    42
    Viadero, Roger C.............................................    51

 
              FINANCIAL MANAGEMENT ACCOUNTABILITY AT USDA

                              ----------                              


                     WEDNESDAY, SEPTEMBER 27, 2000

                                       U.S. Senate,
           Subcommittee on Research, Nutrition and General 
  Legislation, of the Committee on Agriculture, Nutrition, 
                                              and Forestry,
                                                    Washington, DC.
    The Subcommittee met, pursuant to notice, at 9:30 a.m., in 
room SR-328A, Russell Senate Office Building, Hon. Peter G. 
Fitzgerald, (Chairman of the Subcommittee), presiding.
    Present or submitting a statement: Senator Fitzgerald.

 OPENING STATEMENT OF HON. PETER G. FITZGERALD, A U.S. SENATOR 
 FROM ILLINOIS, CHAIRMAN, SUBCOMMITTEE ON RESEARCH, NUTRITION 
   AND GENERAL LEGISLATION, OF THE COMMITTEE ON AGRICULTURE, 
                    NUTRITION, AND FORESTRY

    The Chairman. Good morning. I am going to open this hearing 
of the Subcommittee on Research, Nutrition and Forestry on the 
issue of Financial Management Accountability at the U.S. 
Department of Agriculture.
    The General Accounting Office recently released a study 
asserting that our Federal agencies squandered $20.7 billion 
last year due to poor financial management. Studies by the USDA 
Office of Inspector General and the General Accounting Office 
have found that our U.S. Department of Agriculture is no 
exception.
    Since 1991, USDA has received a series of unfavorable 
financial audit reports ``due to deficiencies in financial 
reporting that are attributable primarily to weaknesses in the 
Agency's financial management systems (GAO).''
    According to the Inspector General, the USDA's books are 
such a mess that at the beginning of this fiscal year its fund 
balance differed with the Treasury Department by $5 billion. 
Every American family must balance their checkbooks and try to 
make ends meet, yet this agency manages to lose track of $5 
billion.
    Although subsequent efforts have reduced this difference, 
it still stands at more than $230 million. The books and 
records of USDA have been so poorly maintained for almost 10-
years that the Agency has not been able to account for its $118 
billion in assets, does not know how much money it needs to 
collect or how much it currently collects, and it doesn't know 
the costs of its operations.
    While our farmers struggle during these lean times of 
record low commodity prices, bureaucrats in Washington can't 
seem to keep track of billions of dollars of taxpayers' money. 
This disgraceful lack of accountability is especially troubling 
because the USDA was warned to address some of these problems 
as long as a decade ago.
    The lax fiscal management of the Agency has led to some 
disturbing findings. According to the most recent IG report, 
funds intended for soil conservation programs have been shifted 
and used for items ``such as wall murals, transportation, and 
bringing civil lawsuits against owners of derelict 
properties.''I can't possibly conceive how painting abstract 
wall murals helps address America's soil erosion problems.
    The implications of the problems at the USDA reach beyond 
the agriculture sector of the economy. Many of the troubles 
have occurred in the USDA's nutrition programs. In a series of 
audits, the IG found that funds intended for feeding children 
at day care facilities under the Child and Adult Care Food 
Program were sent to addresses that turned out to be empty 
lots. The responsibilities of this agency are far too important 
for us to tolerate financial mismanagement of this magnitude.
    Other recordkeeping entries indicate the Department cannot 
substantiate whether its personal property records are 
accurate. According to the Inspector General, the USDA has a 
vehicle valued at $97 million. That is one heck of a vehicle. I 
guess they must have ordered all the options.
    The problem is that the USDA acts as if it is not 
accountable. The chronic financial errors and overpayments 
revealed in the OIG and GAO reports demonstrate how taxpayers 
lose when financial agencies are not held accountable.
    Any corporation that squandered money this way or couldn't 
account for its assets and liabilities in a proper manner would 
have to answer to its shareholders. The American people deserve 
a government that is accountable to them. After all, it is 
taxpayers' money these agencies are spending.
    I am very troubled by the findings contained in the reports 
and audits by GAO and the IG. Today's hearing addresses these 
problems, and I look forward to guidance from the panelists on 
ways to rectify these problems so that we don't have to do 
hearings like this in the future.
    And with that I would like to ask myself for unanimous 
consent to submit a longer introductory statement, and I will 
spare you the full load here at this hearing.
    [The prepared statement of Chairman Fitzgerald can be found 
in the appendix on page 38.]
    I want to welcome our panelists and thank them all for 
coming.
    We have Sally Thompson, who is the Chief Financial Officer 
of the U.S. Department of Agriculture; Roger Viadero, the 
Inspector General from the USDA; Linda Calbom, who is the 
Director of Financial Management and Assurance at the U.S. 
General Accounting Office; and also Mr. Ebbitt. Your first name 
was?
    Mr. Ebbitt. James.
    The Chairman. James Ebbitt. You are Mr. Viadero's assistant 
in the Inspector General's office at USDA.
    Thank you all for coming here. I am going to ask Mr. 
Viadero, the Inspector General, to present his views first, and 
then, Ms. Thompson, we will proceed to you. I am sure you will 
want to do a little bit of a rebuttal. And Ms. Calbom, you will 
also have the opportunity. I will go to you after Ms. Thompson.
    And, Sally, we are also going to want to ask you why you 
wanted to take this position, coming in as you did just 2-years 
ago, after so many years of lax fiscal management at the USDA. 
But Roger Viadero, if you could please begin your testimony, 
and if you could all be kind enough to summarize your thoughts. 
You have all introduced statements for the record. We will 
adopt those as part of the record of this hearing, but it would 
be better if you could just kind of speak free flow, off the 
top of your head, and summarize your findings and conclusions. 
Thank you.
    Mr. Viadero.

    STATEMENT OF ROGER C. VIADERO, INSPECTOR GENERAL, U.S. 
    DEPARTMENT OF AGRICULTURE, ACCOMPANIED BY JAMES EBBITT, 
             ASSISTANT INSPECTOR GENERAL FOR AUDIT

    Mr. Viadero. Thank you, Mr. Chairman, and members of the 
Committee. I am pleased to be here to provide testimony about 
the Department of Agriculture's financial management. With me 
today is James Ebbitt, the Assistant Inspector General for 
Audit.
    Financial information in the USDA is, on the whole, not 
reliable. We have issued disclaimers of opinions for the last 
6-years. In other words, the books and records of the 
Department have been so poorly maintained, we have been unable 
to compile and analyze sufficient evidence to enable us to 
reach any other opinion.
    What we are saying is that we don't know how fairly the 
financial numbers of the Department, such as the $118 billion 
in assets, are presented. More critically, this also means that 
the managers of the programs and operations also do not know, 
and in the absence of this essential information, their 
capability to perform their jobs is significantly impaired.
    I will now briefly discuss the primary problems preventing 
USDA from getting an improved opinion on its financial 
statements.
    The Department's financial management systems process 
almost $10 billion in collections and over $64 billion in 
program costs. One of the Department's most critical systems is 
the National Finance Center's Central Accounting System [CAS]. 
The problems with CAS have been well chronicled. It is poorly 
documented, provides only summary and not detailed data, and 
does not meet government wide accounting requirements.
    Only one clear course of action is apparent to enable the 
Department to emerge from the murky pool of bad data: eliminate 
CAS. The Department is therefore developing a new system called 
the Foundation Financial Information System [FFIS]. 
Implementation of the new system has been slow, however, and 
stymied due to various programming and design problems.
    Credit reform. Another longstanding, highly complex and 
very material encumbrance to the Department's efforts to secure 
a clean opinion has been the implementation of credit reform 
legislation. USDA has several highly unique loan programs, 
subject to credit reform, that total in excess of $70 billion.
    The original loan accounting system was not equipped to 
provide the extensive detail necessary to fulfill credit reform 
requirements. In the absence of reliable historical data, USDA 
agencies have extensively used the judgment of program managers 
to estimate future loan performance. No studies or analyses are 
on hand, however, to support these critical assumptions. The 
breadth and complexity of this issue is extraordinary, though 
the Department, GAO, and OIG are working tandem to attempt to 
resolve it.
    Real property. Another major problem confronting the 
Department is the Forest Service's accounting for real 
property. The Forest Service has about $2.6 billion in real 
property assets. About 60-percent of this dollar value is 
attributable to what is referred to as pooled assets, primarily 
roads. The remainder represents individual assets such as 
buildings. The Forest Service is unable to support the 
valuation of these pooled assets, which is estimated to be $1.5 
billion.
    A significant problem also persists in the valuation of the 
individual real property assets. Our audit tests statistically 
projected that these assets have been overstated by about $135 
million and understated by almost $80 million, or, if you 
would, a net difference of about $215 million.
    Government Performance and Results Act. The next area I 
would like to discuss deals with the Government Performance and 
Results Act [GPRA]. As you know, GPRA seeks to improve the 
effectiveness, efficiency, and accountability of Federal 
programs by requiring Federal agencies to set performance goals 
and to report annual performance compared to these goals.
    Our audit of the Forest Service's fiscal year 1999 Annual 
Performance Report found, however, it was based on flawed data 
and assumptions, to the extent that it did not report reliable 
information about actual performance or the Agency's progress 
in meeting its goals and objectives. At each of the four 
national forests we visited, we found instances where reported 
performance data contained material--material--errors and 
omissions.
    A few examples: Under the goal ``Ensure Sustainable 
Ecosystems'' we found that one ranger district had reported two 
miles of stream enhancement. When we asked to view the stream, 
the Forest Service staff acknowledged that two miles of road 
had been repaired but reported as a stream. No stream.
    At one forest we found that the same portion of a road was 
annually reported as decommissioned. The forest would erect a 
barrier to preclude its use. Passers-by would remove the 
barrier, and the Agency personnel would re-erect it.
    We conducted a review last year of the Department's final 
action process, the legislative requirement that agreed-upon 
audit recommendations be implemented within 1-year. Our review 
disclosed that USDA agencies had not exhibited the commitment 
necessary to promptly and effectively institute corrective 
actions that arise from audits. The Secretary's Management 
Report to Congress was replete with examples of recalcitrance 
in terms of the Agency's unwillingness to revise their 
processes as they had agreed to after the issued audits were 
resolved.
    The failure to implement audit recommendations in a timely 
manner permitted the continuation of ineffective and 
inefficient government operations. At the time of our review, 
the Secretary's Management Report for the six-month period 
ending September 30, 1998 included 187 audits without final 
action within 1-year of management decision, with in excess of 
$989 million in funds to be put to better use, as identified by 
my reports. Since the conditions identified in these audits had 
perpetuated in excess of 1-year to over 10-years, the monetary 
impact of these findings has compounded significantly.
    A major reason that final action had not been achieved was 
that agencies had not published regulations, instructions, et 
cetera, to formally modify their operations in response to the 
audit within the one-year time frame legislatively mandated. 
Although this process is involved, requires various in-house 
and intradepartmental clearances, and can be the subject of 
political considerations, all sense of immediacy in the face of 
critical disclosures has been lost. Rather, corrective actions 
became ensnared in a bureaucratic web from which it has taken 
years to be extricated.
    I will provide you with just one example of many we noted. 
We issued a report on the Forest Service's Timber Sale Cruising 
Controls in 1993. Cruising represented a critical agency 
function to estimate the volume of wood available for sale and 
was to replace, pursuant to a recommendation from the House 
Appropriations Committee, the prevailing method of scaling, 
which had been found to be highly vulnerable to timber theft.
    Our review of the cruising process, as it was being 
implemented, disclosed significant control weaknesses which had 
to be remedied immediately, as cruising was to be adopted as 
the preferred volume estimation method. According to the 
Secretary's March 30, 2000 report, 5-years after the report was 
released, only 3 of the 15 recommendations had been acted upon. 
The reason given for the delay is ``Issuance of the Forest 
Service Cruising Handbook is delayed due to the administrative 
process involved in its publication.''
    Subsequent to the issuance of this report, we instigated 
aggressive actions to get these reports closed. We worked 
closely with the Department and the agencies through 
correspondence and numerous face-to-face meetings, and are 
pleased to report 59 audits were closed in the most recent 
reporting period. The number that still remains open is 
unacceptably high, however, at 166.
    Overall, improvements have been made and that is primarily 
due to the efforts put forth by my comrade here, Ms. Sally 
Thompson, the Chief Financial Officer, who arrived at this 
Department about two and a half years ago. She has really done 
a remarkable job of working with the Inspector General and the 
Inspector General's office. It took a great deal of time, it 
took a great of energy, it took a great deal of attention-
getting to get over the initial inertia, to get this ball 
rolling. I think collectively both offices, combined, have 
gotten over that inertia, and we are seeing marked improvements 
in the Department so far as financial management goes. I still 
don't know what is going on in some of the programs regarding 
financial management, but on Sally's part--excuse me, on Ms. 
Thompson's part--in getting through the National Finance Center 
and instituting this new FFIS, we see marked improvements.
    That concludes my statement, Mr. Chairman. I will be happy 
to answer any questions you may have.
    [The prepared statement of Mr. Viadero can be found in the 
appendix on page 51.]
    The Chairman. We will wait until the end, until everybody 
has testified, and then we will start questions.
    Ms. Thompson, if you could, preface your remarks by telling 
us your background before you came to the USDA and your 
experience before you assumed this position.

