[House Hearing, 107 Congress]
[From the U.S. Government Publishing Office]




 
        H.R. 4685, THE ACCOUNTABILITY OF TAX DOLLARS ACT OF 2002

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

                                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

                                   ON

                               H.R. 4685

 TO AMEND TITLE 31, UNITED STATES CODE, TO EXPAND THE TYPES OF FEDERAL 
   AGENCIES THAT ARE REQUIRED TO PREPARE AUDITED FINANCIAL STATEMENTS

                               __________

                              MAY 14, 2002

                               __________

                           Serial No. 107-193

                               __________

       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



                                 ______

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                            WASHINGTON : 2003
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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
                        Justin Paulhamus, Clerk
                    David McMillen, Minority Counsel


                            C O N T E N T S

                              ----------                              
                                                                   Page
Hearing held on May 14, 2002                                          1
    Text of H.R. 4685............................................     4
Statement of:
    Engel, Gary T., Director, Financial Management and Assurance, 
      U.S. General Accounting Office; Mark A. Reger, Chief 
      Financial Officer, Federal Communications Commission; 
      Alison L. Doone, Deputy Staff Director for Management, 
      Federal Election Commission; Frederick J. Zirkel, Inspector 
      General, Federal Trade Commission; and Paul Brachfeld, 
      Inspector General, National Archives and Records 
      Administration.............................................    55
    Toomey, Hon. Patrick J., a Representative in Congress from 
      the State of Pennsylvania..................................     8
Letters, statements, etc., submitted for the record by:
    Brachfeld, Paul, Inspector General, National Archives and 
      Records Administration, prepared statement of..............    98
    Doone, Alison L., Deputy Staff Director for Management, 
      Federal Election Commission, prepared statement of.........    83
    Engel, Gary T., Director, Financial Management and Assurance, 
      U.S. General Accounting Office, prepared statement of......    57
    Horn, Hon. Stephen, a Representative in Congress from the 
      State of California, prepared statement of.................     3
    Kanjorski, Hon. Dennis J., a Representative in Congress from 
      the State of Pennsylvania, New York Times article..........   111
    Reger, Mark A., Chief Financial Officer, Federal 
      Communications Commission, prepared statement of...........    76
    Schakowsky, Hon. Janice D., a Representative in Congress from 
      the State of Illinois, prepared statement of...............    53
    Toomey, Hon. Patrick J., a Representative in Congress from 
      the State of Pennsylvania, prepared statement of...........    10
    Zirkel, Frederick J., Inspector General, Federal Trade 
      Commission, prepared statement of..........................    88


        H.R. 4685, THE ACCOUNTABILITY OF TAX DOLLARS ACT OF 2002

                              ----------                              


                         TUESDAY, MAY 14, 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 2:01 p.m., in 
room 2247, Rayburn House Office Building, Hon. Stephen Horn 
(chairman of the subcommittee) presiding.
    Present: Representatives Horn, Putnam, Schakowsky, and 
Kanjorski.
    Staff present: J. Russell George, staff director and chief 
counsel; Bonnie Heald, deputy staff director; Henry Wray, 
senior counsel; Rosa Harris, GAO detailee; Justin Paulhamus, 
clerk; David McMillen, minority professional staff member; and 
Jean Gosa, minority clerk.
    Mr. Horn. This hearing of the Subcommittee on Government 
Efficiency, Financial Management and Intergovernmental 
Relations will come to order. We're here today to examine H.R. 
4685, the Accountability of Tax Dollars Act of 2002, introduced 
by Representative Patrick Toomey from Pennsylvania. Mr. Toomey 
will present the merits of his bill as our first witness. This 
legislation would extend the requirement of annual audits to 
all Federal agencies with total annual budget authority of $25 
million or more.
    Since fiscal year 1996, the Chief Financial Officers Act, 
as amended, has required the 24 major departments and agencies 
in the executive branch to prepare annual financial statements 
and have them audited. Although few of these Federal agencies 
can provide reliable and useful information on a day-to-day 
basis, the act's requirement for audited financial statements 
has clearly brought agencies closer toward providing that 
sorely needed information.
    Few agencies dispute the benefits of the audit process. 
Last year, the General Accounting Office surveyed 26 non-Chief 
Financial Officers Act agencies and found that 21 of the 26 
believe that it is beneficial to have audited financial 
statements.
    Our second panel of witnesses will include a representative 
of the General Accounting Office, who will discuss that survey. 
In addition, the panel will include representatives from four 
of the 26 agencies that would be affected by the legislation. 
We also have a written statement from the chairman of the 
Securities and Exchange Commission which, without objection, 
will be included in the hearing record.
    I welcome all of our guests today and I look forward to 
your testimony.
    [The prepared statement of Hon. Stephen Horn and the text 
of H.R. 4685 follow:]

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    Mr. Horn. And we will first have the gentleman from 
Pennsylvania, Mr. Toomey, explain his proposal.

 STATEMENT OF THE HON. PATRICK J. TOOMEY, A REPRESENTATIVE IN 
            CONGRESS FROM THE STATE OF PENNSYLVANIA

    Mr. Toomey. Thank you very much, Chairman Horn. I 
appreciate you conducting this hearing today.
    Specifically, I want to thank you for two things: one, for 
giving me the opportunity to testify on H.R. 4685, the 
Accountability of Tax Dollars Act, and for taking an interest 
in the bill.
    I'd also like to thank you for your leadership in the need 
to improve financial management practices of Federal agencies 
and for making agencies more accountable to taxpayers.
    I first introduced the Accountability of Tax Dollars Act in 
the 106th Congress as a good government measure to combat 
waste, fraud and abuse at Federal agencies. I recently 
reintroduced this legislation with bipartisan support, 
including the support of one subcommittee member, Mr. Kanjorski 
of Pennsylvania, as an original cosponsor. I decided to 
introduce legislation when I learned, to my surprise, that many 
Federal agencies are simply not required by law to prepare 
audited financial statements, even though this is a fundamental 
part of good management and oversight.
    So why do we need this bill? Well, first, oversight of 
Federal agencies is certainly a fundamental responsibility of 
Congress, and it's a responsibility we should not shirk. But to 
carry out that responsibility, we need to see audited financial 
statements that can be relied upon.
    Second, we also have a responsibility to the taxpayers to 
monitor how their tax dollars are spent, but also to enable 
them to see how their tax money's being spent and to ensure 
that it is spent most efficiently.
    Third, required audited financial statements is really a 
reasonable standard of oversight. In fact, Federal law 
currently requires publicly held private companies with budgets 
of a lot less than $25 million, which is the threshold in my 
bill, to file audited financial statements with the SEC. 
Ironically, the SEC itself does not have to prepare their own 
statement.
    At my request, the GAO did a survey of agencies who are not 
required to prepare audited financial statements in order to 
determine several things: first, whether $25 million is a cost-
effective threshold for requiring audits; second, what degree 
of effort would be required for agencies to comply with that 
requirement; and finally, whether non-CFO agencies that 
voluntarily conduct these audits have realized any benefits for 
doing so.
    The GAO survey say that overall the surveyed agencies 
reported they either achieved significant benefits or they 
anticipate achieving such benefits from auditing financial 
statements. Twenty-one of the 26 agencies reported that Federal 
agencies should, in their opinion, have their financial 
statements audited. All of the surveyed agencies that have 
voluntarily audited reported significant benefits from those 
audits, including enhancing accountability, identifying 
inefficiencies and weaknesses, improving internal controls, 
meeting statutory requirements and monitoring assets and 
liabilities.
    I think one of the most convincing results of the GAO 
survey was that 13 of the 14 agencies who do not currently 
prepare audited financial statements reported that the absence 
of a statutory requirement was a primary reason that they do 
not do so. The list of agencies not required to audit financial 
statements includes some very large agencies charged with 
significant regulatory fiduciary responsibilities, including 
the Federal Communications Commission, the Securities and 
Exchange Commission, and the National Labor Relations Board.
    As the members of this committee know, the Chief Financial 
Officers [CFO] Act currently requires the 24 major agencies and 
departments to prepare and audit financial statements annually. 
This information provides Congress with valuable insight into 
the agencies' financial systems and, most importantly, 
performance results. H.R. 4685, the Accountability of Tax 
Dollars Act of 2002, would simply extend the CFO requirements 
currently imposed on the major agencies to all Federal agencies 
with gross budget authority of at least $25 million. The 
agencies that would be covered by this bill have a combined 
annual budget of roughly $20 billion, a significant amount of 
money that, frankly, should be accounted for more rigorously.
    Now, understanding that some of the agencies will be 
required to fully implement the requirements of the CFO Act, 
H.R. 4685 gives the OMB Director discretion for the first 2 
years of implementation to waive application of all or part of 
the requirements.
    In our current climate of budget constraints, a Federal 
agency should being able to demonstrate measurable outcomes in 
the budget process. Audits make agency transactions public, so 
an agency can be evaluated on how well their programs performed 
and whether the public received the benefits they're intended 
to. And frankly, rewarding success can only be achieved with 
complete and accurate financial information available. I 
believe H.R. 4685 would take us one step closer to achieving 
this goal of proper oversight.
    I'd like to thank the GAO and Gary Engel, in particular, 
who is testifying today for their work on this issue. I relied 
on their expertise and insight regarding the benefits of the 
audit process for affected agencies when crafting the bill. I 
also look forward to the testimony of the representatives of 
the agencies who would be covered by this bill, including the 
experience of those agencies that have voluntarily submitted to 
audits in the past and achieved good results.
    Again, thank you for bringing attention to this bill and 
for giving me the chance to make my presentation. I'd be happy 
to answer any questions you might have.
    [The prepared statement of Hon. Patrick J. Toomey follows:]

