[House Hearing, 107 Congress]
[From the U.S. Government Publishing Office]
THE FEDERAL GOVERNMENT'S CONSOLIDATED FINANCIAL STATEMENTS: ARE THEY
RELIABLE?
=======================================================================
HEARING
before the
SUBCOMMITTEE ON GOVERNMENT EFFICIENCY,
FINANCIAL MANAGEMENT AND
INTERGOVERNMENTAL RELATIONS
of the
COMMITTEE ON
GOVERNMENT REFORM
HOUSE OF REPRESENTATIVES
ONE HUNDRED SEVENTH CONGRESS
SECOND SESSION
__________
APRIL 9, 2002
__________
Serial No. 107-168
__________
Printed for the use of the Committee on Government Reform
Available via the World Wide Web: http://www.gpo.gov/congress/house
http://www.house.gov/reform
______
85-482 U.S. GOVERNMENT PRINTING OFFICE
WASHINGTON : 2003
____________________________________________________________________________
For Sale by the Superintendent of Documents, U.S. Government Printing Office
Internet: bookstore.gpr.gov Phone: toll free (866) 512-1800; (202) 512�091800
Fax: (202) 512�092250 Mail: Stop SSOP, Washington, DC 20402�090001
COMMITTEE ON GOVERNMENT REFORM
DAN BURTON, Indiana, Chairman
BENJAMIN A. GILMAN, New York HENRY A. WAXMAN, California
CONSTANCE A. MORELLA, Maryland TOM LANTOS, California
CHRISTOPHER SHAYS, Connecticut MAJOR R. OWENS, New York
ILEANA ROS-LEHTINEN, Florida EDOLPHUS TOWNS, New York
JOHN M. McHUGH, New York PAUL E. KANJORSKI, Pennsylvania
STEPHEN HORN, California PATSY T. MINK, Hawaii
JOHN L. MICA, Florida CAROLYN B. MALONEY, New York
THOMAS M. DAVIS, Virginia ELEANOR HOLMES NORTON, Washington,
MARK E. SOUDER, Indiana DC
STEVEN C. LaTOURETTE, Ohio ELIJAH E. CUMMINGS, Maryland
BOB BARR, Georgia DENNIS J. KUCINICH, Ohio
DAN MILLER, Florida ROD R. BLAGOJEVICH, Illinois
DOUG OSE, California DANNY K. DAVIS, Illinois
RON LEWIS, Kentucky JOHN F. TIERNEY, Massachusetts
JO ANN DAVIS, Virginia JIM TURNER, Texas
TODD RUSSELL PLATTS, Pennsylvania THOMAS H. ALLEN, Maine
DAVE WELDON, Florida JANICE D. SCHAKOWSKY, Illinois
CHRIS CANNON, Utah WM. LACY CLAY, Missouri
ADAM H. PUTNAM, Florida DIANE E. WATSON, California
C.L. ``BUTCH'' OTTER, Idaho STEPHEN F. LYNCH, Massachusetts
EDWARD L. SCHROCK, Virginia ------
JOHN J. DUNCAN, Jr., Tennessee BERNARD SANDERS, Vermont
------ ------ (Independent)
Kevin Binger, Staff Director
Daniel R. Moll, Deputy Staff Director
James C. Wilson, Chief Counsel
Robert A. Briggs, Chief Clerk
Phil Schiliro, Minority Staff Director
Subcommittee on Government Efficiency, Financial Management and
Intergovernmental Relations
STEPHEN HORN, California, Chairman
RON LEWIS, Kentucky JANICE D. SCHAKOWSKY, Illinois
DAN MILLER, Florida MAJOR R. OWENS, New York
DOUG OSE, California PAUL E. KANJORSKI, Pennsylvania
ADAM H. PUTNAM, Florida CAROLYN B. MALONEY, New York
Ex Officio
DAN BURTON, Indiana HENRY A. WAXMAN, California
J. Russell George, Staff Director and Chief Counsel
Rosa Harris, Professional Staff Member
Justin Paulhamus, Clerk
David McMillen, Minority Professional Staff Member
C O N T E N T S
----------
Page
Hearing held on April 9, 2002.................................... 1
Statement of:
Everson, Mark W., Controller, Office of Federal Financial
Management, Office of Management and Budget................ 70
Hammond, Donald V., Fiscal Assistant Secretary, Department of
the Treasury............................................... 62
Walker, David M., Comptroller General of the United States,
U.S. General Accounting Office............................. 9
Letters, statements, etc., submitted for the record by:
Everson, Mark W., Controller, Office of Federal Financial
Management, Office of Management and Budget, prepared
statement of............................................... 72
Hammond, Donald V., Fiscal Assistant Secretary, Department of
the Treasury, prepared statement of........................ 65
Horn, Hon. Stephen, a Representative in Congress from the
State of California, prepared statement of................. 3
Walker, David M., Comptroller General of the United States,
U.S. General Accounting Office:
Information concerning charts................................ 11
Prepared statement of........................................ 18
THE FEDERAL GOVERNMENT'S CONSOLIDATED FINANCIAL STATEMENTS: ARE THEY
RELIABLE?
----------
TUESDAY, APRIL 9, 2002
House of Representatives,
Subcommittee on Government Efficiency, Financial
Management and Intergovernmental Relations,
Committee on Government Reform,
Washington, DC.
The subcommittee met, pursuant to notice, at 10 a.m., in
room 2154, Rayburn House Office Building, Hon. Stephen Horn
(chairman of the subcommittee) presiding.
Present: Representative Horn.
Staff present: J. Russell George, staff director and chief
counsel; Bonnie Heald, deputy staff director; Henry Wray,
senior counsel; Rosa Harris, professional staff member, GAO
detailee; Justin Paulhamus, clerk; Michael Sazonov,
subcommittee intern; David McMillen, minority professional
staff member; and Jean Gosa, minority clerk.
Mr. Horn. A quorum being present, the hearing of the
Subcommittee on Government Efficiency, Financial Management and
Intergovernmental Relations will come to order.
We are here today to examine the financial management
practices of the executive branch of the Federal Government.
Specifically, we want to learn whether Federal departments and
agencies have made any progress in accounting for the billions
of taxpayer dollars they spend each year.
Throughout the past decade, Congress has sought ways to
make the executive branch of the government financially
accountable to the Nation's taxpayers. The Chief Financial
Officers Act of 1990, as amended by the Government Management
Reform Act of 1994, is one of several financial reforms that
received bipartisan support from Congress and the President.
The law requires that 24 major departments and agencies in
the executive branch of the government prepare annual, audited
financial statements. These reports are to be submitted to the
Office of Management and Budget by March 1st. The law also
requires the Department of the Treasury to prepare annual
consolidated, governmentwide financial statements and the
General Accounting Office to audit and report on these
financial statements by March 31st.
The General Accounting Office's report on the consolidated,
governmentwide statements for fiscal year 2001 was released on
March 29, 2002. Based on the GAO report, agency auditors'
findings and a survey of agency Inspectors General, the
subcommittee is releasing its governmentwide financial
management report card today.
This year, the subcommittee used more rigorous criteria to
determine agency grades than in the previous years when the
subcommittee focused on criteria such as whether agencies could
produce clean, auditable financial statements in a timely
fashion.
This year, similar to last year, 18 agencies were able to
produce clean statements, although they often required
extraordinary efforts to do so. Likewise, all 24 agencies filed
their financial statements on time again this year.
Nevertheless, these criteria do not guarantee that agencies
are capable of producing reliable and useful financial
information for day-to-day decisionmaking, including
information on program costs. Although agencies have improved,
they are still unable to achieve that goal.
This year, the executive branch of the Federal Government
has earned a grade of D for its overall financial management
during fiscal year 2001. Sixteen of the 24 agencies received a
lower grade than last year. Most noticeable among those
agencies, three that received As on last year's report card
fell miserably this year. The National Aeronautics and Space
Administration's grade fell to an F. The Small Business
Administration's grade fell to a D plus. And the Department of
Energy received a mediocre C this year. The Department of
Energy's lower grade may be attributed to the subcommittee's
new criteria. However, even without the more rigorous criteria,
NASA still would earned an F this year, and the Small Business
Administration still would have earned a D plus.
In NASA's case, new auditors took a fresh look at the
agency's books and found several significant problems. Auditors
at the Small Business Administration found that the agency did
not have effective internal controls and did not comply with
all Federal financial management laws, as it had in previous
years.