  STATEMENT OF SALLY THOMPSON, CHIEF FINANCIAL OFFICER, U.S. 
                   DEPARTMENT OF AGRICULTURE

    Ms. Thompson. I have been a math teacher, but more 
importantly, I was CPA for over 8-years, and then I went into 
banking. I have been a bank president, and I have been elected 
State Treasurer for Kansas for 8-years before I took the CFO 
position here at the Department of Agriculture.
    The Chairman. You have substantial experience.
    Ms. Thompson. I do. I do, and as you can see, I have half 
my career or more in the private sector, and your comments were 
absolutely right in terms of stockholder accountability. On the 
other hand, I feel that our stockholders are taxpayers, as well 
the people up here on the Hill, as well as OMB, as well as 
Treasury. I have many, many bosses. But I do bring background 
to it.
    You asked me why I would want to do this. Because I enjoy 
taking on challenges, and I pride myself in trying to help 
clean up the mess, and this isn't the first time I have come in 
and been, you know, faced with many, many challenges.
    I have to say, though, that the support that I have 
received from Secretary Glickman and Deputy Secretary Rominger 
has been absolutely incredible. Anything that they could do to 
help me, they have done so. You may know the history of the 
Department of Agriculture. It has been very, very 
decentralized. I, too, would like to express my appreciation 
for both Roger Viadero and for Linda Calbom and her staff at 
GAO. They have given me, also, a tremendous amount of support.
    I sometimes describe Government, Federal Government, like 
the Titanic, in that it doesn't make sharp turns, but I am here 
to say that I am pleased that, unlike the Titanic, we are not 
sinking. We are making progress. There is much left to do. But 
what I would like to do is just to cover a few of the progress 
that we have made in the last couple of years, to say we have 
overcome this inertia and we do have the ball rolling.
    I would like to talk a little bit about the financial 
statements to begin with, and what it will take to get to a 
clean opinion. Now, the clean opinion is not in itself, while 
it is valuable, it is what it represents.
    And I try to explain financial management to our Department 
which, as you know, is largely consumed with delivering 
programs to our clients out there, throughout the whole world, 
in fact, and they are concerned about hunger, and they are 
concerned about production and drought and floods and rural 
development and that sort of thing, and soil conservation, as 
you mentioned. And I explain financial management as like a 
picture frame that tells the world what USDA is all about, and 
when we get a clean opinion on our financial statements, that 
says to the world that we have timely, reliable, and creditable 
information, no matter whether it is in the financial 
statements or it is in a hearing or wherever numbers are being 
discussed out there for USDA.
    I would like to first talk a little bit about credit 
reform, that we have worked--we put together an executive task 
force made up of key people in our department, from 
particularly Rural Development and the Farm Service Agency and 
the Commodity Credit Corporation, which have in total over $104 
billion of loans, which represents about 40-percent of the 
Government's non-tax loans. We had old, antiquated systems. 
When credit reform came in, in 1996, while we could tell you 
every individual loan history, they were not capable of rolling 
up and giving you summary information and giving you 
historical.
    So we have a great number of different types of loan 
programs, and so with GAO's help and with the IG's, we put 
together a very detailed plan which we are following to try to 
resolve all these issues. GAO has helped us look at the market 
to see if there were loan packages out there that we could just 
implement.
    One of the most important ones is single family housing, 
and that one we are going to need to develop from scratch. We 
were able this year to hire an accounting firm to come in and 
look at our data, to make sure that our data had integrity, 
because a new system is only as good as the data that you put 
in it. The accounting firm has come back and said yes, we do 
have good historical data, certainly back to 1992. We may need 
to do some estimating and approximate information prior to 
that.
    So we are moving along on that. We did free up some funds 
just this last month to be able to start to design that model. 
We have been able in the same time, though, to--we have about 
6-percent delinquent loans, though. There is the other side of 
this. While the Government as a whole is 23-percent. So we have 
a very good track record, but that is still not----
    The Chairman. How do you define ``delinquent,'' if I can 
interrupt? Is it 30, 60, 90-days?
    Ms. Thompson. Yes, and there are all different categories 
of that.
    The Chairman. When does it become delinquent?
    Ms. Thompson. About 60-days. When they have missed, you 
know, that 30-day payment, and then the next payment is due.
    The Chairman. Is that a consistent, uniform, 60-days late 
is a delinquency throughout the Government?
    Ms. Thompson. Yes. Yes, these are.
    The Chairman. So your 6-percent delinquency rate compares 
favorably. It is like 23-percent average delinquency for the 
other government loan programs.
    Ms. Thompson. Right. There is a very specific schedule 
called a Schedule 9 that is reported to OMB and to Treasury on 
how you calculate all of that, and so it is very comparative on 
that.
    We have brought that down, you know, in terms of total 
dollars. It was about $7.1 billion and it is down to $5.1 
billion now, in just the last couple of years.
    The Chairman. How much of it was just written off?
    Ms. Thompson. That does not count what was written off, on 
that. Now, to talk about what we have turned over to Treasury--
--
    The Chairman. Well, did you bring down your delinquencies 
by just writing off?
    Ms. Thompson. No. That is what I am saying. These are real 
dollars that we have brought down.
    The Chairman. OK.
    Ms. Thompson. Also, there is a program out there for 
turning over to Treasury for collection after 180-days, and we 
have made significant progress there. In 1997 we turned over 
about $71 billion. This last year we turned over $136 billion, 
and year-to-date, well, through June we have turned over about 
$118 billion, so we probably will at least equal if not exceed 
what we did last year.
    So that, you know, if you look that up for the last 3-
years, that is almost, that is over a 90-percent increase. 
There is still more to do. You know, I am not going to say for 
a minute that we don't have a lot more work to do, but I am 
just trying to give you a picture that we really are working on 
it, and I am mostly just giving you what has happened in the 
last couple of years.
    The Chairman. When do you proceed for collection? I am 
sorry. I am interjecting with some questions now that I don't 
want to forget and have to come back to later.
    Ms. Thompson. That is fine.
    The Chairman. Sixty-days is a delinquency. At what point do 
you refer a loan for collection?
    Ms. Thompson. At 180-days.
    The Chairman. A hundred and eighty-days?
    Ms. Thompson. Now, sometimes that--I put that with caveats, 
because when you are dealing with housing loans, you have got--
you know, the borrower has certain legal rights and terms you 
have to go through, steps that go all the way to foreclosure.
    The Chairman. But you don't begin the process of 
foreclosing until 180-days, so somebody could be 6-months 
behind before you start?
    Ms. Thompson. Well, we certainly have begun the process of 
trying to collect and doing whatever legally we can make the 
steps to. But, as I said, you can't start to foreclose. There 
are standards out there, you know, in the mortgage loan 
industry, and we are guided by those kinds of statutes as well. 
It isn't that we don't get on the phone just as soon--within 
15-days, you know.
    The Chairman. Within 15-days you will be on the phone----
    Ms. Thompson. That is right.
    The Chairman.--asking for their payment.
    Ms. Thompson. That is right, trying to find out what is 
wrong.
    The Chairman. OK. At what point do you file a lawsuit to 
collect the loan?
    Ms. Thompson. It will vary from loan program to loan 
program and loan type. I hate to be--I am not trying to--I can 
get you the various--you know, we have got utility loans and 
telecommunication loans and co-op loans and farm loans of 
different kinds, and housing loans, so each one of those has 
different kinds of statutes connected to it. And I would be 
glad to get you a summary of all that.
    But I am simply saying we are very aggressive. We have, 
over the last few years, consolidated all of the loans into a 
loan servicing center in St. Louis, which has made a 
considerable improvement in the process. We have hired people 
out of the private sector, like a person who headed a Citibank 
is in there, that is bringing into there the private sector.
    Now, you have got to also, and I remind you that we are 
there because the private sector wouldn't make loans to these 
people, but Congress has decided that we want to reach out a 
helping hand. So our clientele to begin with is much different 
than, coming out of the banking industry, I can tell you that--