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    Mr. Horn. Thank you very much. I will ask two questions and 
then we'll have the statement of the ranking member.
    How was the $25 million threshold determined?
    Mr. Toomey. That was a subjective process, admittedly. I 
think it must be necessarily so. If we applied the audited 
financial standard to every agency, I think a case could be 
made that for very small budget authorities, it might be more 
onerous and more costly to comply with than the benefits that 
would be accrued from having that.
    We discussed this with the folks at GAO. We looked at their 
report, and thought that $25 million was an appropriate point 
to make that cutoff. As I mentioned in my testimony, any 
publicly traded company with a security registered on the SEC 
is required to comply with this; and of course, many of them 
have smaller annual sales volumes. But we thought this was an 
appropriate level.
    Mr. Horn. Was a cost-benefit analysis performed in 
determining the dollar threshold for the audits?
    Mr. Toomey. I would refer to the GAO study on this. They 
did take that into account and considered the costs that they 
have estimated, the range of costs that would accrue in 
compliance. It is difficult, admittedly, to know--to quantify 
the benefits, in part because in some cases we may not know yet 
what we might find when financial statements are properly 
audited.
    Mr. Horn. Did you have any questions, as well as your 
statement?
    Ms. Schakowsky. Thank you, Mr. Chairman.
    I think there are some questions implicit in my opening 
remarks, so maybe you'd like to, or not, respond to that.
    I want to thank you, Mr. Chairman. The bill before us today 
is a reasonable effort to require financial audits in those 
agencies not currently required to do so. As the chairman has 
often pointed out, the current law requires audits of 95 
percent of the Federal authority. It is not clear to me how 
much of the remaining 5 percent would be covered by this bill.
    I do, however, have a few concerns about this bill that I 
hope we can address before the bill comes before us to be 
marked up. First, there is an issue of resources both for these 
agencies that have an Inspector General and for those that do 
not. These additional audits will not be free, and with the 
changes in audit practices following the Enron disaster, audits 
are more expensive than ever.
    The bill before us today does not address either the 
financial or personnel resources necessary to carry out the 
functions it requires. Without adequate resources, this bill 
will force the Inspectors General to divert funds that would 
otherwise be used for investigations of fraud, waste and abuse. 
It would be unfortunate if the unintended consequence of this 
bill was to weaken the efforts to prevent the fraud, waste and 
abuse of government funds.
    I, too, want to raise a question about the $25 million 
threshold in the bill. With time, it seems to me nearly all 
agencies will be above this threshold. If that is the intent, 
then we should just include those agencies today. If the intent 
is to exempt small agen-
cies, then we probably should build in some correction for 
inflation.
    I want to thank you, Mr. Toomey, and all the witnesses who 
have agreed to testify today. I look forward to hearing their 
comments.
    [The prepared statement of Hon. Janice D. Schakowsky 
follows:]

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    Mr. Toomey. If I could just respond to the points. I think 
you certainly raised legitimate concerns.
    I would point out, as to the cost of doing this, the 
Federal Government imposes a very comparable requirement on all 
publicly traded companies. We require that financial statements 
be audited if you're going to list your securities with the SEC 
on an exchange. That includes companies that have much lower 
annual budgets than $25 million. It seems that if it's 
reasonable to require this, for the benefit of private 
investors, it's reasonable to have this taxpayer requirement. 
Although in my bill we don't set a strenuous threshold because 
we do have the $25 million cutoff.
    Whether that's an appropriate level in the future, it's 
something that could be addressed at a later date. If inflation 
were to boost budget levels to the point where most or all were 
above that level, then it might very well justify 
reconsideration.
    Ms. Schakowsky. Let me just say beacuse it's worthy doesn't 
mean the money appears. I know that I have a number of worthy 
things on my agenda, as well, and if you compared them to the 
private sector, they would also be comparable. But the question 
of resources, of personnel, of dollars is still an issue I 
think, if we're responsible, we're going to have to consider.
    Thank you. I appreciate it.
    Mr. Toomey. If I could make just one other comment, and 
that is to observe that the many agencies do voluntarily audit 
their financial statements; although they're not required by 
law. The overwhelming majority of them believe that it is 
beneficial to the agency to do so. So that's their point of 
view.
    Mr. Horn. Mr. Putnam.
    Mr. Putnam. I have no questions at this time, Mr. Chairman. 
Thank you.
    Mr. Horn. Delighted to have you.
    Mr. Putnam. Mr. Toomey is on the right track.
    Mr. Toomey. Thank you, sir.
    Mr. Horn. Now, you're certainly welcome to come up here. 
There's five witnesses we're going to hear from, and if you 
have the time, just----
    Mr. Toomey. I very much appreciate the invitation, Mr. 
Chairman, but I have a conflict in my schedule which does not 
allow me to do so. Thank you for inviting me to be here today 
and for giving me the chance to testify.
    Mr. Horn. Thank you very much for coming.
    Now we'll get to the five members of panel two. As you 
know, we ask that the oath be affirmed by our witnesses and 
that the people who are assistants to you also be affirmed and 
take the oath.
    We're now taking Mr. Engel, Mr. Reger, Mrs. Doone, Mr. 
Zirkel, and Mr. Brachfeld. Raise your right hand. The clerk 
will get those names.
    [Witnesses sworn.]
    Mr. Horn. The clerk will note five at the table and about 
two or three behind the table.
    So let us start the agenda with Gary T. Engel as the 
Director, Financial Management and Assurance of the U.S. 
General Accounting Office. We will go down the line and have 
the various Members here ask questions.
    So Mr. Engel, proceed.

STATEMENTS OF GARY T. ENGEL, DIRECTOR, FINANCIAL MANAGEMENT AND 
ASSURANCE, U.S. GENERAL ACCOUNTING OFFICE; MARK A. REGER, CHIEF 
FINANCIAL OFFICER, FEDERAL COMMUNICATIONS COMMISSION; ALISON L. 
 DOONE, DEPUTY STAFF DIRECTOR FOR MANAGEMENT, FEDERAL ELECTION 
  COMMISSION; FREDERICK J. ZIRKEL, INSPECTOR GENERAL, FEDERAL 
   TRADE COMMISSION; AND PAUL BRACHFELD, INSPECTOR GENERAL, 
          NATIONAL ARCHIVES AND RECORDS ADMINISTRATION