The failures of a few agencies continue to tarnish the
overall record of the executive branch of government. For the
5th consecutive year, the Agency for International Development
and two of the governments largest departments, the Department
of Defense and the Department of Agriculture, still face
significant financial management challenges. They again
received the unacceptable grade of F.
Until Federal agencies have financial systems that can
generate reliable and useful information to support day-to-day
management and policymaking, the Government's financial
challenges will continue and the taxpayers of this Nation will
rightly question the government's ever-increasing need for tax
dollars.
[The prepared statement of Hon. Stephen Horn follows:]
[GRAPHIC] [TIFF OMITTED] T5482.001
[GRAPHIC] [TIFF OMITTED] T5482.002
[GRAPHIC] [TIFF OMITTED] T5482.003
[GRAPHIC] [TIFF OMITTED] T5482.004
[GRAPHIC] [TIFF OMITTED] T5482.005
[GRAPHIC] [TIFF OMITTED] T5482.006
Mr. Horn. I welcome today the panel of witnesses, all of
whom have key roles in determining the government's financial
credibility.
Now, as you know, this is an investigating committee of the
Government Reform full committee, and we do have to ask you to
stand and present your right arm. If you have aides to back you
up, place adhere and affirm to this oath.
[Witnesses sworn.]
The clerk will note the three primary witness have taken
the oath, and in back of them are six more.
So we thank you, and we thank you particularly to--we have
here today a distinguished member of the government, the
Honorable David M. Walker, Comptroller General of the United
States, who heads the U.S. General Accounting Office. I want to
thank General Walker, that we have, on this committee, have
been very helpful, your staff, to come with us on our various
hearings we have recently held in Nashville, Albuquerque,
Phoenix, Los Angeles, San Francisco--and we have got only 50 to
go. We thank the GAO for being always present to help bring
things together with the two panel witnesses that we have at
each of those. Thank you, Mr. Comptroller General.
STATEMENT OF DAVID M. WALKER, COMPTROLLER GENERAL OF THE UNITED
STATES, U.S. GENERAL ACCOUNTING OFFICE
Mr. Walker. Thank you, Mr. Chairman. I am pleased to be
here today to discuss our report on the U.S. Government's
consolidated financial statements for fiscal years 2001 and
2000.
Mr. Chairman, with your permission I would ask that my full
statement be included in the record, and I will move to
summarize it.
Mr. Horn. Without objection, it is in the record.
Mr. Walker. Thank you, Mr. Chairman.
As in the four previous fiscal years, GAO was unable to
express an opinion on the consolidated financial statements of
the U.S. Government because of certain material weaknesses in
internal controls and accounting and reporting issues.
Progress is being made in addressing the various
impediments to an unqualified opinion on the U.S. Government's
consolidated financial statements. However, many of the
pervasive and generally longstanding material weaknesses that
we have reported for the past 4 years have not been fully
resolved.
Across government, there has been a range of financial
management improvement initiatives undertaken, and many are now
under way, that if effectively implemented will improve the
quality of the government's financial management reporting.
We have a chart, Mr. Chairman, that shows for fiscal year
2001, as you noted, 18 of the 24 Chief Financial Officers Act
agencies were able to attain unqualified audit opinions on
their financial statements, which is the same number of
agencies as last year, and up from six in fiscal 1996.
Additionally, for fiscal years 2001 and 2000, the reports
of the Inspectors General and the various contract auditors
indicated that only three of the 24 CFO Act agencies had
neither material control weaknesses, an issue involving
compliance with applicable laws and regulations, nor an
instance of a lack of substantial compliance with the
requirements of the Federal Financial Management Improvement
Act of 1996.
In addition, it looks as if no agency fully met the new
criteria for success in the financial management area based
upon the fiscal 2001 results.
Mr. Chairman, I would respectfully ask that this chart be
entered into the record.
Mr. Horn. It is. And it is being--going over the
television.
Mr. Walker. Thank you.
[The information referred to follows:]
[GRAPHIC] [TIFF OMITTED] T5482.007
[GRAPHIC] [TIFF OMITTED] T5482.008
[GRAPHIC] [TIFF OMITTED] T5482.009
[GRAPHIC] [TIFF OMITTED] T5482.010
Mr. Walker. In summary, 18 had a clean opinion, but only
three of which had a clean opinion with no material weaknesses
or noncompliance issues, and none of which appear to meet the
new fuller criteria as established by the JFMIP principals,
which I believe are clearly appropriate. We want meaningful
success in the financial management area, not superficial
success.
The largest impediment to an unqualified opinion on the
consolidated financial statements continues to be the
Department of Defense, which faces serious financial management
problems that we have designated as a high-risk area since
1995. Fortunately, in September 2001, Secretary of Defense
Rumsfeld announced a DOD-wide initiative intended to transform
the full range of the Department's business processes,
including decades-old financial systems that are not well
interconnected. For the first time in history the Department's
Quadrennial Defense Review, the so-called QDR, which is
prepared by DOD, includes business process transformation as a
key element.
The Secretary has also taken action to set aside $100
million for financial modernization and has established a
number of top-level committees, councils, and boards, including
the Business Initiative Council and the Defense Practices
Implementation Board, to develop and implement an integrated
DOD-wide strategy for fundamentally transforming business
practices.
I am convinced, Mr. Chairman, that this Secretary and his
top management team are serious, but only time will tell
whether or not we will achieve the desired outcomes.
Importantly, the President's Management Agenda Fiscal Year
2002 includes improved financial management performance as one
of his top five governmentwide management goals.
In addition, in August 2001, the principals of the Joint
Financial Management Improvement Program, which include
Secretary of the Treasury O'Neil, Director of OMB Daniels,
Director of OPM James, and I as Comptroller General and the
current chair of the group, began a series of periodic meetings
that have resulted in unprecedented substantive deliberations
and agreements focused on key financial management reform
issues such as better defining measures for financial success.
Mr. Chairman, we have already met three times in the last
several months. We are scheduled to meet again next month. This
group had not met more than once in the last 10 years. We have
already met three times, and each meeting has been substantive,
and at each meeting we achieve agreement on important issues as
we expect to in this next meeting.
Mr. Chairman, there are a couple of issues in the last
year's financial statements and our report that I would like to
bring to your attention.
No. 1, for fiscal year 2001, the military post-retirement
health benefits liability increased by $389 billion on a net
present value basis, due primarily to a $293 billion increase
attributable to provisions of the fiscal year 2001 National
Defense Authorization Act, which is Public Law 106-398, that
expanded certain benefits to Medicare-eligible DOD retirees,
their defendants and survivors, and to a $91 billion increase
associated with changes in medical cost trend assumptions.
Mr. Chairman, it is my understanding that the Congress did
not have accurate, timely and useful information when it
considered and debated this change in law and that the amounts
that the Congress was provided with regard to the estimated
fiscal effects of this change were substantially less than what
the actuaries are now estimating. Mr. Chairman, this serves to
reinforce the need to make sure that the Congress has timely,
accurate and useful information, not just for accounting
purposes but also for budgetary considerations, because there
are many things that we may be able to afford today but we may
not be able to sustain tomorrow.
I point to the board and the second chart, which you are
familiar with, Mr. Chairman. This chart is based upon the GAO's
long-range budget simulation which shows that, due primarily to
known demographic trends and rising healthcare costs, we face
serious budget challenges in the years ahead. As a result, it
is critically important that we have timely, accurate and
useful information not just for accounting purposes but for
informed decisionmaking with regard to legislation and other
resource allocation decisions.
Once again, the U.S. Government's consolidated financial
statements reported an update of the key indicators of the
financial status of Social Security and Medicare trust-fund
reports from the trustees' reports. The trustees issued their
reports the same week as the consolidated financial statements.
Without this update, the government would have provided two
different reports on the sustainability of those important
programs which could cause confusion and reduce confidence in
the credibility of the U.S. Government's consolidated financial
statements. This updated information will not be available when
the U.S. Government consolidated financial statements are
issued on an accelerated basis beginning for fiscal year 2004.
The JFMIP principals are considering ways to ensure that
the reports issued by Social Security and Medicare trustees,
these agencies financial statements and the U.S. Government's
consolidated financial statements present timely and consistent
information.
I would argue, Mr. Chairman, that the information on these
programs arguably is among the most if not the most important
from the standpoint of taxpayers. They care deeply about this.
In our view, the Congress may need to enact legislation that
will require earlier reporting and issuance of the trustees'
reports in order to allow for timely social insurance
information to be included in agencies' and the U.S.