--
    The Chairman. I come out of the banking industry, too.
    Ms. Thompson. OK, so you understand what I am talking 
about, you know. But we have made significant progress, and I 
suspect that Ms. Calbom will touch on that, too, not that we 
don't have a ways to go, as everybody will say.
    If I can kind of move on, I would like to talk a little bit 
about the new accounting system that Mr. Viadero mentioned. 
When I came in, it was a project that was in a great deal of 
trouble. With OMB's help and the Secretary's help, and OPM, we 
were able to bring in an experienced project team that has 
turned this around, and as of this weekend we will have over 
80-percent of the department up on the new accounting system, 
which will go a long ways toward solving the accountability 
issues that you were mentioning and our Inspector General's 
office was mentioning. It has been a major project for all of 
us, and we will finish up that within the next year, and we 
will shut down this old CAS system that the IG mentioned.
    He also mentioned reconciliation of Treasury balances, and 
this is a major, major issue throughout the whole Federal 
Government, but I am pleased to say that we have provided the 
Inspector General with all the documentation to have our 
checkbook balanced, but probably for this fiscal year that is 
closing as of Friday or Saturday, the 30th--but more 
importantly, we have a process in place that will keep it 
reconciled on an ongoing basis.
    We have worked with Treasury very closely. Treasury still 
has a lot more to go, and they are in the process of revising 
and redeveloping their system. You know, it is a two-way 
street, when you get your bank statement and you have got your 
checkbook. Well, our bank statement is obviously coming from 
Treasury. They all the time will go in and debit our account. 
The documentation doesn't arrive for 60- to 100-days later, you 
know, to try to balance our checkbook. They are working on 
that, too, very significantly.
    We have built several automated tools, because the volume 
at USDA is just incredible. It is more than having 100 
checkbooks that you have to balance at the end of the month, 
you know, and there are millions of transactions. And I have to 
tell you, with the forest fires that we have had, the 
transaction volume both on the new accounting system, because 
the Forest Service came up last October on the new accounting 
system, just getting all of that run through the accounting 
system has just been incredible, and the same will be true with 
trying to keep our checkbook balanced.
    But I feel comfortable that we have a team in place that is 
dedicated towards that, that are very knowledgeable. We have 
had Price Water house Coopers in. We have had over 100 people 
for a year working on this project, and we are there, and we 
are going to keep it there going forward.
    Mr. Viadero mentioned the plant, property, and equipment in 
the Forest Service. I am pleased to say that we agreed this 
year on a methodology for valuing roads. Roads had never been 
valued, and so we are going back 100-years to try to accumulate 
what the costs were to first prepare the ground to put the road 
in and then to surface it and then to look at the condition it 
is currently in.
    We agreed on a methodology. The engineers have spent a 
tremendous amount of time this year. I have been in two 
regional forest offices this last couple of weeks which Mr. 
Viadero's staff was in, looking at the methodology, looking at 
the engineering reports, recalculating all of our calculations. 
Some of those, as you imagine, are document calculations that 
are this thick. In one, after completely recalculating, they 
found a $6 difference in hundreds of millions of dollars worth 
of calculations.
    I think we are there. They still have other regional 
offices to visit and other road documentation to look at in 
these other regions, but I know that two regions have passed 
the audit test on that. Now, we have got another 10 to go, and 
we will see that it is there, but I feel comfortable that we 
are at least on the right track. Again, it was working in a 
partnership to come up with a methodology for something that 
had never been done before.
    We are doing the same for all of the real property, you 
know, the bulldozers and all of the other equipment we use out 
there in the forests, as well as all the personal properties, 
buildings that were built in 1920, you know, that had never 
been valued before. It is a big job, but once it is done, and 
more importantly, we will have processes in place to try to 
keep it forward, to keep it current and accurate.
    Yes, we have more audit issues to go. I wouldn't be sitting 
here, I wouldn't have a job if we didn't. But we are working on 
it, and I think that the Inspector General let you know how 
much progress we have made. Some of them require systems 
development and some of them require regulations, and we are 
pushing those regulations as a top priority of the Secretary 
right now.
    About half of the regulations are sitting at OMB, and they 
have also promised us they will get those out, and we are 
pushing very hard to have those regulations issued, about 24, 
30 of them, within the next 2-months. A lot of it, you know, 
the public hearings you have to have, the constituent groups 
you have to work with, you know, because there is a lot of 
different views out there on how we deal with things.
    I guess I would just like to close and say, to bring your 
attention to an issue that we have been struggling with and 
what I have definitely struggled with for two and a half years, 
and that is having adequate staff and adequate dollars to 
invest in systems. And I am not talking about me personally, I 
am talking about the whole department.
    If you look as an average, program dollars have increased 
about 50, over 50-percent in the last 3-years, and every one of 
those dollars were needed, whether it was for emergency funds 
for our farmers or whether it was for rural America, to deliver 
to people that were really in need. On the other hand, the 
staff dollars to deliver those, because those staff dollars are 
not included in program dollars, has been cut 30-percent as an 
average. So if you can view 50-percent up and 30-percent down.
    Now, we have done a lot of that in the private sector, as 
you know, but what we have given our people in the private 
sector is the tools to do more with less, and we have not done 
that in the Federal Government. Very fortunate for us, right 
now, with a lot of luck, there is a provision added to our 
budget that would allow us to use unobligated balances to do 
this long-neglected, deferred maintenance of our systems. We 
have got 1970s and 1980s COBOL programming in these systems.
    We put together a committee this last year, made up of the 
senior management of the department, to put together a 
corporate strategy to also feed into our accounting system, 
because what feeds into our accounting system is just as 
important, whether it is in the area of property, in the area 
of travel, in the area of human resources, or in budget 
formulation. And if the Senate agrees to add that language to 
our budget bill, and the last I heard, there was a good 
possibility, we would have the funds that we need to put into 
the systems to bring us probably not into the 21st century, but 
I would be happy just bringing us into the 20th century right 
now.
    The Chairman. How much are you seeking?
    Ms. Thompson. About $100 million.
    The Chairman. OK.
    Ms. Thompson. That would, of course, be spent over a 5-year 
period of time, because it would take us--you can't just flip 
the switch, you know, and get new systems in all of the eight 
areas; telecommunications, be able to--you know, we need the 
right equipment out there to be able to deliver to the field. 
Also, as you know, security is a big issue right now, and so 
that also includes the security we would need to be delivering 
that information.
    The Chairman. You recognize you are asking for $100 million 
at a time when your Inspector General is saying we have a 
difference of $230 million in your checking book with the 
Treasury's statement.
    Ms. Thompson. Well, I am telling you that----
    The Chairman. And he is also saying that he lacks 
confidence in your books, to the extent that he can't give an 
opinion one way or the other in whether they fairly reflect 
your assets, liabilities, revenues, and the like, so----
    Ms. Thompson. Yes, Mr. Chairman, I would agree with that, 
but I think that Mr. Viadero would also agree with you that a 
large part of that inability is due to these antiquated feeder 
systems that we have, that don't reconcile, that don't track 
information. And a lot of that is not cash that has been 
misplaced, it is a matter of not being able to account for it 
in the right accounts, and that is where you are out of 
balance.
    [The prepared statement of Ms. Thompson can be found in the 
appendix on page 42.]
    The Chairman. We will get to that in a little bit on the 
questioning, Ms. Thompson. I want to thank you for your 
testimony.
    We will let Ms. Calbom speak for a few moments, and then we 
will go to the questions. And, if you could, just bring up 
anything that you would want to add to what Mr. Viadero or Ms. 
Thompson has said, so as to not go over old ground.

