[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) 512ï¿½091800  
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                     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:]

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    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:]

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    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:]

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    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:]

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    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:]

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    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.]

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