Government's consolidated financial statements. This is very
important, Mr. Chairman.
In closing, our report on the U.S. Government's
consolidated financial statements highlights the need to
continue addressing the government's serious financial
management weaknesses. The requirement for timely, accurate and
useful financial and performance management information is
greater than ever as the Congress and the administration
prepare to meet today's and tomorrow's fiscal challenges.
The cooperative effort spearheaded by the JFMIP principals
have been most encouraging in developing the short- and long-
term strategies and plans necessary to address the many
problems that I have discussed.
In addition, GAO has probably never had a better working
relationship with OMB and Cabinet-level and other key officials
on a range of good government issues that are of critical
importance and are inherently nonpartisan in nature. While
these and other factors provide an enhanced likelihood for
success, in the end it is results that count.
Finally, I want to reiterate the value of sustained
congressional interest in these issues as demonstrated by this
hearing and your commitment over a number of years. I also want
to note that such congressional interest is critically
important to sustaining progress in this area, and it is key
that the appropriations, budget, authorizing and oversight
committees hold agency top leadership accountable for resolving
these problems and that they support related improvement
efforts. Because many of these improvement efforts will take
years, continued congressinal interest is important and
necessary.
Thank you, Mr. Chairman.
Mr. Horn. Thank you very much.
[The prepared statement of Mr. Walker follows:]
[GRAPHIC] [TIFF OMITTED] T5482.011
[GRAPHIC] [TIFF OMITTED] T5482.012
[GRAPHIC] [TIFF OMITTED] T5482.013
[GRAPHIC] [TIFF OMITTED] T5482.014
[GRAPHIC] [TIFF OMITTED] T5482.015
[GRAPHIC] [TIFF OMITTED] T5482.016
[GRAPHIC] [TIFF OMITTED] T5482.017
[GRAPHIC] [TIFF OMITTED] T5482.018
[GRAPHIC] [TIFF OMITTED] T5482.019
[GRAPHIC] [TIFF OMITTED] T5482.020
[GRAPHIC] [TIFF OMITTED] T5482.021
[GRAPHIC] [TIFF OMITTED] T5482.022
[GRAPHIC] [TIFF OMITTED] T5482.023
[GRAPHIC] [TIFF OMITTED] T5482.024
[GRAPHIC] [TIFF OMITTED] T5482.025
[GRAPHIC] [TIFF OMITTED] T5482.026
[GRAPHIC] [TIFF OMITTED] T5482.027
[GRAPHIC] [TIFF OMITTED] T5482.028
[GRAPHIC] [TIFF OMITTED] T5482.029
[GRAPHIC] [TIFF OMITTED] T5482.030
[GRAPHIC] [TIFF OMITTED] T5482.031
[GRAPHIC] [TIFF OMITTED] T5482.032
[GRAPHIC] [TIFF OMITTED] T5482.033
[GRAPHIC] [TIFF OMITTED] T5482.034
[GRAPHIC] [TIFF OMITTED] T5482.035
[GRAPHIC] [TIFF OMITTED] T5482.036
[GRAPHIC] [TIFF OMITTED] T5482.037
[GRAPHIC] [TIFF OMITTED] T5482.038
[GRAPHIC] [TIFF OMITTED] T5482.039
[GRAPHIC] [TIFF OMITTED] T5482.040
[GRAPHIC] [TIFF OMITTED] T5482.041
[GRAPHIC] [TIFF OMITTED] T5482.042
[GRAPHIC] [TIFF OMITTED] T5482.043
[GRAPHIC] [TIFF OMITTED] T5482.044
[GRAPHIC] [TIFF OMITTED] T5482.045
[GRAPHIC] [TIFF OMITTED] T5482.046
[GRAPHIC] [TIFF OMITTED] T5482.047
[GRAPHIC] [TIFF OMITTED] T5482.048
[GRAPHIC] [TIFF OMITTED] T5482.049
[GRAPHIC] [TIFF OMITTED] T5482.050
[GRAPHIC] [TIFF OMITTED] T5482.051
[GRAPHIC] [TIFF OMITTED] T5482.052
[GRAPHIC] [TIFF OMITTED] T5482.053
[GRAPHIC] [TIFF OMITTED] T5482.054
Mr. Horn. Our next regular witness has been here many
times, and we are delighted to have him today. That is Donald
V. Hammond, the Fiscal Assistant Secretary of the Department of
the Treasury.
Mr. Hammond.
STATEMENT OF DONALD V. HAMMOND, FISCAL ASSISTANT SECRETARY,
DEPARTMENT OF THE TREASURY
Mr. Hammond. Thank you, Mr. Chairman.
I am pleased to have the opportunity to appear again before
you to discuss the financial report of the U.S. Government.
While we continue to make progress, the government still has a
considerable distance to go before the quality of our financial
reporting will be equal to what taxpayers truly deserve.
Mr. Chairman, your tireless pursuit of sound government
financial management has been an important element of our
continued improvement. And, on a personal note, I greatly
appreciate your commitment to this important, though sometimes
dry subject.
Treasury shares your commitment to improving the state of
Federal financial management and in particular reporting
financial information that is timely, reliable and, most
importantly, useful.
The Fiscal Year 2001 Financial Report was issued on March
29th, on time for the 5th consecutive year. The report showed a
financial loss of $515 billion, compared with the budget's $127
billion surplus. The primary components of the difference
between the budget and accrual numbers are increases in the
liability for military healthcare and the liability for
veterans disability. As a result, for the first time, the
liability for Federal employee--military and civilian--pension
and other post-retirement benefits exceeds the Federal debt
held by the public.
I highlight those items because they provide outstanding
examples of the type of unique information contained in the
financial report and point out the importance of disclosing
these results. The financial report presents a complete and
integrated picture of the government's assets, liabilities,
cash-flows and costs.
The report also discloses the government's extensive
stewardship responsibilities and commitments. Only the accrual-
based financial report presents this governmentwide
consolidated financial information in context to the public,
providing a more transparent picture of the government's
financial operations and position.
One of the five governmentwide initiatives in the
President's management agenda addresses improved financial
performance. One component of this agenda item is the
acceleration of the timing of agency and governmentwide
financial reporting.
In support of this endeavor, the Chief Financial Officer's
Council has created a financial statement acceleration
committee which I happen to chair. Accelerated reporting will
finally allow adequate time to have the financial statements
considered in the budget process and time for decisionmakers to
fully consider financial performance in the management of their
programs.
Reflecting Treasury's commitment to improving the financial
statements, the following changes were made this year to
enhance the usefulness and better disclose the government's
activities to the Congress and the public.
This year the report presented comparative financial
statements displaying current and prior year information. In
addition, we have added two new financial statements. The
Reconciliation of Net Operating Revenue to the Budget Surplus
explains the differences between the accrual-based loss and the
budget surplus; and the Disposition of the Budget Surplus
explains the excess cash collected over cash payments made was
used.
Finally, we have begun reporting costs by agency rather
than function, which is much more understandable by the public
and more useful to the readers of the statements.
The General Accounting Office has again given a disclaimer
of opinion on the statements but also acknowledges that
progress is being made.
Across the agencies, specific progress was noted. For
example, the Department of Agriculture and certain other key
agencies made significant improvements with regard to their
lending programs. However, the serious financial management and
systems problems at the Department of Defense remain a huge
obstacle in overcoming the impediments to reaching an opinion
on the governmentwide report, though Defense has evidenced a
serious commitment to improving their financial condition.
With respect to the material weaknesses that are unique to
the financial report, Treasury is actively working with OMB and
the agencies to remove them as impediments to achieving an
opinion on the financial report.
One such weakness relates to the preparation of the
consolidated financial statements themselves and the need to
establish consistency between the agency financial statements
and the compiled information used for the governmentwide
statements. We are developing and implementing a new system and
procedures to prepare the consolidated financial statements
that should resolve this finding.
In addition, a thorough review of the standard general
ledger, or SGL, is in process that will verify that it contains
all of the accounts necessary to facilitate the reconciliation
of net position.
Another area of recurring material weakness relates to
intergovernmental activity and balances. The government
currently lacks clearly articulated business rules to ensure
that agencies record transactions with each other consistently
and correctly. The problem is a data problem. OMB has
initiatives under way to address the data quality problem, and
business rules are currently being developed that will
standardize the recording of agency transactions with each
other.
Treasury is also implementing a methodology that will
effectively eliminate intergovernmental activity. However,
until the underlying data is accurate, there will continue to
be potential problems with the presentation of the government's
activity.