 STATEMENT OF LINDA CALBOM, DIRECTOR, FINANCIAL MANAGEMENT AND 
           ASSURANCE, U.S. GENERAL ACCOUNTING OFFICE

    Ms. Calbom. Thank you, Mr. Chairman. I just wanted to add a 
couple of comments in a few of the areas that have already been 
covered.
    Probably to me the most important area is estimating the 
costs of the loan programs. It is an area where I think a lot 
less progress has been made compared to the other problem 
areas. That is not for a lack of trying on Ms. Thompson's part. 
I think it does get down to a resource area and, frankly, a 
commitment of senior management to take on this issue.
    The whole idea of estimating the costs of these credit 
programs is somewhat complex. I know your banking background, 
so I know you probably understand that basically what they have 
to do is estimate the present value of the cash coming in and 
cash going out, over the life of the loans. And when you have 
so many different loan programs, it does become quite complex, 
and you have to measure it by each year and that kind of thing, 
so it is very complex.
    The Chairman. Are they on accrual accounting for their 
loans, or cash accounting?
    Ms. Calbom. Well, actually, it is what you might call super 
accrual. They have to--and this is different than the private 
sector--they have to estimate the entire cost of the loan at 
the time they make the loan. You know, in the private sector 
you kind of wait until things go bad.
    But in this case you have got to use historical data and 
try to estimate, right up front, what do I think my cash flows 
are going to be? What do I think my defaults are going to be? 
When are they going to be? When am I going to have delinquent 
interest payments? You know, that kind of thing. All of this 
goes into the calculation. It is very complex.
    But the law was passed in 1990. The accounting standards, 
which essentially mirror the law, were passed in 1994. So the 
agencies had a long time to try to deal with this problem, and 
they really just now, in the last couple of years, have been 
focusing attention on it.
    You know, in the private sector, if a new accounting rule 
or a new law was coming out, no matter how complex, I mean, any 
major bank--which USDA, $70 billion in loans--any major bank 
would have been right on top of it. Whatever systems were 
needed, whatever policies and procedures were needed, they 
would have had them in place by the time that rule was 
effective.
    So this issue is probably the number one issue that we have 
concern over. It is one of the issues that actually causes us, 
GAO, to disclaim an opinion on the consolidated statements of 
the Federal Government. So it is something we think is very 
critical. USDA, it is complex, but other agencies, now maybe 
they are not as big, but they have been able to implement the 
systems that are needed to be able to make these calculations. 
So we think this is a big issue that needs a lot of attention 
going forward.
    The next issue that both Ms. Thompson and Mr. Viadero have 
touched on a bit is the fund balance with Treasury accounts. I 
do agree there has been good progress made. It is essential 
that this gets cleaned up. You know, this account, it is like 
their checking account. I mean, all their receipts and 
disbursements go through it.
    The Chairman. When was the first time the $5 billion 
difference was cited? How many years ago was that?
    Ms. Calbom. Well, I know that was last year's number, and I 
know it has been at least, what, some of these differences go 
back about 10-years, don't they?
    The Viadero. Yes, some go back about 10-years.
    Ms. Calbom. Yes. So, again, another issue that has only 
just recently received focused attention.
    This issue, you know, basically says if you can't balance 
your checkbook, you don't know if you are allocating your 
expenses to the right accounts and the right areas. And it all 
comes into performance measurement because, you know, the 
financial statements are just one piece of the end game.
    The end game is being able to tell the taxpayer what do 
they get for their money. And if you can't say what accounts, 
your expenses relate to, and what programs, you cannot tell the 
taxpayer, how much did it cost me to get this service, this 
output. And so it is a very critical account to make sure we 
have in balance because otherwise, everything is suspect.
    The last thing I just wanted to touch on, again, was the 
Forest Service. We have issued a number of reports over the 
years--I think December 1996 was the first one we did on Forest 
Service--because of just the pervasive nature of the problems 
they have had there. And in fact in January of 1999 we put 
Forest Service financial management on our high risk list.
    Now, again, there have been improvements made, the biggest 
one probably being that the new system, this FFIS system, has 
been put in place, and that will help with a lot of the other 
basic, accounting problems, with accounts receivable, accounts 
payable, and that kind of thing. But, and I think this was 
mentioned, the real problem is the feeder systems. So you can 
have a great accounting system, but if the feeder systems that 
put the data in aren't any good, you know, you are still going 
to get bad accounting data coming out.
    So that is a real major issue. Again, it is dollars we are 
talking about, but again, it is over the long term having the 
commitment to fix these things.
    The other thing with the Forest Service is they still don't 
quite have a handle on all their assets out in the field. I 
know they are trying to do this, and they have come a long way, 
but frankly we think the autonomous nature of the Forest 
Service really hinders this.
    And one thing that we have suggested is that each of the 
regions have a chief financial officer installed, which I know 
is being considered, but we think that is something very 
important. If you had a chief financial officer that had direct 
reporting responsibility to headquarters, we think that would 
go a long ways towards overcoming this whole autonomous nature 
of the Forest Service.
    That pretty much summarizes the points that I wanted to 
make. These issues are very deep seated, and particularly going 
forward, even into the next administration, it is going to be 
just essential that focused attention be maintained on these 
issues to ensure that they get corrected.
    So that is all I had. Thank you, Mr. Chairman.
    [The prepared statement of Ms. Calbom can be found in the 
appendix on page 68.]
    The Chairman. Well, thank you very much.
    I wondered, Mr. Viadero, if you have your pictures. We have 
a picture available of the vacant lot.
    Mr. Viadero. This is our substitute for Vanna White. This 
is the best the Office of Inspector General could come up with.
    The Chairman. Mr. Viadero, if you could explain what you 
came up with here, it is my understanding that checks were 
being sent to that address.
    Mr. Viadero. No, no checks were being sent to that address. 
That was listed, though, as a home, a day care home, and 
typically a center home has up to 5 children at it for feeding.
    We rode by there--and this started as one of our 
presidential initiatives. The program was funding for $1.7 
billion, and when we started the program, Mr. Chairman, we 
questioned $1.7 billion or 100-percent of the program.
    We went out to several States, did several reviews, but we 
developed, more importantly, a fraud audit program on this. So 
this was not a compliance audit. We picked out the worst 
offenders based upon the fraud audit profile that we developed. 
This one came out in Ohio, and we rode by there, and that 
vacant lot was listed as a home. Absolutely incredible. 
Absolutely incredible.
    Now, the problem with this particular operation or CACFP, 
if you will, is not so much the providers of the service, the 
mom sitting at home with, you know, anywhere from 2 to 12 
children at home, or the----
    The Chairman. What was the name of this program?
    Mr. Viadero. The Child and Adult Care Food Program [CACFP].
    The Chairman. Child and Adult Care?
    Mr. Viadero. Right. Food Program. CACFP.
    The Chairman. OK, and the program was supposed to own 
centers?
    Mr. Viadero. No, no, the program didn't. We funded, the 
Department, through the Food and Nutrition Service----
    The Chairman. Right.
    Mr. Viadero.--reimbursed the States. Here is where the 
problem starts.
    The Chairman. OK.
    Mr. Viadero. The Department of Agriculture funds these 
programs through the State. The State is the conduit. Here is, 
the next statement lays the problem out. There are sponsors. 
There are sponsors that are reimbursed through the State. The 
sponsors then go out and sign up centers and homes, and they 
reimburse the homes and centers for the meals served. Okay?
    The Chairman. OK.
    Mr. Viadero. They receive $42 a month administrative fee 
for every home that they have. Okay? For a center, they get up 
to 30-percent administrative reimbursement in some states, 30-
percent. Now, most of these homes and centers provide at least 
one, most two meals and a snack, so roughly about $6 a day is 
allotted from USDA to these centers and homes per child.
    In this case, 5 children at $6 is $30 a day. Times that by 
30 days. That is what the people--and by the way, these people 
were convicted, okay?--that is what these people were receiving 
in just reimbursement for that vacant lot, plus $42 for 
administrative costs. That is horrible.
    The Chairman. Services that they weren't providing anywhere 
else, it wasn't just a mistake as to the location of where 
their center was. They didn't have a center.
    Mr. Viadero. No, it was simply just fraud.
    The Chairman. Just pure fraud. You gave the money to the 
State of Ohio, and the State of Ohio was reimbursing it to 
these so-called providers?
    Mr. Viadero. Right.
    The Chairman. Who were committing the fraud. How much were 
those specific providers paid? Do you know?
    Mr. Viadero. I can get that for you, Mr. Chairman. We might 
have it right here. In this particular operation, this 
operation received more than $1.1 billion. I am sorry. I am 
talking in B's in agriculture. It is $1.1 million.
    The Chairman. OK. Was that provider providing services 
anywhere?
    Mr. Viadero. No.
    The Chairman. It didn't exist at all?
    Mr. Viadero. Well, it existed, but we had some, this is 
what we have been proven to be fraud, $1.1 million. They were 
convicted on that figure.
    The Chairman. Now, does the Department now have policies in 
place to prevent a repeat of this kind of fraud? How long was 
this fraud going on before you found it?
    Mr. Viadero. Well, this one was going on, this operation 
was in business about 10-years. However, we just completed one 
up in Detroit----
    The Chairman. So were they taking checks for 10-years for 
services they weren't providing?
    Mr. Viadero. Yes, Sir. See----
    The Chairman. Ten-years, and nobody checked it.
    Mr. Viadero. Let me give you a good quote here, and I am 
going to--I quote General Eisenhower before he became 
President, that the unaudited, the uninspected, deteriorates, 
and that is what happened here. It is a program responsibility. 
Is the program working? Are there controls in place, and are 
they working? That is substantively a compliance review. Nobody 
from Food and Nutrition Service went out and checked it, very 
simply.
    We just finished one in Detroit. $27 million was defrauded 
from the people of the United States. We convicted them on $27 
million worth of Child and Adult Care Food Program fraud. Now, 
as a result of that and the notoriety they got, the husband of 
the wife were arrested and he has been indicted for the murder 
of his former wife.
    The Chairman. And that was recently in Detroit?
    Mr. Viadero. Yes, Sir.
    The Chairman. Was that a program going through the State of 
Michigan?
    Mr. Viadero. Yes, Sir. There is only one State that does 
not operate this way, and that is the State or Commonwealth of 
Virginia. USDA operates the program directly. The sponsors are 
the incipient level or incipient point of entry into the greed, 
into the fraud.
    We have organizations that operate centers, such as the 
YMCA, the Salvation Army, and they have come forward to us and 
said, ``We haven't received our reimbursement.'' So the sponsor 
has, in many cases, either totally absconded with the 
reimbursement for food, because the centers get reimbursed for 
food, or they have lagged for two or 3-months. Now, that is the 
time value of money, so they are using this, the reimbursement, 
as a float, if you will.