    Mr. Engel. Thank you, Mr. Chairman.
    Mr. Horn. Your statements automatically go in the record 
when I call on you. We'd obviously like you to give a summary 
of them in 5 minutes or so.
    Mr. Engel. Yes, sir.
    Mr. Horn. Thank you, Mr. Engel, for coming.
    Mr. Engel. Thank you, Mr. Chairman and members of the 
subcommittee. Good afternoon.
    I'm pleased to be here today to discuss the proposed 
Accountability of Tax Dollars Act of 2002, H.R. 4685. We agree 
with the thrust of the proposed amendment to extend the 
financial management audit requirements of the CFO Act to 
additional Federal agencies.
    GAO's long-standing position has been that the preparation 
and audit of financial statements are important to agencies' 
development of reliable, timely and useful financial 
information. For agencies already covered by the CFO Act, 
financial statement audits have been the primary catalyst to 
increasing the reliability of financial data, improving 
financial information and enhancing accountability.
    In connection with work we did at the request of 
Congressman Toomey in 2001, GAO surveyed 26 Federal agencies 
not covered by the CFO Act to find out their views on having 
financial statement audits. Twelve of these agencies had had 
financial statement audits in the past 5 years. Overall, the 
surveyed agencies reported that they had either achieved 
significant benefits or expected to achieve such benefits from 
having their financial statements audited.
    As the exhibit shows, and you should have a document in 
front of you, the most significant benefit cited by the 12 
agencies that had had financial statement audits were enhancing 
accountability and identifying inefficiencies and weaknesses. 
Other significant benefits including improving internal control 
and enhancing public perception of the agency.
    The 14 surveyed agencies that had not had their financial 
statements audited reported they would anticipate benefits from 
audits, but to a much lesser extent than the achieved benefits 
reported by the 12 audited agencies. Half of the 12 audited 
agencies reported that the benefits of their first audits 
outweighed the costs. And about three-fourths reported that the 
benefits achieved outweighed the costs of subsequent audits.
    According to the size and other characteristics of the 
agencies, the level of effort to prepare financial statement 
audits for the 12 audited agencies reported varied. The 
reported number of staff days to prepare for the first audit 
ranged from 50 to 750 days, and estimated fiscal year 2000 
audit costs ranged from $11,000 to $350,000.
    The 26 surveyed agencies responded that the most important 
factors to consider in determining whether agencies should have 
financial statement audits are: one, whether the agency has 
fiduciary responsibilities; two, risks associated with the 
agency's operations, 13 of the 14 unaudited agencies said that 
the absence of a statutory audit requirement was a reason for 
them not having audits.
    Other reasons cited by six of the 14 agencies included an 
insufficient number of financial management personnel and 
insufficient funding. Twenty-one of the 26 surveyed agencies, 
including all 12 that had audits, said that, in general, 
agencies should have financial statement audits.
    I would now like to offer two points for consideration. 
First, using the fixed dollar threshold to trigger the audit 
requirement has the benefit of simplicity. Over time, however, 
agencies could move above or below this dollar threshold, 
depending upon annual changes in their budget authority. Also, 
as mentioned earlier, because of inflation the number of 
entities that would meet this threshold are likely to increase.
    One way to deal with these issues and still employ a dollar 
threshold would be to give OMB the authority to add or exclude 
agencies based in part on the factors identified during our 
survey.
    My second point involves the waiver that the proposed 
legislation would authorize OMB to grant to agencies for the 
first 2 fiscal years beginning after the date of enactment. We 
support this waiver provision, and we would support making a 
similar waiver available to OMB for agencies that do not 
initially meet, but subsequently do meet the audit threshold.
    The importance of having financial audits goes far beyond 
obtaining an unqualified opinion. The preparation and audit of 
financial statements contributes to reliable, timely and useful 
financial information which helps management ensure 
accountability, measure and control of their costs, will allow 
timely and fully informed decisions.
    Preparing audited financial statements also leads to 
improvements in internal controls and financial management 
systems. Therefore, we view much of the effort involved in 
preparing financial statements and having them audited as an 
integral part of effective financial management.
    Mr. Chairman, this concludes my summary remarks. Again, we 
agree with the thrust of the proposed bill and stand ready to 
assist the subcommittee with the language and concepts in H.R. 
4685. I would be pleased to answer any questions that you or 
other members of the subcommittee may have.
    [The prepared statement of Mr. Engel follows:]

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    Mr. Horn. All right. We will move to Mark A. Reger, the 
Chief Financial Officer for the Federal Communications 
Commission.
    Mr. Reger. Mr. Chairman and members of the Government 
Reform Subcommittee on Government Efficiency, Financial 
Management and Intergovernmental Relations, I appreciate your 
invitation to testify concerning the Federal Communications 
Commission's experience with compiling its auditable annual 
financial statements.
    I serve as the Chief Financial Officer for the FCC. The FCC 
is committed to using the taxpayer's money responsibly and to 
facilitating financial integrity and complete financial 
reporting.
    Let me begin by describing the Commission's financial 
situation, which is different from many other small independent 
agencies. We are an agency of 1,975 people. Our appropriated 
budget is rather small, $26.3 million in direct appropriations 
for fiscal year 2002 with a total budget of $245 million.
    We generate 89 percent of that budget by our collection of 
statutorily mandated regulatory fees. We also collect 
approximately $25 million from statutorily mandated licensing 
fees. Those, however, are not the only moneys included in our 
financial portfolio. We also administer the auction of radio 
spectrum and oversee the administration of other funds.
    For example, in fiscal year 2001, the Commission collected 
over $17.8 billion in auction receipts, managed a loan 
portfolio valued at just over $5.9 billion, and oversaw the 
administration of a fund which an annually collects and 
disburses $4 billion.
    These additional programs substantially increase the level 
of sophistication of our accounts. It became apparent to us 
that we needed to improve our financial recordkeeping process 
to reflect this increased sophistication.
    On its own motion, in 1998, the FCC initiated efforts to 
compile auditable financial statements. We were not required to 
do so by the Chief Financial Officers Act of 1990, but 
nonetheless began efforts to prepare financial statements and 
subject them to an audit, as would have been required under the 
CFO Act.
    Subsequently, in September 1998, the U.S. Treasury 
Department directed the FCC to prepare certain auditable 
information for inclusion in the Treasury's annual financial 
statements. Treasury had directed the FCC to pursue the 
compilation of auditable statements because of the financial 
implications of the spectrum auction program on total receipts 
recorded in the consolidated U.S. Government statements and the 
value of the auctions' loan portfolio to asset values in those 
same statements.
    As a result of both the Commission's efforts and Treasury's 
directive, the FCC compiled its first generally accepted 
accounting principles balance sheet and accompanying notes for 
fiscal year 1999. With that action complete, we generated a 
full set of CFO Act-compliant financial statements for fiscal 
year 2000 and subjected them to an audit.
    We enlisted the aid of two professional accounting firms to 
assist in these efforts. One firm provided credit subsidy 
information concerning the Commission's auction loan portfolio, 
which had not previously been treated under the provisions of 
credit reform, and assisted the limited finance staff in 
actually compiling the statements. The second firm audited the 
results of the statement efforts on behalf of the FCC's Office 
of Inspector General. Incidentally, the FCC received an 
unqualified opinion on that first set of fully compliant CFO 
Act statements.
    As a result of the efforts to prepare statements, the FCC 
has: Compiled financial operating procedures; conducted a full 
agency inventory of property; implemented an annual inventory 
review system; redesigned the Commission's revenue systems; 
implemented a customer numbering and tracking system; altered 
the agency's financial record keeping to record transactions in 
the U.S. Standard General Ledger formats; formalized financial 
reporting processes and responsibilities; compiled loan files, 
standardized loan processing functions and initiated the 
transfer of loan servicing functions to an outside loan 
servicer; implemented credit reform reporting; and initiated 
efforts to link objectives and performance measures to the 
strategic plan and annual financial statements.
    This auditing process is still very new to the FCC. Fiscal 
year 2001 is only the second year we have issued fully 
compliant statements, and we continue to make improvements in 
our financial accounting systems and safeguards. Complying with 
the accounting reporting requirements of the CFO Act is a time-
consuming and expensive process. We were in a position to cover 
most of these costs through the use of auctions generated 
funding.
    For the FCC, the preparation of an auditable financial 
statement has been necessary and beneficial. Because of the 
additional financial programs, we are not ``typical'' as 
compared to other small agencies. I cannot speak to the 
difficulty other agencies may experience in preparing annual 
financial statements and having them audited, but I do know 
from our experience that it is an arduous undertaking.
    Again, thank you, Mr. Chairman, for the opportunity to 
offer this testimony. The FCC is very proud of the financial 
improvements it has made over the last few years. We still face 
many formidable challenges in this regard.
    [The prepared statement of Mr. Reger follows:]