The Treasury Department continues to develop a
governmentwide accounting system that will greatly improve the
agencies' access to data, reduce redundant data reporting,
eliminate reconciliations between the cash amounts shown on
agency and Treasury books and provide a daily accounts
statement. The redesigned system will be Internet-based and
will be implemented in a modular, phased approach over the next
several years.
Treasury's Financial Management Service also continues to
improve the SGL based reporting systems. The SGL and the full
implementation of it is a critical part of Treasury's goal to
make financial data more accessible, more available, more
accurate and more useful for management decisionmaking.
We will continue to work closely with OMB and the program
agencies to raise the bar in financial management. We will
consider new ideas such as audit committees and the use of pro
forma financial statements with budget submissions. These
changes will require the commitment and support of management
throughout the Federal Government. Success will be achieved
when we reliably and accurately report on the distinctly
different financial activities of the many agencies of the
government as if they were one entity and do so in a timeframe
and a manner that is truly useful. We look forward to working
together with all affected parties to reach that end.
I know I speak on behalf of the career staff at the
Treasury Department that we believe that this is a truly
important issue for the Financial Management Service, the
Office of Accounting Policy, my office, and most particularly
for the Secretary of the Treasury.
Thank you, Mr. Chairman. That concludes my remarks.
Mr. Horn. Thank you, Mr. Secretary.
[The prepared statement of Mr. Hammond follows:]
[GRAPHIC] [TIFF OMITTED] T5482.055
[GRAPHIC] [TIFF OMITTED] T5482.056
[GRAPHIC] [TIFF OMITTED] T5482.057
[GRAPHIC] [TIFF OMITTED] T5482.058
[GRAPHIC] [TIFF OMITTED] T5482.059
Mr. Horn. We now have our final presenter who has hit the
ground running in the current administration and was here
during the Reagan administration, Mark W. Everson, the
Controller, Office of Federal Financial Management, Office of
Management and Budget.
STATEMENT OF MARK W. EVERSON, CONTROLLER, OFFICE OF FEDERAL
FINANCIAL MANAGEMENT, OFFICE OF MANAGEMENT AND BUDGET
Mr. Everson. Thank you, Mr. Chairman.
I don't really--you have my statement, which I would ask
that you put in the record.
I don't have too much to add to what my colleagues have
said. Because, as General Walker indicated, we have an unusual
degree of agreement and a very shared sense of priorities
amongst the various players here--GAO, Treasury and OMB--And
those are the three big players. But I will summarize a couple
of the points I have in my statement because they were touched
upon in each case, but I would like to give some emphasis to
them.
As to the consolidated statements themselves, clearly it is
not acceptable to be sitting here almost 7 months after the end
of the fiscal year and to be engaging in such a hearing. That
is not your fault. That is our fault.
We are going to move forward aggressively to accelerate, as
both my colleagues have indicated, the delivery dates for
financial statements. The statements themselves, there was no
opinion this year, as has been indicated by the Comptroller
General.
The two big issues are DOD and the intergovernmental
eliminations that Secretary Hammond mentioned. We are working
on both of those.
I am pleased to say that the Department of Defense is right
on the cusp of releasing a contract that will over the next
year establish the enterprise architecture in the financial
area. This is a very significant first step in what the
Comptroller General indicated is a very deliberate attack of
this longstanding problem.
The other issue, the intergovernmental eliminations,
Secretary Hammond has touched on them.
We haven't talked about the statements of the individual
CFO Act agencies. This chart over here depicts what happened.
As you indicated, with the statements that came through at the
end of February, there was no change in the number of clean
opinions. They stood at 18. But we would characterize, if you
look beyond those numbers, that there was modest but important
improvement. That is because two big departments came into the
clean category, Justice and Transportation.
You will remember that for years GAO has had the FAA as a
real problem area. There was progress in three other
departments: Education, still a qualified opinion, but they got
a lot better. And, most significantly, a lot of the credit
accounting was cleaned up at Agriculture, so that the principal
problem at Agriculture now is in the Forest Service. And USAID
for the first time had--certain of their statements actually
were prepared and were auditable, which had not been the case
in the past.
On the other hand, as you are aware, both NASA and FEMA
deteriorated. The administration has solid plans to make sure
we recover that lost ground in both of those cases.
The other points that I would just make briefly are--
pertain to this area of accounting standards and trying to
achieve greater transparency.
The Comptroller General mentioned this issue, the debt
being eclipsed, as did Secretary Hammond, by the benefits and
retiree payables. I have got a chart that--if you look over
there--this just shows the growth in that. The debt has been
stable these last 5 or 6 years. There has actually been some
modest decrease in it. But look at the growth of the employee
and veteran benefits and pensions payable. It has gone up from
one half trillion dollars in just 6 years to now it is $3.3
trillion. That is dramatic growth indeed.
The point that was taken about the linkage of financial
information to the budget process, that is a key ingredient of
the administration's initiatives both to improve financial
performance but also to improve budget and performance
integration. As I mentioned last time, we have got a pending
proposal--it is a modest proposal before the Congress--to
actually have the accounting for retiree costs be consistent.
This is something that we took to the JFMIP. The JFMIP
supports the need for this, because it is better accounting.
That is to say, all of the retiree costs get shown against the
individual programs, rather than some which are currently shown
centrally against OPM's budget.
This has been called for as a good step by, as I say, the
JFMIP, by the AGA, which is the government accountants group,
and also the AICPA. So I would draw that to your attention.
We are serious about this area. We are reconstituting the
FASAB to have a private sector majority, six to three. That has
generated some heat, principally because I guess there was
concern about the reduction in the role of CBO. I would point
out, though, that we have the same relative proportion in the
government, the three members. GAO has a seat, Treasury has a
seat, and OMB has a seat. So in terms of the government
participation, there is really no change. What we are doing
here is providing for a more independent and hopefully better
accounting.
Those are the high points that I would make. But, as I
said, I don't quibble with a word that was articulated by
either of the other two panelists.
Mr. Horn. We thank you.
[The prepared statement of Mr. Everson follows:]
[GRAPHIC] [TIFF OMITTED] T5482.060
[GRAPHIC] [TIFF OMITTED] T5482.061
[GRAPHIC] [TIFF OMITTED] T5482.062
[GRAPHIC] [TIFF OMITTED] T5482.063
[GRAPHIC] [TIFF OMITTED] T5482.064
Mr. Horn. Let me ask the first question here.
If the three of you were to be available to the President
on other assignments and the three Cabinet officers have been
stuck with malaria, the lepers and everything else, and they
can't get back to their agency for a couple of years, and the
President says, I want you three to go over to those offices,
what would be--given what you are testifying on--what would you
say to your staff in the--that you are now a Cabinet officer
and you were really very concerned about the fiscal situation.
What would you tell them? And how would you face that?
We will start with you, Mr. Everson, because you know what
the executive branch is like.
Mr. Everson. Yes, thank you.
Mr. Horn. So do you other two. So what would you say and
what would you have them do?
Mr. Everson. I think that the division that has been
articulated by the JFMIP, it is thanks largely to the
leadership that GAO has demonstrated over the years, is that
financial information has to be useful to support day-to-day
operating decisions. What I am struck by, returning to
government, is the total split between staff functions in
government and operating functions in government.
In industry, there are two things that happen. First, the
staff functions generally tend to hang together, if you will,
where the CFO and the CIO and the procurement officer and the
H.R. officer all work together and frequently they battle it
out with the operators.
What is the problem you have here and gets back to this
issue is you--one of the questions I have about--there are many
benefits to the CFO Act, but we seem to have moved forward with
a real splitting of those functions now. I am not sure that
they are cooperating the way they should be.
So the first thing I would try to do is get my staff
functions to be aligned and to work together. Because you are
not going to fix your financial issues until you get all of the
staff functions to work together.
Then the second step is to get the operating people, the
program managers to work with the staff functions. It is a two-
step process, if you will.
Mr. Horn. Mr. Hammond, you have been around here a long
time.
Mr. Hammond. Building on what Mr. Everson said, I think the
important thing from my standpoint would be to identify within
the organization that there be only one source of financial
information on program data.
I think one of the things that I found in my experience is
when you talk to program managers within an agency they come up
with financial information that is totally distinct from the
financial information that may be found in any central system
or central reporting. If you can put in place a methodology and
a discipline to look to only one source of data, and that being
the agency's own central data, I think that goes lockstep with
what Mark was saying, that you integrated then the staff
functions into the program people.