    The Chairman. Now, was USDA doing no checking on that 
program at all, that Child and Adult Care Program?
    Mr. Viadero. Well, it is interesting that the USDA gave out 
a total of $88 million over 5-years to the States to audit the 
program. In other words, USDA----
    The Chairman. They gave money. So was this a State of Ohio 
problem or a USDA problem? Whose fault is this?
    Mr. Viadero. Both.
    The Chairman. Both.
    Mr. Viadero. Both parties are jointly and severally liable 
in this case. Let me give you an example.
    The Department of Agriculture gave out about $88 million 
over 5-years to the States to audit this. Okay? Because the 
Food and Nutrition Service said they couldn't do audits. They 
reimbursed the States.
    We do have some honest States out there. Some States 
returned about $24 million over the 5-year period and said they 
audited the program through other various and sundry programs. 
The States returned to the Department of Agriculture $24 
million.
    We found in several States where there was little activity, 
but States used the money.
    The Chairman. Hold on. Do we have policies in place now to 
prevent this kind of fraud in the future?
    Mr. Viadero. We had policies in place before. The problem 
is, nobody went out and looked at it. It is simple. Controls in 
place, yes or no. Audit working, yes or no. In this case we had 
controls but they weren't working, by any measure.
    The Chairman. Well, is the problem with this program that 
you have the State and the Federal Government in charge, and 
one may think the other is auditing it or checking on it, but 
in fact nobody is, and it is a lack of accountability?
    Mr. Viadero. Well, I think it is a little----
    The Chairman. I mean, Ohio is probably pointing the finger 
at the USDA, and USDA is pointing the finger at Ohio.
    Mr. Viadero. I think it is a little difficult--and this is 
just one picture, I mean, I am not picking on the State of Ohio 
by any means----
    The Chairman. We will ask Senator Voinovich about this. He 
was probably Governor when that happened.
    Mr. Viadero. Use her name.
    [Laughter.]
    The issue, though, Mr. Chairman, is that the State, 
regardless of where it is, the State received the money from 
USDA and they signed an agreement to audit this program.
    The Chairman. Can you go against the State, to get that 
money back from the State?
    Mr. Viadero. We have asked the Food and Nutrition Service 
to do that.
    The Chairman. Are they doing that?
    Mr. Viadero. They are attempting it.
    The Chairman. Shouldn't the State have to pay that back?
    Mr. Viadero. That is what we thought.
    The Chairman. Now, tell me about the murals that you found, 
if we could put that up.
    Mr. Viadero. He will win an incentive award for this.
    The Chairman. Now, where is that mural?
    Mr. Viadero. Southern California.
    The Chairman. And it was painted by the Government, or with 
government resources?
    Mr. Viadero. With government resources. This was funded 
through the Urban Resources Partnership, through the Forest 
Service, through National--I am sorry, the NRCS, Natural 
Resources Conservation Service.
    The Chairman. OK, and it was out of program funds that were 
supposed to be used to prevent soil erosion, was that right?
    Mr. Viadero. Yes, Sir.
    The Chairman. And there was no authorization in any statute 
for them to take money out of that soil erosion program and use 
it to paint murals?
    Mr. Viadero. That is correct, Sir, and we even had two 
opinions from the Office of General Counsel to support that.
    The Chairman. Who was the responsible official in the U.S. 
Department of Agriculture who ordered that, that money be used 
to paint murals on walls?
    Mr. Viadero. The Under Secretary of Natural Resources.
    The Chairman. And what is his name, or her name?
    Mr. Viadero. James Lyons.
    The Chairman. And is he still there?
    Mr. Viadero. Yes, Sir.
    The Chairman. Has he been reprimanded in any way?
    Mr. Viadero. I believe so. I think the House took care of 
that last week.
    The Chairman. They took care of that last week?
    Mr. Viadero. We had a hearing on this topic last week.
    The Chairman. And this man's name is James?
    Mr. Viadero. Yes, Sir. Lyons. L-Y-O-N-S.
    The Chairman. Under Secretary of----
    Mr. Viadero. Natural Resources and Environment.
    The Chairman.--of Natural Resources. He ordered that this 
money be taken out. When was that, that he did that?
    Mr. Viadero. Our review of these expenditures covered the 
period of 1994 through 1997.
    The Chairman. So he was doing it for 3-years.
    Mr. Viadero. From 1994 through 1997. I am sorry, 4-years.
    The Chairman. He was not disciplined internally in the 
USDA?
    Mr. Viadero. Not to my knowledge, Sir.
    The Chairman. Should not somebody like that, in your 
opinion, lose their job?
    Mr. Viadero. That is not up to me, Sir. That would be up to 
the Secretary.
    The Chairman. Did you present your findings to Secretary 
Glickman?
    Mr. Viadero. The Secretary got a copy of the audit.
    The Chairman. And when did he get a copy of that audit?
    Mr. Viadero. It was issued in December of 1999, Sir.
    The Chairman. And nothing has happened to Mr. Lyons. He is 
still there, still drawing his salary?
    Mr. Viadero. Yes, Sir.
    The Chairman. I think that is something we should follow up 
with the Secretary, to find out why someone like that wouldn't 
be disciplined, or how they could continue to maintain their 
post.
    How many funds were taken out of the soil erosion program?
    Mr. Viadero. Total funding for the program including soil 
erosion funds exceded $20 million, Sir. That was over the 4-
year period, so on average, $5 million a year.
    The Chairman. Was Mr. Lyons--did you confront him with this 
finding?
    Mr. Viadero. Yes, Sir.
    The Chairman. Did he say he was ordered by anybody to do 
this?
    Mr. Viadero. No, Sir. He said he had authority to use these 
appropriations, and that the General Counsel supported his 
position. It was our interpretation--I am not an attorney, 
sir----
    The Chairman. So the General Counsel of the USDA supported 
him?
    Mr. Viadero. Supported us.
    The Chairman. Supported you?
    Mr. Viadero. Yes. And he went back to General Counsel and 
asked for another opinion, and the second opinion likewise 
supported us. We were looking for--I think General Counsel uses 
the term ``nexus''--we were looking for just some connection 
between what was done in the cities to a conservation message.
    In some cases it met the standard. In that event, we gave 
them credit for it, but there were 209 projects such as this. 
If anybody can see a conservation message in the paint on the 
side of somebody's privately owned garage, I would appreciate 
it if they speak up, because we are still looking for it. We 
have another one.
    The Chairman. And the General Counsel agreed with you there 
had to be a nexus with soil erosion, and what he was doing 
was----
    Mr. Viadero. Absolutely. That is what the grant was for.
    The next one--again, this is all Southern California we 
have here----
    The Chairman. Did he, did Mr. Lyons give this money to 
private individuals and pay them to paint these murals? Was 
that the idea?
    Mr. Viadero. Absolutely.
    The Chairman. I mean, who were these individuals who got 
this money? It is $3.4 million?
    Mr. Viadero. Yes, about $3.4 million of the funds spent for 
the projects we reviewed did not meet the purposes of the 
statutes from which they were funded. Some of them were----
    The Chairman. Was just paid to people to paint murals?
    Mr. Viadero. Yes. Some of them were inner city groups, to 
paint them, to get a message out, an environmental message. I 
can't find the environmental message painted on the side of 
this commercial building.
    The Chairman. Do you know what groups received that money?
    Mr. Viadero. It is in the work papers, Sir.
    The Chairman. Did you refer this to any law enforcement 
authority?
    Mr. Viadero. We are the law enforcement branch, Sir. 
Understand, the Office of Inspector General is composed of 
about 50-percent audits and about 50-percent investigators. I 
am the former Special Agent in Charge of Auditing and the Chief 
Auditor for the FBI.
    The Chairman. But you can't bring a prosecution.
    Mr. Viadero. We refer all of our criminal cases to the 
Department of Justice. We work with the local United States 
Attorney----
    The Chairman. Did you refer this to any U.S. Attorneys?
    Mr. Viadero. Oh, yes, Sir.
    The Chairman. You did.
    Mr. Viadero. They are ongoing.
    The Chairman. Is there any prosecution?
    Mr. Viadero. They are ongoing, Sir.
    The Chairman. There are investigations, there is a criminal 
investigation ongoing on this?
    Mr. Viadero. There are several investigations, Sir.
    The Chairman. This is an outrage.
    Tell me about the $97 million vehicle.
    Mr. Viadero. I will ask Mr. Ebbitt to.
    The Chairman. OK. We don't have a picture of that vehicle? 
I would like to see what a $97 million vehicle looks like.
    Mr. Viadero. But it might have the bad tires on it. I 
can't----
    The Chairman. Maybe the Batmobile, or--Mr. Ebbitt?
    Mr. Ebbitt. Mr. Chairman, clearly a mistake. I mean, 
somehow or other the books and records at the APHIS had 
recorded this particular vehicle having a value of $97 million, 
obviously an outright mistake, no----
    The Chairman. It was a Forest Service vehicle?
    Mr. Ebbitt. No. APHIS.
    The Chairman. Did they put that number in to plug a gap in 
their financial statements, that they were having a $97 million 
difference?
    Mr. Ebbitt. Mr. Chairman, I don't believe that is the case. 
I mean, the books and records are in such a state that there 
was no point in trying to plug anything, because, I mean----
    The Chairman. Nothing balances.
    Mr. Ebbitt.--you couldn't get to the right answer. This was 
clearly a mistake. One of the major problems, as Ms. Thompson 
referred to, is property within the Forest Service. We have 
this major effort underway right now to try and understand 
these values. And these kinds of mistakes, are being corrected 
this year, and hopefully before this year is out, as we start 
next year, we are going to get closer to the right answer.
    The Chairman. Another example you had was an $11 million 
microscope?
    Mr. Ebbitt. Yes, Sir. Again, these are just mistakes. How 
they got there--they were so numerous, clearly just mistakes.
    The Chairman. So their books and records are replete with 
instances of those kind of mistakes. You are just picking out a 
few examples to kind of dramatize the situation, a $97 million 
car, an $11 million microscope, but the bottom line here is 
that their books and records are in such disarray that they are 
almost of no help in examining the financial condition or 
position of the USDA.
    Mr. Ebbitt. That is correct.
    The Chairman. As it relates to the Forest Service, but the 
rest of the USDA, you have greater confidence?
    Mr. Ebbitt. Obviously, Mr. Chairman, the Forest Service is 
a huge part of the Department of Agriculture, so the problems 
within the Forest Service carry through to the consolidated 
statements of USDA. When you put all the numbers together for 
the Department, the problems of the Forest Service definitely 
impact the consolidated statements.
    The Chairman. Let me ask this. It has been many years since 
Congress required all the agencies to have audits, and it was 
expected that they would all be achieving unqualified opinions 
from accountants who would be able to state that they have 
confidence that the financial statements presented accurately 
reflect the financial position of each of the agencies. That 
requirement of those audits went into effect in the early 
1990s. Was it 1994 or 1990? There have been two acts. There was 
one in 1990, and then 1994. Which one required the audits?
    Mr. Viadero. We were one of the original departments. We go 
back to 1990.
    The Chairman. To 1990, okay. It has been 10-years. USDA's 
books and records haven't been cleaned up in the last decade. 
The USDA probably has been beaten up by Congress many times 
over this issue, but it doesn't seem to matter. They keep 
coming back. I mean, they are trying to improve but we are 
still not getting clean opinions.
    Let me ask Mr. Viadero this question: It seems like there 
is no down side for an Agency of the Federal Government, or a 
Department, if they get a bad audit. They can still receive 
their full appropriations the next year. In fact, they may even 
use their poor audit to argue that they need more money to get 