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    Mr. Horn. Alison L. Doone is the Deputy Staff Director for 
Management of the Federal Election Commission.
    Welcome.
    Ms. Doone. Good afternoon, Mr. Chairman, and members of the 
subcommittee. I serve as the FEC's Chief Financial Officer. 
It's a pleasure to be here today to testify regarding the 
utility of audited financial statements for the FEC. The FEC is 
a small independent bipartisan regulatory agency charged with 
administering and enforcing the Federal Election Campaign Act, 
the statute that governs the financing of Federal elections.
    In October 2001, the FEC responded to the GAO survey on 
Expansion of Financial Statement Audit Requirements. The FEC 
responses mirrored those of the surveyed agencies, as mentioned 
in the November 30, 2001, GAO survey results.
    The fiscal year 2002 FEC appropriation is $43.7 million and 
362 FTE; 70 percent of the budget is spent on salaries and 
benefits, 10 percent on information technology projects, and 8 
percent on rent. The remaining 12 percent funds FEC operations 
including contracts, travel, training, equipment and supplies.
    FEC assets are nominal. As of September 30, 2001, FEC 
assets totaled $9.4 million. Of that, $6.7 million, 72 percent 
of the total, is the cumulative FEC appropriated fund balance 
of unobligated and unexpended funds from fiscal years 1996 
through 2001. Only $2.7 million is equipment.
    FEC liabilities are also modest. As of September 30, 2001, 
FEC liabilities totaled $2 million and consisted primarily of 
accrued annual leave and accrued payroll.
    Like other survey respondents, the FEC believes that an 
agency's fiduciary responsibilities, risks associated with 
agency operations, amount of liabilities, amount of assets and 
amount of budget authority are all important factors to 
consider in determining the need for audited financial 
statements.
    We note the survey respondents ranked fiduciary 
responsibility and risks associated with agency operations as 
the most important considerations, and placed equal weight on 
the amount of assets, liabilities and budget authority as the 
next most important factors. We agree with those rankings.
    The amount of budget authority is not the most important 
factor in whether an agency should prepare annual audited 
financial statements and should not be the sole determinant in 
the decision. Materiality is measured by more than just the 
size of an agency's budget.
    The agency operations and the types of programs 
administered by an agency should be more important than size of 
budget in determining the need for audited financial 
statements. For example, an agency with a budget less than $25 
million that has fiduciary responsibility for a trust fund, 
administers a grant program or operates revenue-generating 
programs may be the type of agency that should prepare audited 
financial statements. Whereas, the FEC, with a budget greater 
than $25 million with none of those features, with minimal 
assets and liabilities and with a budget that primarily funds 
personnel costs and rents, should not be required to prepare 
audited financial statements.
    The issue of whether audited financial statements would 
increase internal controls also varies among agencies. The FEC 
has strong internal controls and senior management review and 
oversight of financial operations and allocation and 
expenditure of funds. FEC audited financial statements would 
not result in greater accountability or tighter controls.
    Audited financial statements for agencies with the 
characteristics that I just mentioned may be necessary. In 
agencies lacking those features, like the FEC, preparation of 
audited financial statements would increase costs with few or 
no material benefits.
    I would like to thank you, Mr. Chairman, and the 
subcommittee for the opportunity to appear before you to 
present our views. I would be delighted to answer any questions 
you may have.
    Mr. Horn. Thank you.
    [The prepared statement of Ms. Doone follows:]

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    Mr. Horn. We'll go to the next presenter, the Honorable 
Frederick J. Zirkel, Inspector General, Federal Trade 
Commission.
    Mr. Zirkel. Good morning, Mr. Chairman and members of the 
subcommittee. I am Frederick Zirkel, Inspector General of the 
Federal Trade Commission. I'm pleased to testify before the 
subcommittee today in support of financial statement audits.
    The FTC is a non-CFO agency that has its financial 
statements audited annually by the OIG. To accomplish its 
competition and consumer protection missions, the agency was 
authorized approximately $156 million and 1,074 work-years for 
fiscal year 2002.
    Funds are provided the agency from two major sources: 
premerger filing fee collections and annual appropriations. For 
financial statement reporting purposes the Financial Accounting 
Standards Advisory Board defines the agency's premerger filing 
fees as ``exchange'' revenue; that is, funds that the agency 
has earned and can use with its annual appropriation to pay for 
salaries and other operating expenses to achieve its mission 
objectives.
    The FTC also receives ``nonexchange'' revenues. For 
example, the agency collects civil penalties. Civil penalties 
cannot be used to pay for agency operating expenses, but 
instead must be remitted to the U.S. Treasury. An agency with 
substantial nonexchange revenue is expected to prepare as part 
of its financial statement package, under the CFO Act, a 
``Statement of Custodial Activity.''
    I mention these accounting concepts and authorities because 
the FTC, as part of its financial statement package, prepares a 
custodial activity statement. During the years under audit the 
FTC's nonexchange revenue has always exceeded its exchange 
revenue. Yet, without a financial statement audit, this major 
area of financial activity would receive little, if any, 
scrutiny.
    Furthermore, for the FTC, the preparation and audit of the 
custodial activity statement has helped management integrate 
its financial and program management systems. In addition, the 
statement provides information that interested third parties 
could use to judge how well the agency is meeting its basic 
mission responsibilities.
    A word about audit approach: At the FTC, the annual 
financial statement audit is performed by an audit team 
comprised of OIG staff and an independent public accounting 
firm under contract to the OIG. As IG, I sign the audit 
opinion. In each of the 5 years the audit has been conducted 
the agency has received a clean opinion.
    A word about audit benefits: I believe that annual audits 
are worth the expenditure of agency funds for many of the 
reasons stated in the GAO survey. The benefits specific to the 
FTC include improvements of internal control, strengthening of 
financial management systems and enhanced accountability.
    Of course, obtaining a clean audit opinion is not an end in 
itself, but merely the first step to improving agency financial 
management. It is also, I believe, a necessary step if an 
agency is to fully implement GPRA, that is, tie performance 
measures and/or objectives to audited costs contained in the 
Statements of Net Cost.
    A word about audit cost: The OIG at the FTC is provided 
with an annual budget of 5 work-years and contracting dollars 
of about $100,000. The OIG budget, when adjusted for inflation, 
has stayed relatively constant over the past 5 years for the 
time span we have been conducting financial statement audits. 
From this budget, my office commits approximately $60,000 per 
year to an IPA contract to perform the financial statement 
audit.
    In addition, my office also applies approximately one-half 
to three-quarters of an FTE, or work-year, to the audit. 
Consequently, conducting a financial statement audit is a major 
commitment of my office. Yet, I believe the resource commitment 
is a wise expenditure of taxpayer funds.
    A few comments on management cost: A financial statement 
audit should be, or I view it as, a quality control activity 
that is an integral part of the overall management process. It 
provides needed feedback to management. The absence of such 
audits in past years may explain in part why government 
financial management is often viewed in low esteem.
    Finally, when considering management costs, I think it is 
important to distinguish between the incremental cost that an 
audit requires managers to incur from the need to incur costs 
to correct a procedural weakness or respond to a system 
breakdown.
    These points lead me to a general statement about auditing 
costs. All other things being equal, the better managed the 
unit or organization being audited, the lower the cost of the 
audit will be for the management team. The more knowledge the 
audit team has of the organization being audited, the lower the 
cost will be for the audit organization.
    A word about lessons learned: First, the process is 
evolutionary. It improves with age. As you go through it, you 
get better. Second, I think you need to stay the course. It 
instills a discipline and improves the systems as years go on. 
That's the experience that we have had at the FTC, and I 
believe the systems are stronger and the information is better.
    I would like to thank you, Mr. Chairman, for this 
opportunity to provide my comments. I would be happy to answer 
any questions.
    Mr. Horn. We thank you.
    [The prepared statement of Mr. Zirkel follows:]