Today the amount of time and effort that is spent in
program operations, developing and tracking their own financial
information and measuring it their own ways and slicing it in
their own fashion is huge; and it results in them looking at
the staff functions and, quite frankly, saying they are not
value added to me.
That is not the right outcome. The right outcome is for the
staff functions to provide the data that the program needs, for
that not only to be value added but for them to be a critical
part of the discussion.
Mr. Horn. What is the role of your Assistant Secretary for
Administration in Treasury? Does he have any--he or she--is he
the fiscal financial officer?
Mr. Hammond. He has actually got somewhat of a unique role,
as I understand it, across agencies, in that Assistant
Secretary position is not only the Chief Financial Officer for
Treasury but it is also the Chief Operating Officer,
essentially, for the agency. He sits on the President's
Management Council. So he has a unique perspective on--his
involvement not only deals with finance, but it deals with the
fundamental operations and systems reforms throughout the
department, and the CIO reports to that position as well.
So I think it--in Treasury, you have a very strong
integration of those staff functions, bringing them together at
an operating level. You still, however, because of the
decentralized nature of the bureau operations, have program
information which, you know, is not under, you know, the same
type of review, I guess I would say.
Mr. Walker. Can I take a shot?
Mr. Horn. Go ahead.
Mr. Walker. I would characterize your question as why
should we care about this? And the response that I would give
to that is that accounting is how you keep score and how you
keep score counts.
Second, if you don't have timely, accurate and useful
financial, budget and management information available, you
will never maximize the economy, the efficiency and the
effectiveness of government and you will never adequately
ensure the accountability of government to the taxpayers.
Third, if you can't do that, then you are not going to
attain and maintain the public's respect for and confidence in
their government.
And, last, given our long-range fiscal challenges which are
being pushed by known demographic trends and in rising
healthcare costs, we have to make some tough choices. You need
to have that timely, accurate, useful information in order to
be able to make tough choices about where you ought to allocate
resources, what is working, what is not working, who should be
rewarded, who should be held accountable, etc.
Mr. Horn. One of the things that has bothered me for 5
years on this thing was the Treasury; the Administrative
Secretary there was putting all of these things to his
particular bailiwick.
Now, when Congress put together saying, you know, they have
got to face up to CFOs, we meant a full-time CFO, not just
pushed into the administrative thing. I think part of
Treasury's problems has been, over the years, with the Internal
Revenue group, et al, which had a real mess on its hands, and I
don't know the degree to which--we are going to have the
Commissioner in here in a couple of weeks, as we do every year.
Then when Congress said, you know, most of those people down
there really don't know what they are talking about when you
get to a Chief Information Officer--so that is thrown in there,
and it seems to me you need to get a few first-rate people to
hold one of those positions. The Deputy Secretary in Treasury
and the under secretaries of many other departments, it just
seems to me that they don't fully use their opportunities for
talent to come into the administration and to provide some
leadership there.
And you say, Mr. Hammond, that you don't agree with that.
That is fine. Let's hear it.
Mr. Hammond. Well, it is certainly a little bit out of my
area of expertise with regard to the Treasury's overall
operations. But I would speak to the fact that over the past 4
or 5 years the role of the Assistant Secretary for Management
at Treasury has been very carefully refined, trying to balance
the needs for management of a very large decentralized
organization and bringing in some very, very top-notch people.
We have been fortunate to have people such as Nancy
Killefer as well as the incumbent, Ed Kingman, hold that
position. I think they bring a vast amount of private sector
experience and have made a lot of changes in the way that
office interacts with its--you know, its appropriate functions
within the department.
I know that from my other hat, I sit on top of the
Financial Management Service in the Bureau of the Public Debt,
two operating bureaus at Treasury that I deal with, the
Assistant Secretary for Management on a range of budget issues
and operational issues for those two bureaus, I find them to be
very engaged and very involved in not only the financial
management but the overall program management from the
standpoint of how it relates to consistent Treasury policy.
Mr. Everson. Could I weigh-in on this one?
Mr. Horn. Yes.
Mr. Everson. Secretary O'Neil is not a bashful fellow----
Mr. Horn. I have noticed that.
Mr. Everson [continuing]. And he totally, totally supports
both the governmentwide efforts that we have all been speaking
to, but dramatic reform efforts at Treasury. He has tasked Ed
Kingman--and, as Don is saying, I chair the President's
Management Council. Ed is a frequent participant in the
substance there and also chairs one of our CFO committees. Just
as Don chairs the financial acceleration, Ed chairs another. He
has the total support of the Secretary.
You can set up any boxes you want. But, if the leadership,
meaning the Secretary and the Deputy, doesn't empower these
people and drive them to change, nothing will happen.
Changes are happening at Treasury. They are moving to the
3-day close, very aggressive programs to eliminate the two
remaining material weaknesses.
So I think that even though it is a very hard department to
manage, because, as Don indicated, everything from the IRS to
international trade elements, tracking to the ATF, this
administration through those players I know is tackling those
tasks that you are concerned about.
Mr. Horn. Well, the other one told us that, too, and that
is when I started getting upset and--back in, as I say, 5 years
ago--and I never saw much happening. Well, a little bit is
happening now, and they are in the category of improvement, and
that is a clean-bit on there for a while.
But it just seems to me that--and that is what I said way
back during the Clinton administration, what are you doing? I
mean, for heaven's sake, can't you focus on something and not
just have a position and overwhelm one person and not take
advantage of the CFO and the CIO?
Mr. Everson. Yes.
Mr. Horn. That bothers me. I guess it is going to continue
to bother me. But until they really get the job done, I don't
know how you can do anything else. That is part of your
problem.
You are right about saying, get the staff to start moving.
That is what a staff is supposed to be for. I think there has
been some progress to improve the financial management, but I
think it has a long way to go.
What role do you see your agency--or under your
jurisdiction taking in developing strategies for addressing the
problems that continue to prevent the government from preparing
auditable consolidated financial statements? That group is
going to stay out there in malaria-land until you three get
there, because you are the only ones left practically. And what
would you do? How would you keep after them? They just smile at
you.
I mean, I know what the bureaucracy does. I have been in
it. And I was bothered then. That was the Eisenhower
administration. I am still thinking about it.
Yes.
Mr. Walker. Mr. Chairman, I think you have to start at the
top, and there are a lot of other things that have to happen.
But let me touch on a few things. First things first.
As I noted in my testimony, the President has identified
financial management as one of his top five management
priorities. Now, frankly, the last President did, too. This
President has a CFO Council. You know, the last President did,
too. But, the fact of the matter is that there are some things
that are fundamentally different that cause some hope.
First, this President has been personally engaged on
occasion in dealing with some of these management issues. That
is unusual, if not unprecedented, at least in modern times.
Second, most of the Cabinet-level officials--or at least
many if not most of the Cabinet-level officials--in the
administration have some private sector experience and have a
better understanding of the need for timely, accurate and
useful information, because of some of the reasons I have
articulated.
Third, the JFMIP principals, which comprise the individuals
that I talked about, have never been more active in identifying
what are the problems, what the barriers are, and determining
an action plan that can be implemented by the staff who are
critically important to getting us to where we need to be. And
all are fully committed.
I have got to tell you, Secretary O'Neil has been at every
JFMIP pricipals meeting. Director Daniels would have been at
every meeting but for a last-minute meeting with the President
that he was called to before our last one. Director James has
also been involved in every meeting. We are all confirmed for
the next meeting.
So there are a lot of things that have to happen. But I am
hopeful that if we can sustain this momentum we will see much
more progress over the next year or two than we have seen in a
number of years.
Let me mention one other thing. I think one of the things
we have to deal with is that, while we have a lot of capable
and committed players at the present point in time, I think we
have to recognize that not only in the financial management
area but also in the human capital area, in the information
technology area, in the strategic planning area and a variety
of others, we are talking about a fundamental transformation of
how the government does business.
We are talking about looking longer range. We are talking
about looking more integrated. We are talking about changing
some fundamental things. That takes years.
I think one of the things the government is going to have
to face is whether it is well organized? Does it have the right
kind of people responsible and accountable who over a period of
time, will transcend presidents, political secretaries, and
assistant secretaries in different areas to try to make sure
that the infrastructure issues get dealt with and dealt with
effectively over time? I have concerns about that.
Mr. Horn. Any other thoughts on that?