the right systems to clean up their books and records.
    Shouldn't there be some penalty for an agency that doesn't 
get clean audits? What about a 5-percent across-the-board 
administrative cut for any agency that can't clean up its books 
and records, to give them a real incentive to improve their 
practices?
    Now, a publicly held company that couldn't get a clean 
audit really couldn't continue to have its stock traded 
publicly. Nobody would buy a stock in a company that couldn't 
get a clean audit. There are down sides for any private company 
that can't get its act together. It seems to me there is no 
real down side for a government agency that can't clean up its 
books, other than it is going to have to endure a couple days 
of embarrassing hearings on Capitol Hill, but then that is the 
end of it.
    Do you agree with me on that? Shouldn't there be some kind 
of penalty or an incentive for these departments to get their 
acts together?
    Mr. Viadero. With regard to the incentives or 
disincentives, I leave that up to this wonderful body up here 
on the Hill, because that is going to be the legislative fix. 
However, just by way of background, if I can, I am starting my 
seventh year here, and I walked in with the Food and Nutrition 
Service receiving an disclaims of opinion on their financial 
statements. They couldn't find $18 billion out of $38 billion.
    Now, nobody took the money. You know, no Government 
employee is going to take $18 billion. $18, maybe, $180, but 
not $18 billion, and that was just in bookkeeping errors, if 
you will. Too many people, when they made corrections----
    The Chairman. But it is possible there could be millions of 
dollars that somebody is actually stealing----
    Mr. Viadero. Absolutely.
    The Chairman.--and we wouldn't be able to detect it.
    Mr. Viadero. I mean, we don't know. I mean, that is the 
bottom line. We don't know.
    But let me get back to the story, if I can. I put in an 
action team, if you will, consulting. I operated a management 
advisory service out of the Office of Inspector General, with 
auditors that did not have any reason to go back to the Food 
and Nutrition Service again, to go in and work with the Food 
and Nutrition Service. We brought that organization up to a 
clean opinion, from an adverse opinion, and I understand that 
this year we are probably going to have a clean opinion again, 
at this utterance, on Food and Nutrition Service, so they got 
it together.
    I took 22 people for the last 4-years and entered into an 
agreement with the Forest Service to do the same thing. It is 
sort of we have to retrain them after lunch again, what they 
learned in the morning. We find the same errors being repeated. 
To this end, in the year 2001, the upcoming fiscal year, we are 
not going to have a consulting service, because I am taking 
their money from them on a reimbursable agreement and it is 
being wasted.
    Somebody has to get the Forest Service's attention. You 
know, the managers in the program, these program people must 
have 100-percent efficiency rate because it is all going to the 
program, because nobody is spending any time or effort on the 
financial management of these dollars.
    And to that end, my own budget, I have lost 24-percent of 
my people in the last 5-years because the Office of Inspector 
General is looked at as a staff agency, and we have been----
    The Chairman. Who controls your budget?
    Mr. Viadero. The House.
    The Chairman. OK, but----
    Mr. Viadero. We have been looked at, we have been 
flatlined. We haven't gotten any decreases.
    The Chairman. Has the Secretary been giving you an adequate 
budget?
    Mr. Viadero. Yes, and we even, we got support out of OMB, 
from the President. We got support from the Secretary going 
out.
    The Chairman. But the House cut your budget?
    Mr. Viadero. This year we got flatlined.
    The Chairman. And you feel you could use more resources, 
too?
    Mr. Viadero. Mr. Chairman, I tell you, my organization is 
basically labor-intensive, travel and per diem costs for the 
audits and the investigations. And we are bringing in, we bring 
in three times our annual budget.
    The Chairman. How many cases have you referred over the 
years for prosecution?
    Mr. Viadero. Thousands.
    The Chairman. Thousands?
    Mr. Viadero. Thousands.
    The Chairman. Has that involved internal theft?
    Mr. Viadero. Well, I am very happy to say, because that is 
the job I had at the FBI, my last job was the internal side of 
it, this is an exceptionally clean Department insofar as 
internal theft goes. Now, we have internal problems, workplace 
violence issues.
    The Chairman. Have you seen any collusion on the part of 
USDA employees who may be working with that child care food 
provider in Ohio on a scam to send out USDA checks to that 
provider that doesn't really exist? Have you found----
    Mr. Viadero. Now, we haven't found that, but we have found 
collusion with State employees and some of the sponsors.
    The Chairman. With State employees?
    Mr. Viadero. Yes. Remember, USDA is just the----
    The Chairman. Did you find that in Ohio?
    Mr. Viadero. No, Sir, not that I recall.
    The Chairman. How about my State of Illinois?
    Mr. Viadero. No, we didn't find that much in Illinois. 
Minor, minor deficiencies.
    The Chairman. OK. So collusion with State officials. Well, 
maybe these programs would be better if they were run with the 
USDA, instead of turning the money over to the States to run 
them.
    Mr. Viadero. Well, again, the State of Virginia, we don't 
have any problems.
    The Chairman. They run it, right, and don't----
    Mr. Viadero. Yes, the Department runs it. It is 
interesting. We did five or six audits throughout the State, 
and what we found, I think the most horrendous one was, we 
found somebody was using some of the funds to buy cigarettes 
and beer, but the amount was absolutely de minimis. I mean, you 
could not get a Federal prosecution on this in the district. It 
was that we found $50 here, $70 there, strictly bookkeeping 
errors. But we did find children at the sites. That is key. We 
get excited when we visit this and we find people there. OK?
    We found such things that we had to report to the local 
fire marshal's office when we went in, or the building 
inspector, whoever had the jurisdiction. We found 21 children 
in a 10 by 15 room, in a basement, with no window. I mean, 
these are U.S. children here. This is the future of the 
country. That is less than 10 square feet a person, and if 
anybody is familiar with children, they generally take more 
than 10 square feet during the day.
    We found in some cases no smoke alarms or no fire alarms, 
no extinguishers. In one case we found the whole house being 
heated by the stove, the gas stove and the oven. Not good to 
have children around. We reported this to the local 
jurisdiction. We have had some very, very serious prosecutions 
in this program, I have gone out to meet several top State 
officials, to bring it to their attention. This is something 
you have to get fixed right away. You can't wait necessarily 
for our process of jurisprudence to go to work. We refer them, 
but we want this condition corrected immediately.
    The Chairman. Well, thank you. I am going to give Ms. 
Thompson some time for some closing remarks. I guess I want to 
ask you--we are going to have to move to the next panel--I 
understand you have brought in a Big Five CPA firm to help you 
reconcile that cash balance with the Treasury. You now have the 
difference down to $236 million?
    Ms. Thompson. No, Sir. We have it down much below that. In 
fact, it is close to being totally reconciled. Obviously, we 
broke it into three pieces----
    The Chairman. What is it at now?
    Ms. Thompson. It is probably less than, what, $5 million, 
maybe, at the most.
    The Chairman. So you are working that down, you are getting 
it there. How much have you had to pay the Big Five CPA firm to 
get----
    Ms. Thompson. Too much.
    The Chairman. How much is it?
    Ms. Thompson. About $2 million.
    The Chairman. And what firm is it?
    Ms. Thompson. Price Waterhouse Coopers.
    The Chairman. And how long have they been working on it?
    Ms. Thompson. A year.
    The Chairman. A year?
    Ms. Thompson. They had 40 people in there that literally 
rolled up their sleeves. This wasn't a consulting job. They 
helped us put together, obviously, the project plan, and they 
have been training another 40 or 50 people, of our people, to 
work on it. But they got in, rolled up their sleeves, and 
looked at thousands and thousands of transactions that went all 
the way back into the early 1990s.
    The Chairman. Where was most of that $5 billion error?
    Ms. Thompson. Again, it was accounting errors. You know----
    The Chairman. Tons of small transactions?
    Ms. Thompson. Yes.
    The Chairman. It wasn't one big----
    Ms. Thompson. No. I wish it were. It would have been 
easier.
    The Chairman. When do you think you will have the USDA's 
books and records in such a position that you will be able to 
get an unqualified opinion?
    Ms. Thompson. We are hoping to get there before DOD does. 
We are working very hard, and I am not sure that we can get 
there, but we had a plan in place this year to get it to a 
qualified opinion, which shows you that we are making progress, 
and I would hope to get to an unqualified opinion by the next 
year.
    The Chairman. By next year?
    Ms. Thompson. Right.
    The Chairman. By 2001?
    Ms. Thompson. Yes.
    The Chairman. Well, we wish you good luck. It is a tall 
order, and I clearly believe you have the background to do this 
job. You have a background in banking, as a CPA, and as a State 
Treasurer. You certainly appear to have great qualifications. I 
know you came into a Department that was in horrible disarray, 
is still in disarray, but hopefully getting better.
    And I would encourage you to promote Mr. Viadero's efforts 
within the USDA, and I hope that if we have a hearing like this 
next year, that we will hear a better report out of the GAO and 
your Inspector General. And I want to urge you to keep up the 
good work. Of course, the administration may change in the 
meantime----
    Ms. Thompson. That is true.
    The Chairman.--and somebody else will be sitting here. But 
I want to thank you very much.
    Did you have any more pictures up there that we haven't 
seen, Mr. Viadero?
    Mr. Viadero. We only have one more art picture, if you 
would care to see it.
    The Chairman. Well, we might as well take a look.
    Mr. Viadero. The mural, this is the mural.
    The Chairman. OK.
    Mr. Viadero. And, again, we just ask if anybody can see any 
soil conservation message here.
    The Chairman. All taken out of the soil conservation fund 
by Mr. Lyons, the Under Secretary of Natural Resources?
    Mr. Viadero. Yes, Sir.
    The Chairman. OK, and did you find out who were the 
individual community groups that were paid the money, the $3.4 
million, to paint these murals? Do you think these murals are 
worth $3.4 million?
    Mr. Viadero. Sir, my wife has the fine arts degree. I am 
the accountant.
    [Laughter.]
    The Chairman. How many of these, how many murals did the 
$3.4 million buy?
    Mr. Viadero. I don't have the exact number, but we can get 
that for you. It is in the work papers.
    The Chairman. In your judgment, was this just a mechanism 
for paying cash to some community groups in Los Angeles?
    Mr. Viadero. That is part of the ongoing investigation, and 
unfortunately, we can't talk about it.
    The Chairman. There is a grand jury. Possibly this money 
was just spread around the community. Do you suspect any 
kickbacks were received in the Department of Agriculture?
    Mr. Viadero. No, Sir.
    The Chairman. You don't?
    Mr. Viadero. No.
    The Chairman. Well, at least that is good. Well, Mr. 
Viadero, Ms. Thompson, Ms. Calbom, Mr. Ebbitt, thank you all 
very much.
    We will proceed to the second panel. Well, thank you very 
much. We have on the second panel Mr. Thomas Schatz--is that 
the correct pronunciation?--president of the Citizens Against 
Government Waste, and the Honorable Maurice P. McTigue, the 
distinguished visiting scholar at the Mercatus Center at George 
Mason University. Mr. McTigue has done a study on the audits 
that have been done of all Federal agencies, have has published 
some reports that got widespread attention.
    I would like to start with you, Mr. McTigue, first, and 
then proceed to Mr. Schatz, and I may just interject along the 
way with questions. Mr. McTigue, thank you for being here.