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    Mr. Horn. Our last presenter, and then we'll go to 
questions, is the Honorable Paul Brachfeld, Inspector General 
for the National Archives and Records Administration.
    Mr. Brachfeld. Good afternoon. I am Paul Brachfeld, the 
Inspector General of the National Archives and Records 
Administration. I thank you for the opportunity to testify 
before this distinguished subcommittee.
    I must first apologize for not having presented a written 
statement prior to my testimony, as I was just called upon 
yesterday to join this distinguished panel. However, I am 
pleased to be here to lend my support to this proposed 
legislation.
    I speak as the Inspector General of the National Archives 
and Records Administration and in my former capacity as 
Assistant Inspector General for Audits at both the Federal 
Communications Commission and the Federal Election Commission.
    In fiscal year 2002, NARA was appropriated an annual budget 
of approximately $289 million and 2,794 full-time equivalent 
positions, or FTEs. The $289 million includes appropriations 
for operations, repairs and restoration of facilities and 
grants.
    NARA operations are spread throughout 37 facilities 
nationwide to include archives and records services facilities 
and Presidential libraries. NARA also publishes the Federal 
Register, administers the Information Security Oversight Office 
and makes grants for historical documentation through the 
National Historical Publication and Records Commission.
    In addition to our annual appropriation, Public Law 106-58 
established the Records Centers Revolving Fund on September 29, 
1999. The enabling legislation authorized NARA to charge 
customers for records storage and services. Income from these 
operations in fiscal year 2002 is estimated to be approximately 
$107 million.
    NARA also maintains a gift fund with estimated fiscal year 
2002 availability of approximately $9.2 million, and Trust 
Funds with estimated fiscal year 2002 operating income of 
approximately $15.9 million.
    I am pleased to report that in the 2 years that I have 
served as the IG at NARA, the components of the agency which 
are subject to financial audit have received clean or 
unqualified opinions. These audits of Revolving Fund and Gift 
and Trust Funds were performed under the control and direction 
of the OIG. While no material weaknesses were detected, the 
Independent Professional Accounting Firm [IPA], did identify 
opportunities to strengthen financial accounting practices and 
procedures and enhance internal controls, most notably as 
related to information technology controls and continuity of 
operations.
    Currently, NARA does not perform a financial statement 
audit over our appropriated funds. The OIG does not have any 
funding or resources to oversee or perform this work.
    As you know, the GAO transmitted a survey to my agency 
dated September 28, 2001, focusing upon whether financial 
statement audit requirements should be expanded to certain 
agencies, including NARA. Question 54 of the survey was ``Why 
has your agency chosen not to have its financial statement 
audited?''
    In response, the NARA Director of Financial Management 
Services checked all four boxes provided. They were as follows: 
Not statutorily required; insufficient funding; insufficient 
financial management staff; insufficient expertise in preparing 
financial statements.
    I think that ``choice'' should be removed from this 
equation and that the OIG should be provided the necessary 
staffing and resources to perform in work.
    At NARA, the proposed price for this first option year of a 
multiyear contract with an IPA to provide financial auditing 
services to the Revolving Fund and Trust and Gift Funds is 
approximately $260,000. The OIG does not have any dedicated 
financial auditors on staff to administer the contract and 
performance; thus, this collateral part-time duty is shared by 
myself, the Assistant Inspector General for Audits and an 
information technology auditor. I do not consider this to be an 
optimal staffing solution.
    Financial accountability and stewardship over funds is too 
important a matter to compromise due to a lack of enabling 
resources. I believe that this office should have the necessary 
resources to accomplish our mission and that defined by 
Congress and Public Law 100-504, the Inspector General 
amendments. Thus, should this legislation be ratified, there is 
a critical need to provide funding and resources to support the 
intent of Congress.
    I continue to face a critical shortage in resources, and in 
this semiannual reporting period, I have continued to alert 
Congress to the situation. I firmly support the adoption of 
this legislation, but I'm well aware that without funding and, 
more importantly, auditors on staff with financial statement 
auditing expertise, the task of performing this work will be 
daunting.
    Over a decade ago, when I served as the Assistant Inspector 
General for Audits at the FCC, I met with the chairman to brief 
him on the results of my limited financial statement audit of 
selected balance sheet accounts that I had single handedly 
performed. The balance sheet line items I looked at were 
accounts receivable, accounts payable, and property, plant and 
equipment. In this audit, constrained by lack of resources and 
staff I was all alone, I identified significant deficiencies.
    When I met with the former chairman and attempted to 
explain my findings, he confessed that he could not follow my 
presentation. Thus, I simplified them by asking him whether he 
would invest in a company that couldn't track its receivables 
and payables, and didn't place a valuation on their property, 
plant and equipment. He laughed and said, ``Of course not,'' at 
which point I congratulated him on being the CEO of that 
company.
    Since that meeting I held in, I believe, 1991, the FEC has 
moved quite a distance as OIG auditors, with the support of the 
CFO, are now performing full financial statement audits and 
received unqualified clean opinions. However, this progress may 
not be shared by all agencies.
    I believe that we owe it to the taxpayers to demonstrate 
proper stewardship of our assets and account for how we budget 
and spend our money. We owe it to them to guarantee that we in 
the public sector are using timely, reliable and comprehensive 
financial information when making decisions which impact upon 
them and the welfare of their loved ones.
    It's not logical to me that certain Federal agencies are 
required to perform annual financial statement audits while 
others are excluded from these requirements. I believe that 
sound financial auditing practices, as required by the CFO Act, 
can and do provide tangible benefits to our customers and 
should be extended to a broader range of agencies as called for 
in this proposed legislation.
    Mr. Chairman, this concludes my remarks. I would be happy 
to answer any questions you or any member of the subcommittee 
may have about my office's experience related to financial or 
related matters. Thank you very much.
    Mr. Horn. Well, thank you.
    [The prepared statement of Mr. Brachfeld follows:]