Mr. Hammond. Well, just one. I think I wanted to
reemphasize something that is apparent to me but I think isn't
also necessarily apparent to the public, which is the level of
involvement that Secretary O'Neil brings and commitment to
those areas. He has demonstrated a focus and an interest that I
have not seen during my tenure at Treasury on financial
management from the secretaries. Bob Rubin had a strong
interest but not the level of detailed interest that Paul
O'Neil brings to this.
For example, this year with regards to the management
representation letters across government, he was involved in
the preparation for the governmentwide management
representation letter. As you can imagine, there a number of
weaknesses noted in that.
Mr. Horn. Now, Secretary Rubin was committed to getting at
the debt, and I just haven't followed it yet. But what about
Secretary O'Neil? Is he pushing the agencies to get the debt
turned over for the credit and the debits and the--getting rid
of the debt?
Mr. Hammond. Very definitely. There is a great example of a
program, once it gets high-level attention and focus, that
every agency comes on board, participates cooperatively, and we
have got a whole range of success stories. Debt collection is a
great example of when you bring the kind of high-level focus
and commitment, you can get some very, very strong results.
I am encouraged that after the Secretary this year went
through the agency rep letters, for example, that he is going
to followup with some of the agencies. Because I think it is
very eye-opening, when you see a three-inch binder of
disclaimers from various agency officials about the state of
their financial systems, someone with our Secretary's
experience looks at that and immediately understands that this
is a bigger issue than it may appear, you know, at first
glance.
Mr. Horn. Well, it is especially important when we are
trying to get a balanced budget again; and one way to do it is
to take care of the debt situation all over the executive
branch. I do hope the administration will ask the Ways and
Means Committee that we get at the tax debt. Right now,
everybody says, oh, well, that really isn't in the law. Well,
if you are sitting there, you got to have a little energy and
do what is needed to be caught up. And it has not been very
well caught up except for Rubin's pushing on that. His
successor didn't do a thing, so I am glad that Secretary O'Neil
wants to do it.
Because it is--I think for the average citizen, when they
say, hey, I pay my taxes, what is wrong with these jokers? And
getting away time after time after time in terms--just saying,
oh, you know, I am going into bankruptcy. And we shouldn't
allow that. We shouldn't have that kind of thing.
Constantly the same old gang is the one that is just--is
thieving away at the Treasury. And that gets me, and it gets
everybody else when you pay your taxes.
Mr. Hammond. I do have some encouraging news with regard to
the collection of delinquent tax debt, which is that the tax
levy offset system is now fully operational. So we are in the
process of working with the IRS to get those debts certified
so--the only thing worse than not collecting debt is collecting
the wrong debt. So we are wanting to make sure that those
numbers are good and that the debts are validly owed. Once
those are loaded in the system we will have another tool to
collect the--exactly those delinquent obligations.
Mr. Horn. Are we going to get tax collectors in the private
sector or are we going to continue to let the bureaucracy
continue to do it in IRS?
Mr. Hammond. With regard to the private collection
agencies, that at this point is still an IRS operational issue.
Mr. Horn. That is why we haven't collected the debt, and we
knew that from day 1. They phonied us up here when they said,
oh, we have got this great bit for you to have a little pilot
of this. Well, it was a 5-year-old debt, and you never get
anywhere with a 5-year debt.
I was shocked because I have a great opinion of
Commissioner Rossotti. But I was shocked last year that he
hadn't taken some really moving ahead action.
You can't just take one phone call or one letter. You have
got to keep after it. The Commissioner before Mr. Rossotti
said, we can't do that, that is the privacy law.
That is nonsense. Just give them the address, say they owe
us $10,000. If they are gripping about that, fine, then you
turn them over to the IRS and say, well, now is this right or
wrong?
So, again, we just let the money go down the drain, and
that bothers me.
I don't know. What does the General Accounting Office think
about that?
Mr. Walker. Clearly, we think there are more aggressive
steps that need to be taken with regard to debt collection. I
think, as Secretary Hammond noted, it is important, though, to
make sure that when people are aggressively attempting to
collect valid debt.
That leads us back to the problem with the basic financial
systems. We don't have timely, accurate and useful information.
So I think we need to keep that in mind in determining what
type of safeguards might need to be in place, so that as you
pointed out, Mr. Chairman, if somebody believes that they don't
owe anything, there is some type of mechanism whereby the
validity of the debt can be verified one way or the other and
not have people aggressively going after debts when there could
be some real legitimate dispute about whether or not the amount
is owed.
But once that has been decided, I think we need to consider
some experimentational alternative ways of collecting that
debt, because you want to have incentives for people to do the
right thing. If they don't do the right thing, then you have to
have appropriate accountability. Otherwise, that creates
pervasive incentives not to comply.
Mr. Horn. Any other comments on that?
Mr. Everson. I agree with both of those remarks, sir.
Mr. Horn. Good. Well, maybe we can get something done,
particularly on the private collections. I just don't
understand why that can't be done.
I realize they have got a union in the Treasury and all
that. But we said, hey, you can have the first crack at it in 3
months. If you haven't collected it, turn it over to collectors
that know what they are doing. So that is what bothers me.
Because I don't know--they talk a good game, but let's see what
happens. When you are after money and we are waging a war, we
need to find every dollar we can find to get it into the
Treasury.
Now the administration and the executive branch has done a
fine job with your management scorecard to highlight the
agencies progress in achieving the management and performance
improvements. I just wonder, how do you plan to measure
agencies progress? What are you primarily thinking about? Is it
just dollars or it is accomplishments and results of what you
were given the power by Congress to do it? So how are we going
about that?
Mr. Everson. In each case, as you will recall from our
earlier discussions, we did a baseline evaluation as of the end
of the last fiscal year, the end of 2001, against the standards
for success. The standards for success were articulated for
each of the five agenda initiatives. In the case of the
financial standards for success, we developed them at OMB. We
had them commented upon by the agencies. And then we took them
to the JFMIP, so that the JFMIP staffs and then the principals
reviewed and adjusted the standards. So you have the vision
that is articulated in each of those areas for what is success.
And I would tell you that is a first and significant step.
In financial management, for years the administration, the
government has been responding to GAO high-risk lists or your
own interventions from the Congress for investigations. And
that, frankly, is the wrong way to do it. It is reactive as
opposed to having a set of standards that you are driving to
and always, of course, being attentive to the events or to
areas that come up from time to time. But you should have
standards. We have got that now.
As we made those evaluations, we went back and asked each
agency to develop plans to improve their status. They have done
that now. There was a series of negotiations that took place.
Some have just only been completed. They all differ. Because
each agency's situation is unique, of course.
We have been talking about the Treasury Department. But the
Treasury Department, with all of its disparate functions, is
different form the Social Security Administration, which is
sort of a more of a single-purpose entity, if you will.
We have worked with the agencies, and they have established
a set of deliverables and timetables. We will measure progress,
once having accepted the plans by how they are adhering to the
deliverables and the timetables that they agreed to with us.
Each quarter we will sit down with them.
I am going to be sitting down with the leads on each of the
five agenda items actually later this month to review where the
agencies--what they got done in this first calendar quarter of
2002, and we will assess the progress that way. If they are
making progress in accordance with the established deliverables
and the timetables, that would be green on the progress side
for the agenda item. If they are showing some slippage, which
calls into question the timing or maybe some elements of the
deliverable, that would be a yellow. If, on the other hand,
they are at risk of achieving the objective absent strong
intervention, meaning that they are headed toward not achieving
the objective, that is going to be a red on the progress side.
We are just starting that. We are going to do our first
evaluations at the end of March. So we are sort of tweaking
that process and tightening it up as we go.
Mr. Horn. Well, I will stick with you for a minute. The
preparation of reliable financial statements is only the first
step to financial management improvement. In the testimony the
General Accounting Office stated that many agencies resort to
extraordinary efforts to prepare financial statements.
What's being done to address the internal control and
systems weaknesses that are preventing agencies from having
reliable financial information for day-to-day management?
Mr. Everson. I think there are--there are three things.
First, we are--on a governmentwide basis Don spoke about the
efforts he is leading to look at, let's say, certain
governmentwide standards and issues on reporting and fund
balances and transactions that Treasury has the lead on. We're
trying to, from a policy point of view, cleanup things and make
them better governmentwide. Joe Cul, my deputy, Don, and I got
a group of people who have worked very closely on that.
But second, the two other areas which are internal to the
agencies are really related to two things; one, systems, and
there are any number of important systems projects under way,
where I mentioned just a moment ago the start of something very
significant at DOD where they're doing the enterprise
architecture. So they'll have a coherent systems approach and
they will rationalize over 600 different systems that they have
that feed into the financial statement information. That
clearly is a major thrust and if you look almost at any
government agency now there's a lot of systems work under way.