 STATEMENT OF HON. MAURICE P. MCTIGUE, DISTINGUISHED VISITING 
       SCHOLAR, MERCATUS CENTER, GEORGE MASON UNIVERSITY

    Mr. McTigue. Thank you, Mr. Chairman. Just a couple of 
comments on my background. I am a visitor to the United States. 
I have been here for 3-years. I spent the 3-years prior to that 
as New Zealand's Ambassador to Canada, and the 10-years prior 
to that as an elected Member of the Parliament of New Zealand. 
I was a member of the Cabinet of the Parliament of New Zealand. 
I held seven different portfolios.
    And that was during a period of change to the machinery of 
government that is very similar to the change that you are 
going through in the United States, in other words, a major 
movement away from accountability just for cash inflows and 
outflows as far as government was concerned, and a new 
accountability requirement that was designed to show what were 
the public benefits that flowed from the expenditure of 
taxpayer dollars and from government-funded programs.
    And it is really on the basis of that experience that the 
work that I do at Mercatus is very much monitoring what is 
happening with the implementation of your Government 
Performance and Results Act, and observing the impact that 
those new incentives have on Government agencies and how that 
may change their behavior and their performance over time.
    Mr. Chairman, this isn't an experience that is unique to my 
country and your country. There is about 50 to 60 countries 
around the world that are going through remarkable changes to 
their accountability regimes, and they are all headed in 
exactly the same direction, that government organizations have 
to be much more accountable for the public benefits that they 
produce and able to identify exactly what those public benefits 
are.
    Having listened to the testimony that has appeared before 
you this morning, Sir, and recognizing the gravity of the risks 
concerned with regard to agriculture, I want to take that 
another stage further, because in my view the greatest risk is 
not just mismanagement of money, but is mismanagement of the 
activity which is designed to produce very significant public 
benefits, and because of these issues may not be able to indeed 
do that.
    I want to really pick two areas of activity, and they are 
two areas that I did cover in my written testimony to you, and 
the first of those is with regard to the Forest Service. And if 
you look at the responsibility of the Forest Service, first and 
foremost it is a custodial role. And if you have a custodial 
role, then the first issue that you have to address is, are we 
able to manage this resource in perpetuity for the benefit of 
the American people, and really the first rule should be, 
first, do no damage.
    If you look at the performance reports of the Forest 
Service, it is very hard to find out where they give a high 
priority to the health and protection of the resources under 
their care. Good management would say that the first thing that 
you do when you have a custodial role is to say what are the 
mission-critical issues that could put this particular resource 
in jeopardy? And in the case of the Forest Service and the 
forests themselves, it would be things like fire, it would be 
wind blow, it could be disease, it could be animals, a variety 
of different things.
    The first priority for your management, then, would be to 
diminish those risks. If you look at a lot of the research that 
has been done around the national forests in recent years, the 
Forest Service has been continually warned that there was a 
catastrophic potential fire risk to the forests because of the 
rapid build-up in fuel inside the forests.
    Now, the Forest Service can't prevent fires from happening, 
but its managerial practices certainly can diminish the 
severity or the intensity of the fires by making certain that 
the fuel levels within the forests don't get beyond a certain 
level. It is very difficult to find that anybody has been 
concentrating on that issue.
    And I think that those are things that Congress itself 
needs to concern itself about. Are they, first and foremost, 
able to concentrate and effectively carry out their custodial 
role for all of the resources that they have under their 
control? And given the experience of the current year, I think 
that, that is questionable.
    The second thing that you would have to ask would be, does 
anybody know exactly what the critical risks are to these 
resources, and what strategies do they have in place to make 
certain that these risks are at least diminished or in many 
instances eliminated? And I think that, that would currently be 
difficult to find.
    So this is not an issue that can be excused by saying that 
we don't have the resources to be able to do this, because with 
mission-critical issues, those are the areas in which you put 
the very first of your resources. Some of the peripheral issues 
you may not be able to fund because of resources, but mission-
critical issues should have first call on resources, and you 
can't say at a later date, ``Sorry, we weren't able to do that 
because we didn't have enough resources.''
    I now want to take a slightly different tack and look at 
one of the other areas of responsibility that USDA has, and 
that is to reduce hunger and ensure food for the hungry. And 
quite clearly, when Congress decided that these programs should 
exist, it was addressing two issues.
    The first issue was hunger, and the requirement to reduce 
hunger really says that USDA should be looking at causal 
factors. What are the causes of hunger, and what can we do to 
diminish or eliminate those causes of hunger? The second one 
was the consequences of hunger. There are hungry people, so 
let's see that we feed hungry people. But it seems to me that 
the more important of the two is the first, the requirement to 
diminish hunger.
    If you look at the measures that come through in the annual 
report of USDA in this area, it isn't possible to determine 
from that whether the problem of hunger is getting better or 
worse. If you look at the feeding programs, it seems that at a 
time of extraordinary affluence in the United States, more and 
more people are requiring feeding. So one of the measures can 
be, how many people did you feed? But another measure that 
seems to be absent, in my view, is how many hungry people did 
you not feed, because that is of serious consequence as well.
    And if you take on a social responsibility like that, then 
I believe that you do have an ongoing responsibility to pass on 
to those who control your destiny in terms of financing your 
operations, a full picture of whether or not you are impacting 
these particular social problems that you are addressing, 
whether or not you have an understanding of what the causal 
factors are, and can you draw distinct linkages between your 
activities and these particular problems?
    Now, I don't think that you can say fairly that the USDA is 
responsible for hunger. No. But what you have given it is a 
responsibility in that field, and it should be able to trace 
the activities of its programs and directly link them to how 
much they are diminishing hunger. If they were able to do that, 
you would then be able to decide which of the programs were 
most effective and which of the programs therefore were most 
deserving of resources.
    If you were able to optimize those resources into the very 
best of those programs, then you may be able to materially 
improve the lot of hungry people in society without actually 
having to put any more resources into the programs, because you 
would be funding only those which were most effective. At the 
moment it is very difficult to be able to draw a measure of 
effectiveness of those feeding programs across the activities 
of USDA.
    Mr. Chairman, I would be the first one to admit that we 
can't expect everybody to get this perfect in year one, and we 
are dealing with year one. The 1999 financial year was the 
first year that everybody had to comply with the full 
implications of GPRA.
    But I think that it is timely for Congress and the Senate 
to start to put some pressure on these organizations to say at 
least by next year we need to be able to able to have a fair 
indication that you are impacting these problems, that you are 
able to get on top of mission-critical issues as far as the 
Forest Service is concerned, that the risk is diminishing, not 
increasing, and that the resources that you are using are 
indeed fulfilling some of the goals that have been set out for 
you in the mandates given to you by Congress and the 
administration.
    The Chairman. If I could interject at this point, Mr. 
McTigue, and bring up a question I asked of the last panel, I 
asked Mr. Viadero specifically, and he didn't want to answer in 
his role as Inspector General of the USDA, but maybe you as an 
academic and somebody who has a lot of experience in 
government, as a Member of Parliament in New Zealand and as an 
Ambassador from New Zealand to Canada:
    What would be a good idea for Congress to do to get these 
departments to take our requirements of getting their books in 
order seriously? Doesn't there have to be some down side other 
than just getting berated before a Senate or a House panel and 
enduring one or 2 days of bad publicity, and then they go back 
to their old ways and keep their books in an unsatisfactory 
state? Should we look at something like cutting their 
administrative budget automatically if they aren't presenting 
financial statements that are given unqualified opinions?
    Mr. McTigue. I think that the intent that Congress clearly 
had at the time that it passed GPRA was to put itself in a 
position where it could measure the efficacy, the effectiveness 
of different programs, and then decide which of those programs 
it was going to fund. The work that you are doing here this 
morning I would consider to be part of the research work that 
goes into trying to identify effectiveness inside the 
organization, and that should influence the decisions that are 
made about appropriations.
    Unless there is a clear linkage between high quality 
performance and the allocation of resources, then I don't think 
that well-intended criticism is ever going to really change 
behavior. The only thing that will change it is if you link 
resources to poor performance, or the loss of resources to poor 
performance.
    The Chairman. I agree with you on that. It might be a 
political problem around here, though, to do that. Is there a 
way of linking their administrative resources to their 
performance, as opposed to linking their overall budget 
resources to their audit results, because we don't want to cut 
some of these programs that are intended, for example, to feed 
the hungry? Would you see anything, any way we could target our 
linking of resources?
    Mr. McTigue. Yes. Let me just put the targeting to one side 
for a moment and say that in my view there are a significant 
number of dynamics at work, as soon as you decide to move 
scrutiny of activity to an assessment of what was the public 
benefit that followed as a result.
    By requiring full disclosure, and you are entitled to 
that--what government agencies do should not be an issue of 
hide-and-seek between themselves and those people who stand in 
the shoes of the owners, the American public--there should be 
full disclosure. If you have full disclosure and full 
transparency, just the fact that the poor performance is going 
to become known will have a salutary effect on management 
inside the organization in the first instance. In the second 
instance, public knowledge of it will also put pressure on the 
legislature to take action on those programs that they see as 
being ineffective.
    In my view, you cannot address all of this issue by 
attacking administrative allocations of monies only, because 
you may indeed be the architect of the problem, or blamed for 
being the architect of the problem, because there aren't 
sufficient administrative resources to actually effectively 
deliver the program. So I think there is a risk there.
    In fact, we heard the Chief Financial Officer saying that 
the inability to be able to gather accurate information was one 
of the major causal factors in their inability to be able to 
properly manage their resources. There is some truth in that, 
but you would have to say that if that was one of the most 
important mission-critical issues for Agriculture in the last 
10-years, there should have been money being diverted from 
other areas to address that issue.
    The Chairman. That is a very good point. What did they do 
in New Zealand? Did they have a requirement of audits for each 
agency and department?
    Mr. McTigue. Yes, indeed. But more than that, what you call 
the Secretary, we call the Chief Executive Officer of a 
government organization, the Chief Executive Officer has a 
formal written contract, legally enforceable, with the 
Government to deliver a certain volume and quality of outputs. 
The failure to deliver those would result in the termination of 
that person's position, so there is full accountability. That 
Secretary, or in our case the Chief Executive Officer, will 
have those types of contracts with their senior management team 
and down on through their organization, so the accountability 
has been brought very much an individualization basis as well 
as a global basis for the organization.
    The Chairman. Well, here, where we have a government that 
is spending $2 trillion, roughly, per year, it wasn't until the 
1920s, as I understand it, that we required the agencies or 
departments to have budgets at all that they would present to 
Congress, and it was only in the early 1990s that we required 
audits at all. I gather that prior to 1990 there were no audits 
being done of any of these departments. And now that we are 
spending $2 trillion a year, and many of the departments are 
not able to get their books and records in an intelligible 
state, there is still the possibility that just vast amounts 
are being wasted, misappropriated, stolen in some cases, 
possibly, and we wouldn't even know about it.
    How do the USDA's books and records or financial 
recordkeeping compare with the other agencies of government 
that your center has looked at and done reporting on?
    Mr. McTigue. One of the things that we did a real study on, 
because in our view it is the most important incentive created 
by GPRA, was what is their level of disclosure and what is the 
transparency of their reporting, and USDA did not come out very 
well in that study. Of the 24 CFO agencies, it came out as 
number 22, so very close to the bottom.
    The Chairman. Who are the worst two?
    Mr. McTigue. USDA--I would have to have a look, Mr. 
Chairman. The best two, I can tell you while I am having a 
look, was----
    The Chairman. Defense?
    Mr. McTigue. No, the best wasn't Defense. The worst were--
USDA was number 22, and Department of Commerce was also 22, and 
the worst of the lot was the National Science Foundation.
    The Chairman. National Science Foundation was the worst of 
the lot?
    Mr. McTigue. Yes, in terms of the quality of its 
disclosure. And what we are really doing there is saying that 
if you can get open, very good disclosure, and you get very 
open transparency, then the pressures created by the Congress 
and the public will see that performance improves. That is not 
a measure of their performance. That is a measure of their 
reporting. But the quality of their reporting is usually 
indicative of other things that are happening inside the 
organizations.
    The organizations that came out well----
    The Chairman. How many of them had unqualified opinions?
    Mr. McTigue. I can't answer that, Sir, without doing some--
without going back to our----
    The Chairman. That number has been going up. It was very 
few. Initially, I think none had unqualified audit opinions, 
and now we have a number that are achieving that.
    Mr. McTigue. My recollection, Sir, is actually the other 
way, that we are getting more agencies now who have unqualified 
opinions than when you first required the creation of 
Inspectors General back in 1990, so there has been some 
improvement but you still have a number of agencies that have 
qualified accounts.
    The Chairman. Right.
    Mr. McTigue. So that you have a wide range of----
    The Chairman. And some that have disclaimers of opinion 
altogether, like USDA.
    Mr. McTigue. Indeed there are, yes. There is a wide range 
in terms of the quality of financial reporting and the quality 
of reporting generally. But I think that what we have been able 
to detect across Government organizations is, there is 
considerable good will to address the issue and to get better 
at it.
    And it is interesting that some of the best performers were 
organizations that 10-years ago were considered to be among the 
worst performers. A notable one there, of course, is FEMA, 
which came from being an organization which Congress talked 
about getting rid of and eliminating entirely in 1990, today 
being an organization that performs considerably better. So it 
does show that it is possible to turn around poor performing 
organizations and make them perform somewhere close to the 
international standards.
    [The prepared statement of Mr. McTigue can be found in the 
appendix on page 88.]
    The Chairman. Mr. Schatz, would you wish to jump in at this 
point and talk about the perspective of Citizens Against 
Government Waste?