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    Mr. Horn. We're now going to go to questions. It will be 5 
minutes for each of us. We'll just start with myself and then 
the ranking member, then Mr. Kanjorski.
    Let's start with Mr. Engel, Director of Financial 
Management and Assurance for the U.S. General Accounting 
Office. Mr. Engel, your testimony generally supports the thrust 
of H.R. 4685. From your experience, what do you see as the 
primary benefits to an agency to prepare agency-wide financial 
statements and having them audited?
    Mr. Engel. Yes, Mr. Chairman. My experience with the CFO 
Act agencies, as well as in the private sector, prior to coming 
into the Federal Government, was very similar to the results 
that we had seen from the surveyed agencies and that is 
displayed on the chart over here.
    Enhancing accountability is certainly an experience that 
many of the CFO Act agencies have had during these initial 
audits since the CFO Act was passed. Identifying inefficiencies 
and weaknesses and improving internal controls, we've seen that 
while, as you had mentioned earlier, a lot of the agencies 
still are not receiving unqualified opinions, we have seen 
improvements in the number of weaknesses and reportable 
conditions that are being identified out at the agencies.
    The agencies are being alerted to where the real problems 
are, which is one of the benefits of having a financial 
statement audit by an independent auditor; and actions are 
being taken to address these.
    The reliability of financial information is also a key 
result of having a financial audit. When you recall, back to 
the early years of the CFO Act and the audits of the IRS 
financial statements, I believe in front of this subcommittee, 
there were various hearings and there was a lot of discussion 
about the amounts of taxes receivable.
    There were large amounts that were originally on the books, 
but it was through the financial statement audits that it was 
determined that many of those amounts were not valid 
receivables. In many cases, we had duplicates, even triplicates 
of amounts being counted as receivables. So we really were not 
reacting to an amount that we could go after and collect.
    We also did not have a very good idea of what the 
collectability of those receivables were. It's been through the 
audit process that we're getting a better handle on how much we 
could expect to go after and collect so that we can plan future 
decisions down the road.
    These would be some of the key things I'd identify.
    Mr. Horn. Mr. Engel, what changes, if any, would the 
General Accounting Office propose making to H.R. 4685?
    Mr. Engel. I think some of the key ones relate to 
discussions we've had here today.
    We had a lot of discussion about the dollar threshold. As 
our survey had identified, one of the factors was using the 
budget authority. But there were several other factors that we 
felt important and the respondents, I believe, felt important 
as well. These included the fiduciary responsibilities and the 
risks of the operations themselves.
    The idea of using a dollar threshold certainly makes it 
more simple to design the law itself. One way around that--
again, that I had mentioned in my testimony--if you wanted to 
stick with that, but still build in the factors, is to give OMB 
the authority to make decisions as to adding or excluding 
agencies that meet the dollar threshold; but maybe they do not 
meet some of the other factors that have been identified as 
important in making a decision as to whether or not an audit 
should be done or not.
    That would be one mechanism I think should be considered.
    Another is the waiver authority that's being authorized. 
The way the legislation is drafted right now would identify and 
give a transition period. I believe it's typically needed for 
entities that have not been through a financial statement 
audit. The waiver authority allows OMB to waive the first 2 
years of audit to the agencies, but if you do have agencies 
coming on subsequent to what the initial cut-off of agencies 
are, we need to build something for those agencies to be able 
to have a transition period.
    Mr. Horn. I'm going to have to move to the third question 
with you. Other than the dollar threshold, what factors should 
be considered in deciding whether an agency should be included 
in the legislation?
    Mr. Engel. Some of the most important ones, I think, are to 
take a look at that agency and determine if they are 
responsible for fiduciary responsibilities. Are they handling 
funds on behalf of others? Do they have retail operations--
let's say, more risky operations that involve the collection of 
funds? Do they provide insurance, do they make loans, or loan 
guarantees?
    Those types of factors I think would be important to 
consider in determining whether an agency should be audited.
    Mr. Horn. Good.
    Five minutes and 5 minutes, Ms. Schakowsky.
    Ms. Schakowsky. Thank you, Mr. Chairman.
    Mr. Engel, can you give us any kind of an estimate of the 
financial or personnel resources that might be necessary to 
carry out the provisions of the bill?
    Mr. Engel. I can give you some of the information that we 
had from the surveys themselves. There really was a range 
depending upon the size of the agency.
    One of the dependencies is whether you have multiple 
offices. Nonintegrated systems can contribute to what it could 
cost; the range was actually from $11,000 as a low up to 
$350,000 for the audit cost itself.
    Now, in between there--and those really did range from an 
agency that had less than $25 million of budget authority, 
didn't have a lot of assets or liabilities, to one that was up 
over $6 billion of budget authority----
    Ms. Schakowsky. You didn't just look at agencies over the 
$25 million?
    Mr. Engel. We actually included in this survey some 
agencies that were less than $25 million. They were all above 
$10 million, but there were some that were under $25 million.
    Ms. Schakowsky. OK.
    Ms. Doone, you raised some questions about the $25 million 
threshold. What were your discussions about how we might be 
able to setup some sort of other criteria by which we gauge 
whether someone would fall under this act?
    Ms. Doone. I noted in Mr. Engel's testimony, and then in 
his response to the questions, giving that authority or giving 
some room to OMB to make that determination based on assets, 
liabilities and risks of the agencies. I think that would be an 
appropriate course. That way you would be looking at budget 
authority as well as assets, liabilities, and fiduciary 
responsibilities. That I would give a more complete picture as 
to the need for audited financial statements.
    Ms. Schakowsky. Do you have any problem with the $25 
million number being static? Even if we were to use $25 million 
as the threshold and then make other kinds of criteria?
    Mr. Engel.
    Mr. Engel. Yes. Again, what I was proposing in my statement 
was that you could get around the inflationary effect of that 
having a static number, again through OMB's allowance of having 
the authority, if all they saw was the reason that an agency 
was coming on to meet the threshold was because, over time, 
inflation had gotten them there, they could exclude that agency 
and explain to Congress that they don't believe that agency 
should be added.
    Ms. Schakowsky. Mr. Reger, I was interested, you indicated 
that the Federal Communications Commission still has a number 
of formidable challenges in complying with the audit 
requirements.
    Can you describe those challenges?
    Mr. Reger. Integrating financial systems is probably one of 
the largest challenges. We have a number of systems, and trying 
to make them all work in a timely manager--you're aware that 
the financial CFO Act requires ever-decreasing timeframes now 
for providing audited financial statements.
    Those timeframes are difficult for us as we try to gather 
information from many systems, just as an example.
    Ms. Schakowsky. And so, what do you conclude with that? Are 
you in support of that legislation?
    Mr. Reger. The Commission hasn't taken a position, ma'am.
    Ms. Schakowsky. But you're saying right now you would not 
be in a position to comply?
    Mr. Reger. No, we do in fact comply. We currently generate 
auditable financial statements.
    Ms. Schakowsky. But it's hard?
    Mr. Reger. It is very difficult.
    Ms. Schakowsky. Mr. Brachfeld, you indicated that the 
burdens of an audit requirement would strain your office's 
resources.
    Do you have some idea of the number of staff positions and 
the budget authority you'd need if this bill were to pass?
    Mr. Brachfeld. Based upon my past experience in the Federal 
Communications Commission, where I served as AIG and actually 
worked with Mr. Reger, I would estimate at least two people, 
two OIG staff financial auditors; and then the financial 
dollars, if we brought in a contractor.
    Right now, we pay, I think approximately--I quoted 
somewhere, I think, about $180,000 or so for the larger part of 
the Revolving Fund financial statement audit. To incorporate 
our appropriation, I would guess we'd probably look--say we'd 
have to bring in a vendor for probably $300,000 more, or 
something along those lines.
    Ms. Schakowsky. Let me ask this last question. Anyone can 
answer.
    Since this legislation does not include any increase in 
either personnel or financial resources to--so that you could 
comply, what would happen to your agencies were it to pass 
without that, those resources? Would you have to make cuts 
elsewhere? What would you cut? What would you do.
    Mr. Brachfeld. On the IG's side, we would have to honor the 
request of Congress and honor the law; and we would, therefore, 
have to borrow or take staff away from other projects.
    But not only would we have to take staff from other 
projects, we would have to have the staff in house that would 
have that expertise, because converting an IT order or a 
contract order to do financial statements is a completely 
different discipline.
    So not only would it be a staffing in terms reallocating 
staff, we may not have the skills on board to conduct this type 
of work.
    Mr. Zirkel. I think for the Federal Trade Commission--since 
we already go through this process, I don't believe that as a 
result of passing the law, there would be any additional cost 
associated with this mandate.
    I also looked at this when the original CFO Act was passed. 
We at non-CFO agencies were provided an opportunity by Congress 
to move forward at our own pace into this area, realizing that 
this was a basic accountability responsibility or obligation 
that management had to the taxpayers.
    And so, I know that audits and the cost of audits, whether 
it's management that's incurring the cost or whether it's an IG 
that's incurring the cost, there are more important things that 
people see being done. But in the long list of different 
priorities, even if it's not the highest priority, I just 
believe it shouldn't be ``no priority'' or off the list. It 
should be somewhere in there, so that, in fact, management is 
held accountable to the public.
    And there was one chart that I found interesting from the 
GAO study, and that was a list of all of the legislation over 
the years where financial statement audits were mandated. It 
started, I guess, in 1934 with the Securities and Exchange Act. 
And while people always question financial statement audits, it 
doesn't seem like we've found another alternative to meet this 
obligation.
    So it's one thing to say, well, you don't have enough 
money, but what are you doing to fulfill your responsibility 
there? That's sort of the middle ground here. I mean, you have 
to almost move to do it until you find an alternative that is 
better, more cost-efficient. Then, if you do, I'm sure a lot of 
people might run to that.
    Without that alternative, I think what we have here seems 
to work. Even if it's not the highest priority, it should 
certainly fall somewhere in the whole scheme of things.
    Mr. Horn. Five minutes to the gentleman from Pennsylvania, 
Mr. Kanjorski.
    Mr. Kanjorski. Thank you very much, Mr. Chairman.
    I guess to the full panel, if this piece of legislation is 
passed, do you anticipate any savings that may occur by doing 
the auditing process that would, therefore, pay for and justify 
the audits, or is this just duplicative?
    Mr. Zirkel. My experience is that--for example, I mentioned 
that we have an IPA, and we also put in about a half a work-
year on our staff. The IPA is a CPA firm under contract to the 
OIG for around $60,000 a year.
    In the year 2000, for example, we found an overpayment of 
rent at the FTC that totaled $189,000. The FTC had closed some 
regional offices and, in fact, the landlord was continuing to 
bill the agency. When we located that, then they went--the next 
year, they went back and got a refund for the overpayment.
    Well, this $189,000, in essence, would pay for 3 or 4 years 
of my audit.
    I am not one to justify a financial statement audit based 
on savings. That puts a lot of pressure on the system, and it 
sort of sets-up the wrong relationship between management and 
the auditors. Nevertheless, and particularly in small agencies, 
savings will be intermittent, but they will help. And this was 
just one example.
    In most years we always have some savings and, most years, 
they're smaller. So I think that savings are a very real 
benefit. It's just difficult to say that those savings in all 
cases will offset all of the costs. So in fact this is a cost-
efficient approach.
    In most cases, I believe it will be.
    Mr. Kanjorski. To a large extent, an audit would determine 
whether or not the agency is performing its mission?
    Mr. Zirkel. Yes.
    Mr. Kanjorski. And it is a way of Congress and the 
executive branch knowing where it's going; is that correct?
    Mr. Zirkel. I believe for agencies that have custodial 
activity statements that where we get into these fiduciary 
responsibilities, that moves into the mission of the agency. 
And I believe it also will help in terms of--there's another 
statement called the Net Cost Statement, and then that cost 
statement, I think, is audited costs that can be used with 
GPRA. So in that respect, a financial statement audit with net 
cost will help and make sure that management is not coming up 
with costs to tie to a performance measure that is not tied to 
anything.
    Mr. Kanjorski. Just for the efficacy, do you fear this may 
put pressure, external pressure on your agency since you 
regulate those of us who sit up here?
    Ms. Doone. I don't think we would be concerned about 
external pressure, but going to your previous question and the 
one from the last round, we don't think there would be any cost 
savings for us, because we believe our internal controls are 
quite tight, and we do think there would be, in fact, an 
increased cost. We have a very small IG office, a staff of 
four. Either they would have to stop work on existing projects 
or we would have to contract out.
    Mr. Kanjorski. We may like you to have them stop work on 
certain projects. Mr. Engel, I am particularly interested in 
the Endowment for Democracy. Are you aware of that 
organization? That's funded by Congress, too, at about $33 
million a year, and is a recipient of incredible amounts of 
money that they send out around the world. And it is 
structured, as I understand it, as a nonprofit 501(c)(3) 
corporation established by Congress to, I guess, aid and assist 
the State Department, CIA and other agencies of the Federal 
Government, but they practically--I have been in Congress 18 
years and I can't find out everything they give their money to.
    But Mr. Chairman, I have a piece from the New York Times I 
would like to make part of the record of their most recent 
activities in Venezuela.
    Mr. Horn. Without objection, this will be put in the 
record.
    [The information referred to follows:]