But it goes beyond that, I would say, to include looking at
your business processes independent of systems. It's not only
about money and new systems. It's also about doing things like
looking at your unliquidated obligations on a regular basis
instead of doing some sort of an analysis just 4 or 5 months
after the close of the fiscal year, a lot of things that
companies do on a monthly or quarterly basis that government
doesn't bother to do except at the end of the year, and clearly
one of our clear intentions by forcing acceleration of the
statements is that there will be a rupture, there will be a
change in practices and that will have two benefits. It will
provide for the more timely information itself, but it will
also get to the issue of actually making information useful
internally.
Mr. Horn. When will that happen on what you're doing with
the agencies and the systems they have and how they can
generate financial statements to meet the dates? What will
happen?
Mr. Everson. I think that's all going to happen on a case-
by-case basis. What we've done now is we--the due date for the
2001 statements was February 27. We've done two things for the
2002 cycle. First, we've mandated joint or combined performance
and accountability reports. Up until now, although some
departments and agencies did it, there is no requirement to
link your GPRA reporting to your accountability reports which
has the financial statement information. That's nuts because
the whole intention of GPRA is to have that kind of a linkage.
So we're requiring that linkage. We're going to accelerate the
due date to February 1, but then after a lot of internal
discussion we decided to have a pause so that the 2002 date
will be the same date in 2003 and then accelerate it from
February 1 to November 15 in 2004 because we recognize that
these issues and some of the systematic changes will take time.
We want the agencies to plan correctly to do this because there
are a lot of technical issues.
Mr. Horn. Comptroller General.
Mr. Walker. Mr. Chairman, I think there are three things
that hopefully can help significantly to make progress in this
area and avoid what we have referred to in the past as heroic
efforts where people spend millions of dollars and thousands of
person-hours trying to get a clean opinion but at the same time
they have material control weaknesses, substantial compliance
problems, and don't have timely and accurate, useful
information to make decisions. No. 1, change how you keep
score, change the definition of what is success in financial
management.
The last administration did a number of positive things;
however, one of the things that I was always concerned about is
that they tended to measure success based upon whether they
achieved a clean opinion or not. That creates perverse
incentives. GAO has said for some period of time that's the
wrong measure. The JFMIP principals have now agreed. OMB has
now adopted it for their ``getting to green'' efforts. And so
we've got different measures of success to deal with the root
causes.
Second, the acceleration of the due dates of the financial
statement reporting will serve to further discourage heroic
efforts because people won't have time to be able to do a lot
of things they've been doing and still hit the date. So you
give them an incentive from the standpoint of how you keep
score. You end up undercutting their ability to do it by
accelerating the due dates. And the third thing which I hope is
happening, and I'm sure that they will followup on if it's not,
is one of the things that Mark just talked about--is linking
performance and accountability, linking budget with management,
and focusing on results and outcomes.
So hopefully one of the things that is happening through
the budget process is that OMB is integrating what the
management plans are with the resource allocation decisions and
they are funding things that are dealing with the root-causes
and denying things that are superficial and that aren't ending
up actually making substantive improvements that can be
sustained over time. I think that's another critical element
and one of the reasons why you really do need to link that M
with that B in order to get the desired results.
Mr. Horn. Let's take one example of Treasury Customs. When
Commissioner Kelly was there, he recognized, and he had a
software to produce it, that he looked at the East Coast versus
the West Coast on the type of personnel that they needed in
both places because of containers and the whole business of
trade coming into the United States and so forth. So he was out
at the end of that, and I don't know that the new Commissioner
is doing anything about it. But it sure needs it and in order
to do it, as we know, in a bureaucracy, you can't just take it
from the New York crowd and put it in the two largest ports in
the United States or the Long Beach Port and the Los Angeles
Port, and together they are No. 1 right behind Singapore, and
yet they don't have the people to check the containers and all
the rest and you've got--some of the containers have people
from this gang in Shanghai that charge $30,000 to get each of
those persons into the United States, and we try to get them on
the high seas and the Coast Guard has done a terrific job in
doing that, and then you also have the problem of just a plain
bunch of fouled-up invoices, and they need to deal with that.
And I think Customs has a great opportunity but we've got to do
that and you can't take it away. So let's do it for more where
it's needed, and that was what Kelly's approach was to that and
he was right.
Mr. Hammond. I'm not all that familiar with the operations
of the Customs Service obviously, but I can tell you from
conversations that I've been part of that container inspections
in particular, the way they're approached, the methodology, the
data supporting how that development, how that inspection is
done is something that Secretary O'Neil has personally
expressed a lot of interest in. It is something that he
understands and the--obviously the events of September 11th
have focused a lot of attention on issues related to container
security as well as other forms of port of entry. It is
something that I can tell you that he is personally engaged in
and I suspect that Judge Bonner, the new Customs Commissioner,
is equally engaged in that same sort of very disciplined review
of those practices.
Mr. Horn. What they have now is they say, well, we check 1
percent. This was 1 year ago. We get 1 percent of the
containers coming through. That's sort of laughable. So they
got it up to 2 percent, and every 4th month or so 1.6 million
containers go through the ports of Long Beach and Los Angeles
and that moves to all over the United States, and we're about
to realize this coming week that the Alameda Corridor is opened
and that will move trade even faster in terms of trains moving
24-hours a day right up to the cargo and off it goes, and if
they are suspicious about one they take it up 20 miles, unload
all of the container and they take it apart, and sometimes they
get a good hit and there's narcotics or whatever there and it
just--but we need some more people power to really have any of
this moving.
So I would hope that we can get it in a fairer way so the
West isn't constantly losing a lot of people and then not being
able to hire others because it's on the East Coast. We had that
on frequencies, by the way, on these terrorism things. Most of
them are on the East Coast and we need to get frequencies for
communication throughout the executive branch, and that's a
real problem. And we shouldn't be having private sector things
when the government needs the frequencies. And in our first
hearing in Nashville we had a problem with the helicopters of
the bases in Tennessee versus the civilian helicopters that
bring people into hospitals from far away places, and again
they can't talk to each other because they aren't on the right
frequencies. So we need to do something with that, and that
ought to be going fast.
So in the results approach, a good bipartisan bill we had,
and the Majority Leader Armey was pushing that for everybody
just as I was and we need to get the results timed with the
financial side and, as you say, the scoring and if it isn't of
any use to making decisions, then we shouldn't even waste our
time on it, but if decisions can be better and more effectively
used, that would be important, it seems to me, for all of us to
take a look at that, what is it and how do you know that this
cabinet department really is doing something effective or just
writing checks. Well, there's more to that than just writing
checks.
So what kind of penalty will the executive branch do if
people sort of fail on the reporting deadlines? What kind of
penalty is it? Do you take a few million dollars out of their
budget? That would get their attention.
Mr. Everson. On the deadlines itself, I haven't
contemplated yet what would be the ramification of that. As you
indicated earlier, all 24 of the CFO Act reports were timely
this year. I don't yet have any indications--Don and I haven't
talked about it but--that we'll have a problem next year with
the 1-month acceleration. I believe that we will meet that
uniformly in the sense that nobody's yet squawked and said they
can't do it. It's too early to say, sir, where we'll be on the
45-day deadline. That's 2\1/2\ years out.
We set a very high bar. I fully hope that we will achieve
that across the board of all 24 agencies. That is what we're
going to drive to. I can't tell you yet what the consequence
would be if we fail in one or more instances, but I will
certainly consider it. And all I want to just do is reiterate,
as Dave said a few minutes ago, on the scorecards themselves
the President has been using these. I don't know what more
consequences or focus you could want than to have the chief
executive of the land using the scorecard when he sits down,
and it was mentioned--Ari Fleischer was talking about it last
week, when the Social Security Administrator was in with her
deputy--they went through the scorecard and they talked about
it afterwards in the press. So I think there will clearly be
consequences as time goes on because of the accountability and
the focus and the thrust that the administration all the way
through is bringing to these things.
Mr. Walker. Mr. Chairman, can I jump in there?
Mr. Horn. Certainly.
Mr. Walker. I think we need to look at it from the
standpoint of both individual and institutional perspectives.
You've got to have appropriate accountability mechanisms if
things aren't done, and obviously it depends upon how
significant the slip is and the item. But obviously something
that should be looked at is, you know, to what extent is this
affecting the individual's compensation, including whether or
not they will receive a bonus. It should also affect their
opportunities for promotions or different level increases to
the extent they're in the SES, whatever level they are at. It
should also affect in appropriate circumstances whether or not
they continue to be retained in their position. So I think you
have to look at it both individually as well as
institutionally.