  STATEMENT OF THOMAS A. SCHATZ, PRESIDENT, CITIZENS AGAINST 
                        GOVERNMENT WASTE

    Mr. Schatz. Thank you very much, Mr. Chairman. And just an 
observation about this hearing, which is, of course you are the 
only Senator at this hearing, but if you were here discussing 
spending money, I am sure that most of the Senators would be 
showing up to participate in that activity. And that is 
unfortunately one of the other problems that you and your 
colleagues face in terms of bringing management issues to the 
attention of not just the agencies but also the Senate and the 
House itself.
    There was discussion briefly about incentives, and in the 
last year I know that the Chairman of the Government Reform and 
Oversight Committee in the House, Mr. Burton, and also the 
Chairman of the Appropriations Committee, Mr. Young, did write 
a letter to the agencies that were on the high risk list of GAO 
to inform them that they would be considering their performance 
in terms of providing support for their activities in the 
fiscal 2001 appropriations process.
    Now, I don't know if they have followed up on that because 
of course we haven't seen all the final bills, but there is at 
least a recognition that the Government Performance and Results 
Act is in place; that there is some accountability that is 
being considered in the appropriations process. And that of 
course is the first time that a letter like that has been sent, 
in my recollection, and hopefully those kinds of activities 
will be followed up, both by the oversight committees as well 
as the Appropriations Committee.
    The Chairman. You are suggesting there needs to be a tie-in 
between committees like ours, which are an oversight committee, 
and the Appropriations Committee. And it may well be true that 
while we are out doing all these oversight hearings on this 
committee and other committees, the Appropriations Committee, 
which is giving monies to these departments, really doesn't 
know what the results of all these hearings are. And so there 
has got to be a greater link in reporting back to the 
Appropriations Committee, and they really have to get involved 
in this, or the oversight committees are going to have no 
effect in getting improvement in these agencies.
    Mr. Schatz. In particular that is true in these last 
several weeks of the Congress, where most of what is read about 
in the papers and the reports from the appropriators is that 
they are just going out to spend more money. This will be 
another record year of spending. Spending will go up more than 
the appropriators intended.
    Certainly within that spending, because it will be done, 
there should be some effort to provide the support, for 
example, that is sought by the CFO of USDA in terms of more 
resources to improve technology, to improve the performance of 
the agencies themselves. So, while we would certainly prefer 
that the money not be spent in terms of all these additional 
projects, at least there would be some support or some effort 
put in to provide some money for the various projects that are 
out there, that have not been funded, that haven't been able to 
provide these changes in assistance.
    When you hear about COBOL system from the 1970s and 1980s 
in terms of computers, you know, we were in college, or in some 
cases with some of the staff maybe in high school when these 
systems were put in, and nothing has been changed.
    The Chairman. Couldn't an agency like USDA, which spends 
billions and billions of dollars, find $100 million worth of 
waste and cut it out, and redeploy that money internally to 
take care of their needs in information services?
    Mr. Schatz. I would certainly agree with that, Mr. 
Chairman, but----
    The Chairman.--if we just give them another $100 million, 
they don't have the incentive to go out and find the waste, 
fat, fraud and abuse that they otherwise would have if we 
didn't give them that extra $100 million.
    Mr. Schatz. But what occurs in the appropriations process, 
as you well know, at the end of each Congress, is all of these 
projects and programs get put in by the House and the Senate 
that force the Agency to spend the money elsewhere. And 
certainly if you were in charge yourself, as the CEOs I believe 
in New Zealand might be, of these departments and agencies, you 
could really reallocate those resources in the appropriate 
manner.
    But if you follow all the line items and you follow all of 
the monies through the appropriations process, if somebody 
wants to spend money on wood utilization research, for example, 
and that is $5.8 million a year almost every year that we have 
been around since 1985, they spent that amount on this 
particular project, if USDA says, ``We're going to take that 
$5.8 million and go out and buy some new computers,'' you can 
be sure that the Members from the States that are affected by 
that project will say, ``Sorry, you can't do that.'' So you and 
I might agree on what we consider a wasteful project, but once 
Congress says, ``Go out and spend it,'' it is difficult for the 
Secretary or the CFO or anyone else to go and reallocate that 
money without some flexibility in terms of what they do.
    We just had a report by Senator Thompson, who asked the 
General Accounting Office to examine improper payments. There 
is some $20.7 billion in improper payments, and that is only in 
12 agencies throughout the Federal Government.
    The Chairman. Are these of the nature that we talked about 
with that soil conservation program being used to paint murals?
    Mr. Schatz. It is not necessarily along those lines. For 
example, in the Food Stamp program there are improper payments 
going out. Medicare, there is $13.5 billion in improper 
payments. Some of those are paperwork errors----
    The Chairman. Overpayments to providers?
    Mr. Schatz. Not necessarily overpayments. They may be 
payments that are made in error. They may be, for example, a 
payment that is made that doesn't take advantage of a discount. 
If you have a contract with a vendor, and if you pay early you 
are supposed to take a 15-percent discount, but you actually 
pay the entire bill, that is called an improper payment. And 
there is actually legislation that is, I believe, being marked 
up today by the Senate Committee on Governmental Affairs, to 
put in a recovery audit program which has been----
    The Chairman. Describe recovery auditing.
    Mr. Schatz. Recovery auditing is a process where an 
organization, whether it was in or outside the Government, goes 
into the Agency and examines the transactions inside the Agency 
to determine whether the payments were made properly. In other 
words, was the right amount paid? Was it paid in a timely 
manner? Was there an overpayment that should be refunded back 
to the Agency?
    And right now they have done a pilot program in the 
Department of Defense, and I don't recall the exact number, but 
they have recovered tens of millions of dollars through this 
process. And the bill would actually provide funding back to 
management improvement. Twenty-five-percent of what is 
recovered can go----
    The Chairman. Are these computer systems that you are 
putting in, or are you just hiring accountants to come in and 
audit your payments to vendors to make sure that you didn't 
overpay them?
    Mr. Schatz. Well, there is actually no money being spent by 
the Government. In other words, the audit company itself gets 
paid only if it recovers funds, so the money goes back to the 
Agency or to the Treasury.
    The Chairman. But there are presumably companies out there 
that are probably lobbying for that bill to be passed, because 
it----
    Mr. Schatz. But it is a competitive situation. In other 
words, in some cases the Agency itself might do the audit. In 
other cases it might be a private sector organization. Actually 
one of the issues within the bill is whether you can go within 
the Agency itself and----
    The Chairman. Let me just bring up a situation that 
happened in the State of Illinois in our last administration. 
In their Medicaid payments, they brought in somebody to do 
recovery auditing. The first year they paid this company 
$200,000 and I think they recovered $5 or $6 million. The next 
year the State paid this company about $4 million and they 
recovered $8 million. Then the following year it was found that 
the State of Illinois was paying this consultant $8 million to 
recover $8 million, and it led to prosecutions and people went 
to jail on that. I mean----
    Mr. Schatz. Well, there is always, whenever you are talking 
about money, there is always an incentive to get more than you 
should get, whether it is within the Agency, with these murals 
or the other things that we have talked about. But certainly 
there is money out there that could be either collected or 
reallocated to deal with these management issues.
    But again, if you look at what the Inspector General spoke 
about in the earlier panel, in terms of what they have been 
receiving for support, the Secretary supported them, asked for 
more money, and the House has said, ``Sorry, we're just going 
to keep you at the same level,'' but they get a 3 to 1 return 
on that investment.
    Now, that is within the Government itself. Whether you are 
talking about, although people don't like to talk about the 
IRS, they do collect more than you pay for in terms of audits, 
as well. So when you put the resources into either finding the 
waste, fraud and abuse or fixing the system so you can actually 
understand what is going on with these various programs, you do 
find an awful lot of money.
    There was a report by the House Government Reform and 
Oversight Committee in 1996 talking about management in the 
21st century, where they said there could be as much as $350 
billion in waste, fraud and abuse throughout the Federal 
Government. Needless to say, the Department of Agriculture 
played some prominent role in that report.
    And I would actually like to submit that for the record, 
the Agriculture portion, as well as what we put out called 
``Prime Cuts'' that identifies in this case, for this year, 52 
specific recommendations to reform USDA with savings of $57 
billion over 5-years. So when you say yes, we can----
    The Chairman. Would you highlight a couple of those 
recommendations, some of the better ones?
    Mr. Schatz. Well, one is that, interestingly, the Food 
Stamp program--and this was actually a recommendation from the 
Grace Commission 16-years ago--does not update the program 
annually to reflect changes in the participant households' size 
and composition. The last time they changed that was 1971, so 
clearly the nature of a family----
    The Chairman. So as kids move out of the house----
    Mr. Schatz. Well, what they do is, they take the average 
family and they say, ``This is what an average family should 
get for Food Stamps,'' but that number has changed. What that 
would mean is that you would get less money for Food Stamps, so 
it is politically a very difficult decision to make, but it is 
actually a factual one if you approached it from simply that 
standpoint and said, ``This is how we should be spending money 
on this particular program.'' And that, as I said, goes back 
quite a number of years.
    We also have talked about--well, we talked about the 
Natural Resource Conservation Service a little bit. The Natural 
Resource Conservation Service simply tells farmers how to take 
care of their own land, and we think that at this point farmers 
can probably figure that out for themselves. That is about $3.5 
billion over 5-years.
    The Chairman. Telling farmers how to take care of their own 
land?
    Mr. Schatz. Right.
    The Chairman. What is it----
    Mr. Schatz. Well, I don't know a lot of the details on it. 
These are summaries of other resources. Now these, by the way, 
are referenced to the original source, whether it is the 
Inspector General or another source, and we can provide some 
more details on that particular----
    The Chairman. OK.
    Mr. Schatz. Another one is to reduce the county offices, 
field offices of USDA. They have been reduced over a number of 
years, but we believe they could be reduced further. Certainly 
people have access to information on the internet or by 
computer, and----
    The Chairman. Well, we just passed a bill this year, it was 
my bill, to require the USDA to allow farmers to file their 
paperwork on line.
    Mr. Schatz. Right.
    The Chairman. But it will take USDA a couple of years to 
have that capability, and they really argued with us about the 
implementation time line for this and tried to slow it down as 
much as they could.
    Mr. Schatz. Well, that again goes back to the incentives. 
It goes back to ensuring that there is more interest on the 
part of your colleagues in the House, as well, to exercise the 
oversight.
    And also, as Mr. McTigue pointed out, the more that people 
are aware of the kinds of changes that need to be made, in this 
case some progress has been made at USDA, the public also needs 
to know about what is going on in order for them to demand more 
changes. Because, again, you will get more people interested in 
providing money for the various projects at USDA than actually 
fixing the management problems themselves.
    There are a number of other recommendations, as well, that 
we have in here, and again I would be happy to submit that for 
the record.
    The Chairman. In general, I take it that both of you 
support Congress giving more resources for financial 
management, for Inspectors General, for the sorts of things 
that could result in cost recovery or expense reduction. You 
recognize that Congress has put restrictions on how the USDA 
can spend its funds, so when we give it its overall 
appropriation, it must spend this much on this program, this 
much on that program, and it can't just reallocate within 
itself, steer the financial resources within the Department, 
oftentimes to beef up its financial accounting, for example, 
and its information systems. So in general, you guys support 
the concept of Congress giving them more money for their 
internal control operations?
    Mr. Schatz. Well, hopefully by eliminating the waste and 
mismanagement, in other words, providing money back into the 
system in those circumstances, as opposed to just simply 
saying, ``Here's another $100 million.'' Because again, with an 
agency of that size, as you have pointed out, there is plenty 
of room to reduce the excesses and come up with a way to 
provide these management systems. Any other organization would 
be doing that in order to modernize itself, to keep up with 
whatever competition it may have, and that sense of urgency 
needs to be permeated throughout the agencies themselves.
    You have also pointed out the Chief Financial Officer will 
likely be someone new, so that the systems are very important, 
that they remain in place, so that anyone coming in can say, 
``Well, here is an unqualified opinion. I know exactly what is 
going on, because all of those feeder systems are correct and 
all the information is correct,'' and we know that GAO and the 
IG will agree with that, because they are more or less kind of 
more permanent oversight in terms of what is going on. So that 
is certainly something that has to get done.
    Mr. McTigue. Mr. Chairman, if I were sitting in your seat, 
I certainly wouldn't give carte blanche and an open check. I 
would only do that if they were able to produce for me a study 
that showed these are the strategic, critical elements that 
need to be addressed, this is the cost of each of them, and 
this is the benefit that should flow from those.
    And in my experience of doing that, the best measure is how 
will this impact our capability? And the capability that you 
would want to see improved was their ability to control and 
manage their assets, their ability to be able to produce the 
information necessary to improve their decisionmaking on where 
they would allocate their resources. But all of the other 
things on the periphery, I wouldn't give a carte blanche for 
that at all.
    The other thing is this, that as you develop the capability 
to be able to measure the effectiveness of program activity, 
you are going to get to a point where you are going to be able 
to at least maintain or improve the public benefit, but do it 
with less in resources, because you are going to put your 
resources into the most effective of your programs. Some of the 
international orders of magnitude in that area are quite 
enormous, and some of them we are seeing replicated here in the 
United States.
    For example, a number of the Government departments in my 
country were able, when you allocated the resources only to the 
most effective programs, to produce about 20- to 40-percent 
more in public benefit for about 20- to 30-percent less in 
money, a very large order of magnitude.
    But if you actually look at FEMA as an organization, and we 
did a case study on it earlier this year, between 1990 and now 
you can look at the level of activity of FEMA, the number of 
disasters it was managing and everything like that, and what it 
is doing today, and today it is doing about 20-percent more to 
25-percent more for about 20- to 25-percent less money, a 
similar order of magnitude. Now, the cost of the disasters has 
gone up. That is the money they pay to other people. But the 
administrative cost of running the organization has come down 
considerably.
    So what that says to me is that in a number of 
organizations inside the U.S. Government, there is room for 
gains of about that magnitude. But at the moment I don't think 
that anybody is doing the critical thinking in terms of what 
are the resources we need in place to be able to give us the 
capability of doing that.
    [The prepared statement of Mr. Schatz can be found in the 
appendix on page 83.]
    The Chairman. Well, thank both of you. You have been 
wonderful. I appreciate your time and attention, and compliment 
you on your good work and your studies in this regard, and I 
hope we can keep in touch. The key is that this committee stay 
on the USDA, and I think that we talk to our appropriators, as 
well. And we have learned a lot from you. I want to thank you 
both. Thanks very much.
    Mr. McTigue. Thank you very much, Mr. Chairman.
    The Chairman. With that, this meeting is adjourned.
    [Whereupon, at 11:25 a.m., the Subcommittee was adjourned.]
      
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