    [GRAPHIC] [TIFF OMITTED] T6451.087
    
    Mr. Kanjorski. Do you think we ought to extend the group 
that we are looking at auditing and since this nonprofit 
organization that is a part of the U.S. Government carries on a 
portion of our foreign policy and invests in elections to 
unseat democratically elected presidents sometime; that it may 
be worthwhile to audit some of these independent agencies or 
quasi-governmental agencies that expend government funds?
    Mr. Engel.
    Mr. Engel. I think that could be considered. It could 
actually be considered and part of this legislation. If so, it 
would be probably on an agency-by-agency or entity-by-entity 
basis and looking at the risks.
    Mr. Kanjorski. You wouldn't see anything that the crook 
here is the fact that the agency or bureau or a quasi-
government agency is using Federal funds. That justifies our 
reason why to have an audit performed?
    Mr. Engel. Yes.
    Mr. Kanjorski. And so it wouldn't be inconsistent with this 
act or general good principles of government if we included an 
agency like the Endowment for Democracy to be audited also.
    Mr. Engel. To cover the government funding.
    Mr. Kanjorski. You are with the General Accounting Office?
    Mr. Engel. Yes.
    Mr. Kanjorski. And you never heard for the Endowment for 
Democracy? Well, anybody else?
    Mr. Horn. Nobody would do it from GAO unless we request it. 
Sometimes you dig it up yourself. But actually, it's is a 
rather fine group. And as I remember, the leaders came mostly 
out of the American labor movement because they were upset by 
the Stalinist, Marxist, Soviet type of labor.
    Mr. Kanjorski. It did grow out of the cold war, Mr. 
Chairman, but I think the cold war ended sometime in the last 
decade. But it carries on----
    Mr. Horn. It hasn't ended in Cuba at this point and it 
hasn't in some of the types of--well, even in the party now in 
control in part of the Duma is Communist. As I remember when I 
was in the Department of Labor, that basically was to get----
    Mr. Kanjorski. So the record is clear, it just doesn't fund 
the labor movement. It is an uncanny organizational structure 
that has four basic institutes: It funds the National Chamber 
of Commerce and it funds the AFL-CIO Institute, so they balance 
off labor and big business and they get their portion of the 
funds.
    It also funds the Republican Institute, Republican party so 
it can have a travel agency; and it funds the Democratic Party 
Institute so it can have a travel agency. But above and beyond 
that, and far beyond the appropriated funds, it receives 
actually unknown funds from aid and other Federal agencies that 
get channeled. And it just strikes me the last time I raised 
this issue, the Endowment for Democracy funded a poll against 
the President of France, for the purpose of creating some 
democracy, I am not sure. But there are a great deal of funds, 
almost $1 million are channeled into organizations that brought 
about, or attempted to bring about the fall of the democratic-
elected president in Venezuela. I don't necessarily support the 
policies of that democratically elected president. But I begin 
to wonder if we have an audit that we're talking about here 
with quote, executive agencies that exist out there, maybe we 
ought to start auditing some of these agencies that are below 
the radar screen.
    Mr. Horn. Well, as I remember, they also try to get fair 
elections and go as pollsters and observers and see if----
    Mr. Kanjorski. All functions could be performed by the 
State Department or other executive agencies of the United 
States.
    Mr. Horn. Well, I would think somebody's knows that a 
precinct is a lot better than a lot of the people in the 
Department of State. They can analyze it. They can read the 
newspapers. They do a very fine job, but if you are going to 
talk to real people, we ought to be getting people from 
Chicago, Jan, and they would know how an election ought to be--
and hopefully it wouldn't be a resurrection day which has been 
in places like Pittsburgh, Philadelphia, Boston, so forth. But 
it is very interesting. Was that a recent part of the New York 
Times?
    Mr. Kanjorski. Last week, I believe.
    Mr. Horn. OK. We will startup again now and use 5 minutes. 
And Ms. Doone, in your testimony, you mentioned your agency 
already has strong internal controls and that audited financial 
statements would not result in greater accountability or 
tighter controls. What type of controls does the Federal 
Election Commission currently have in place?
    Ms. Doone. We have a Finance Committee composed of 
commissioners who determine and propose to the full commission 
the allocation of our budget authority among offices and 
projects. Once that is established after we have received our 
appropriation, we have monthly budget execution reports which 
show the moneys that have been obligated and expended for each 
object class for each division within the agency.
    Further, on the lowest level there must be supervisory 
approval for all obligations and expenditures within each 
office. There is further approval going all the way up into the 
administrative office as well as the finance office who puts 
these together. Further, when invoices are received, the 
invoices go back to the procuring office where they assign to 
the people who have procured the services or goods to sign-off 
and certify that the amount is correct.
    Before the payment is made, we have a certifying officer 
independent of the whole process reviewing the invoices to 
ensure everything is in order before payment is made. Further, 
when we submit our quarterly SF133s to Treasury, we must 
balance with our balances over at the Treasury Department. We 
do this quarterly, and annually we submit a SF 2108 so that we 
know our balances are in order.
    With respect to contracting, the Commission must again 
approve all FEC-issued contracts. We believe from the lowest 
level to the highest level we have checks and balances 
throughout our budgetary and expenditure process.
    Mr. Horn. But basically, your agency ensures financial 
accountability and effective internal controls without 
independent verifications by auditors.
    Ms. Doone. That's correct.
    Mr. Horn. You have an internal auditor situation. Has there 
ever been an audit in the history of the Federal Election 
Commission? Has it ever been under an audit by an outside 
accountant?
    Ms. Doone. In terms of the financial statements, no.
    Mr. Horn. That's right.
    Ms. Doone. For the financial statements.
    Mr. Horn. So that is part of the good government that we 
passed here about 10 years ago. Is your statement that the 
Federal Election Commission doesn't conduct outside audits, but 
conduct internal controls are the equivalent?
    Ms. Doone. As I mentioned, we have an IG whose audits, 
because the IG is not auditing programmatic issues at the FEC, 
most of their audits are confined to the administrative side. 
We do have IG audits that are performed on our procurement 
policies, training procedures, how we procure training. But 
yes, it's correct that we have never had audited financial 
statements.
    Mr. Horn. How would your agency fund the cost of a 
financial statement audit?
    Ms. Doone. Our IG office consists of four employees. It is 
unlikely that they would have the resources among the current 
staff to do the audited financial statements themselves. If 
they were to, they would have to stop working on other 
projects. If that is not a desirable outcome, we would have to 
fund it from the rest of our budget, and at this point, I don't 
know where the Commission would decide to take the funds.
    Those funding decisions are made initially by the Finance 
Committee, and then the recommendations are submitted to the 
full Commission for approval. So I don't know at this point 
where we would take the funds, but they would have to come from 
some program area.
    Mr. Horn. What is the budget now for the Federal Election 
Commission?
    Ms. Doone. For fiscal year 2002, our appropriation is $43.7 
million.
    Mr. Horn. Now I think about eight to 10 years ago, Congress 
gave the FEC about $3 million to computerize your operation. 
They didn't do it. And I remember the Appropriations Committee 
saying I will never do anything for that agency again, which I 
can understand when a group says this is what we need it for, 
we give it to them, they don't use it and just hire more 
people. And the question was, how to get the clients to see the 
various financial matters that we have to put as people running 
for office and the citizens need to be able to access that 
computer base.
    What can you tell me about that computer base now? What 
kind of satisfaction are you giving to either reporters, to 
politicians, to staff, to every citizen that wants access?
    Ms. Doone. Mr. Chairman, over the past few years, we have 
been working very closely with the House Appropriations 
Committee who have been very supportive in funding our 
information technology projects and in fact has been earmarking 
funds for us over the past few years to accomplish that. We are 
in the midst of converting to a client server system for our 
disclosure data base to which you were referring where the 
financial disclosure reports are placed. We are converting into 
the new environment now.
    As you may know, we implemented mandatory electronic filing 
in 2001, so that now over 80 percent of our transactions are 
coming into the Commission electronically. We are moving in the 
right direction to move toward using technology to give a more 
complete picture of disclosure.