Unfortunately, what has happened all too frequently in the
past--and I'm not talking about this administration, I'm just
talking generically--is that entities who get more of the money
are the entities who have failed in the past, and so we need to
have an incentive to make sure that we understand where we're
going and we've got a game plan. We've got to get people
focused on appropriate accountability mechanisms and try to get
the money to these people who are really making a difference,
both institutionally and individually, in achieving progress.
Last thing, as Mark mentioned, the administration has
decided to accelerate the due date for agency financial reports
up to February 1st next year. Our statutory reporting timeframe
for the consolidated financial statements, as you know, was
March 31st. The Social Security and Medicare trustees'
statutory reporting deadline is April 1. I can tell you if past
is prologue we are going to have a problem next year in that
this year we had about 3 days to be able to look at the Social
Security and Medicare projections, which is absurd, especially
given the fact that GAO has access to top secret information,
special compartmentalized information, and yet the staff don't
want to provide information on the Social Security and Medicare
reports. Something has got to be done to make sure that
information is accelerated and to make sure that type of
information is included in not only the agency financial
statements but the consolidated financial statements. Otherwise
the government just looks foolish.
Mr. Everson. We would agree with that. There are a host of
sequencing issues that you get to when you start to do the
acceleration, and those are the kinds of things we're grappling
with right now.
Mr. Horn. On the Results law Mr. Armey in particular likes
that. He has told the chairs of the authorization committees
and the appropriations subcommittees that you ought to be able
to sit down with members of the executive branch and just talk
and not just have the staff of both parties do it but the
people that are selected by the President and the people that
are elected by the people. And I don't know if any of them have
ever sat in this last year. Has anybody ever said, hey, let's
talk about some of this? And maybe they all want to run in
opposite directions. I don't know.
Mr. Everson. In terms of--you're speaking, sir, of the GPRA
reporting and----
Mr. Horn. Right.
Mr. Everson. I think that my perspective on this, and it
goes back to what we were speaking about just a minute ago, the
Comptroller General was talking about, what is really the fifth
initiative, budget and performance integration. I see very
serious efforts taking place at the departments to try and
rationalize that continuum of establishing objectives,
strategic objectives, which my impression from the discussions
I've had with other administration officials is that by-and-
large coming in our people tend to believe that the strategic--
the broad strategic objectives, what's the mission of the
Interior Department at broadest level, has been pretty well
articulated and we accept in many instances those overall
mission statements.
It's when you get down to the second and then the third
level of what you might consider more tactical objectives that
you get into trouble, where outputs rather than outcomes have
been defined. Let's get 100,000 new cops; that's an output as
opposed to is crime down and why is crime down. Let's get more
teachers; that's an output as opposed to are kids reading
better. Let's write more grants for diabetes; that's an output
as opposed to is diabetes being reduced. We're trying to,
through that initiative, focus on that continuum so that you're
getting the right things measured because what you measure will
change behaviors, and I think that through that initiative
we're starting to see some progress.
Mr. Walker. If I could add to that real quick, Mr.
Chairman, I think part of that goes back to what we talked
about earlier, which is how do you define success? We've
redefined what success is in the area of financial management.
The President's Management Agenda has taken a shot at
redefining success in the other five major areas. Departments
and agencies need to look beyond what historically they viewed
in their mission and say, well, how are we going to define
success, how are we going to know whether or not we are being
successful or, if we're not, are we making progress toward
achieving the desired outcomes? That is part of this
fundamental transformation process. That is a multiyear effort,
but is beginning and it is important that it continue.
Mr. Horn. Well, I think that's you're absolutely right on
that, and I'm delighted you're pushing it in that way and
challenging the bureaucracy and the political appointees and
the career appointees that you're serious.
Mr. Everson. Could I make one additional point on this? I'm
the vice chair and the acting chair of the President's
Management Council and we've just recently made a change there
based on our--we had a retreat at the beginning of March and
wanted to figure out how we would do things better because it's
been about a year, and what we've done is we've reconstituted
the Council to include three committees. One is human capital
and that's chaired by OPM Director Kay James. Another is on e-
government because that is a particularly challenging
initiative because it requires coordination across agencies,
and that is chaired by Cam Findley, who is the Deputy at Labor.
Bill Hansen, who is the Deputy Secretary of Education, is
chairing the third group, which is on budget and performance
integration because we recognize that unless we get buy-in from
the cabinet departments and the agencies and they help us
define what this has to look like, it won't help just having
the Comptroller General and the Director of OMB and a few other
people talking about it. It's got to be--this club has to be
picked up and carried by the operators that run those
departments. So we think that this will help do that.
Mr. Horn. Good. So let me just close with a few things
here. Does the Congress need to impose any additional
legislative requirements to assist the agencies improve
financial performance? Is there something that we can do that
will help you manage the executive branch?
Mr. Everson. I'd like to think about that, sir. We've had a
series of conversations about very preliminary and very
general--there are a lot of things that interact here. There
have been some statutes that have been established over the
last 10 or 12 years. They aren't always totally connected, and
you've had evolution in duties and responsibilities of IGs and
other areas. There are a lot of things to look at that could be
considered in terms of defining a slightly better working
model.
I'm not suggesting the model that we have is a barrier. I
think that certainly the burden is upon us to work with that
model and there is a lot we can do with the existing model, but
I want to reserve judgment before I would make any specific
suggestions.
Mr. Horn. The kind of thing I'm thinking of is in the Debt
Collection Act back in 1996 we provided that the agency that
collected the debt, to help it along because they needed
computing and take part of that and let the agency improve
their computer situation; in other words, we're given a little
carrot out there.
Mr. Everson. No. I'm going to back up and I'm going to
reverse myself here. I think that the erroneous payments area,
I'll tell you something that's pending before the Congress
right now that I'm concerned about. In the farm bill the
quality control program is being weakened rather than
strengthened and as we go--one of the vexing things is not just
our systems but in a lot of cases this $20 odd billion or so
dollars that GAO reports on as erroneous payments. A lot of
times these are moneys--these are programs that are conducted
by States or counties or other officials on behalf of the
Federal Government. There needs to be clear accountability on
the part of the third parties. It's not just the fact that
Treasury or Ag or somebody is not running the program
correctly. I would watch--I would take a look at that farm bill
if you could.
Mr. Horn. I'm going to be in Iowa in a month or two; so we
might ask that question.
Mr. Walker. Mr. Chairman, I think it's appropriate for the
JFMIP principals to talk about this issue. We already have
identified a couple of areas where we know there are problems
that need to get resolved. They may be able to be handled
administratively but to the extent they can't be handled
administratively, we won't be shy about letting you know.
Mr. Horn. Well, any other thoughts you have?
Mr. Everson. No. I'm just thankful that you have this
continued interest and, as I said at the top of the hour, I
think that we have an unusual alignment right now of people who
are really trying to get some things done. Your continual
poking and prodding and corralling us is very helpful because
it makes sure that we get centered correctly from time to time
and aren't only talking to each other.
Mr. Horn. Well, I agree with you on that, and anything we
can do to be helpful we'll be glad to do it, at least up
through December, or part of December.
I want to thank the people that put this hearing together.
J. Russell George is our very distinguished staff director and
chief counsel right back there. And Bonnie Heald, deputy staff
director, next to him. And then Henry Wray, senior counsel,
right behind me here, and we're delighted to have Rosa Harris,
who's done a terrific job as professional staff on loan from
the General Accounting Office. Don't hold anything against her.
Just hold it against me. Give her a raise. Detailee. She's done
a terrific job. I've seen the best questions and so forth, and
I haven't given her justice because I haven't used all her
questions. Justin Paulhamus, the majority clerk, he's gone with
us now all over America. He'll see America. And Michael
Sazonov, the subcommittee intern. And the minority staff here
is David McMillen, professional staff for the minority, and
Jean Gosa, for the minority clerk, and without her we couldn't
use this place. The court reporters, Mark Stuart and Lori
Chetakian. And we thank you all, and I'd like to thank the
inspectors general of the 24 departments and agencies for their
invaluable contributions to our financial management grades
this year and we thank you. You're moving in the right
direction and if we can help you, we'll be glad to. With that
we're adjourned.
[Whereupon, at 11:29 a.m., the subcommittee was adjourned.]