    Mr. Horn. Well, we will move from you to Mr. Zirkel on the 
Federal Trade Commission. In your testimony, you indicated that 
the Federal Trade Commission has been audited for the past 5 
years; is that correct?
    Mr. Zirkel. Yes, that is.
    Mr. Horn. And describe the level of effort that went into 
preparing and having audited financial statements for the first 
time.
    Mr. Zirkel. The first time, the first and second year was 
much more difficult because what we found is that the audit 
team had to work much more closely with management in 
developing reconciliations. And when we would ask for, let's 
say for a list of judgments, how much was the agency's 
judgments for the year, that would have to be in fact created 
because those lists didn't exist. As the audits went on over 
the years, what happened with the discipline of the audit was 
that all of a sudden systems begin to develop and the next 
year, the reconciliation was there. The system was in place and 
we learned that the program people would discuss and reconcile 
matters with the finance staff. So as the years went on, the 
cost of the audit from the IG standpoint--it's around $120,000 
a year but the cost of the audit would stay the same. The 
quality of our audits is improving every year. And again, 
intermittently throughout the years we would find some savings 
in the audits to offset the cost of the audit, but we don't 
focus on that.
    I think the IG also has the responsibility to make use of 
this financial statement in order to, not just a throw it to 
management when we find something where we think additional 
benefits are, we will schedule another audit outside the 
financial statement audit to look in that area. We have done 
that over the last few years and that has paid some dividends.
    Mr. Horn. Now you went through this. There are other 
agencies that might go through this as well. What problems, if 
any, did your agency encounter during that first year audit? 
What would you advise other commissions and agencies?
    Mr. Zirkel. I think you start with the proposition that 
management is rather nervous about this whole process. They 
don't know what the costs are or what the outcome is going to 
be. I think even in the finance units they are afraid that they 
are going to fail. You have to start out with the proposition 
that you are there--that as a result of this effort, we're 
going to improve management at the agency and we are working 
together, even though we're independent and we are still all 
working for the taxpayer.
    I think with that idea and also saying that we are going to 
provide some accounting expertise, the development and creation 
of the financial statements requires a high-level of 
professional accounting. It requires FASP standards and 
understanding of OMB's form and content standards. I think the 
audit team can bring some expertise and help management in 
these areas.
    If they are willing to commit the resources to do that, 
then in the first year, it will be successful; it will be 
trying but successful. From there, you can build on that. I 
believe if you get into an area where you have an agency where 
there is a custodial activity statement involved, this is the 
fiduciary side, that it's important for an IG auditor to work 
with an IPA auditor and because a lot of these agencies have so 
many unique programs. If you want to be efficient, you have to 
know the program and IG staff know the program. So a 
partnership between IPA and IG audits would keep the audit 
costs down from the side of the OIG. Those were some of the 
lessons we learned.
    Mr. Horn. The 24 Chief Financial Officer Act agencies are 
also required to issue a report on internal controls and 
compliance with laws and regulations, and to state whether the 
agency is in compliance with the Federal Financial Management 
Improvement Act. Have the Federal Trade Commission auditors 
prepared these reports for your agency? If so, what were the 
results?
    Mr. Zirkel. Yes. We go through the--in the opinion, the 
overall opinion, we not only certify to the financial 
statements, but we certify to internal controls. We go through 
that process and we do note problems with compliance when staff 
reports the information, so we have done that and the agency is 
generally in compliance with its various laws and regulations.
    Mr. Horn. Would you propose any changes to Mr. Toomey's 
bill, H.R. 4685?
    Mr. Zirkel. No. I don't have a personal opinion on the 
level or the size that it should be. I know there has been some 
discussion here today. I would say, though, that to the extent 
that an organization or an agency has no fiduciary 
responsibility, it has a small budget and it has good controls. 
The cost of a financial statement audit should not be 
excessive. My experience is that to the extent that the 
financial offices are operating effectively, the cost of the 
audit is way down. The extent of agency problems really raise 
the cost of an audit. So getting back to answering the 
question, I don't have a limit or a dollar limit so I can't 
really add to that.
    Mr. Horn. Mr. Brachfeld, what about your thoughts on Mr. 
Toomey's bill? Is there anything else that we ought to look at 
there?
    Mr. Brachfeld. Again, I want to reemphasize that I think it 
is very valuable to do this work. I should say some Federal 
agencies contract out most of their accounting to a larger 
agency or larger component, and then they basically minimize 
their own accounting staff. They believe that because somebody 
else is doing their bookkeeping, they don't need to have 
seasoned financial auditors or accountants, I should say, on 
their staff.
    That leads to a climate where I believe fraud can take 
place. I have identified that on a number of occasions in my 
career where, again, they think that somebody else is--they are 
paying the good money to GSA or Department of Agriculture. One 
of the big guys is handling their accounting and they basically 
go to sleep and forget about internal controls and forget they 
need to have an external audit oversight.
    So I support the context of this bill, and again, I am just 
reemphasizing that I am already sinking under a volume of work, 
and I would support any opportunity to put a strong reliance 
that the IG should be given sufficient resources to do these 
audits properly.
    Mr. Horn. That is an excellent point, and we will take that 
into account because you can't just have ``accountants.'' You 
have to get those documents if the leadership of the agency is 
going to use it for management purposes. I think you're right 
about making sure that anybody that is handling cash or 
anything else, or any way of--people, citizens, whatnot, that 
is a real problem. We shouldn't hire auditors. I had an auditor 
when I was president of a university. I had him practically 
stationed at my door. When they moved in, sometimes people 
started running and it worked.
    So the question is what do you do? Anything else we have 
here? I have enjoyed what you have done. Is there anything else 
you want to add on the Toomey bill itself?
    Mr. Engel. I would like to point out since we had a lot of 
discussion about costs and benefits, I want to call attention 
to the results of our survey, figure 3 in my testimony where we 
did discuss that there was, for most parties, reported back 
that the benefits outweighed the costs. I think that's 
consistent with what we've seen in those CFO Act agencies as 
well. I know Ms. Doone had mentioned that she feels they have 
strong internal controls at her agency. When a lot of the CFO 
Act agencies were first being audited, they were self-
supporting, and many of them were identifying some weaknesses 
and controls. But when you started to get external auditors 
coming in and really scrutinizing the processes, you started 
identifying more critical control problems.
    For example, you're aware of all the problems with computer 
security. That is a critical issue that has been identified 
through these financial audits, which you may not be able to 
point to a dollar savings, but you could point out there's been 
the prevention of some losses as a result of improvements made 
to systems controls.
    So, I would say we need to take that into account. These 
were the results of actual agencies that have gone through the 
audit process, many of which volunteered to do this and they 
are saying that in many cases, the benefits substantially 
outweigh the costs. We have seen those types of benefits as 
well on the CFO Act agencies.
    Mr. Horn. Any of you have any other thoughts? Going, going, 
gone. All right, I am going to thank all those besides the 
witnesses which were excellent. This is our staff: J. Russell 
George our staff director and chief counsel was here; Bonnie 
Heald, deputy staff director; Henry Wray, our senior counsel 
was also here for awhile. And we have Justin Paulhamus. He is 
the majority clerk, and Michael Sazonov is the professional 
intern. And the GAO detailee, we are thankful to have here. She 
is on my left, and your right, Rosa Harris, is doing a great 
job. And she will go back to the GAO and say, ``boy, let me 
tell you how those people on Capitol Hill do.'' She will start 
giving seminars, I think, down there.
    And now we have David McMillen, professional staff, long 
time excellent person; and Jean Gosa, the minority clerk. And 
we thank you both. And the court reporters are Julie Thomas and 
Nancy O'Rourke. And we thank you also. It is tough in these 
rooms and whatnot to hear everybody. So thank you very much all 
and we are adjourned.
    [Whereupon, at 3:25 p.m., the subcommittee was adjourned.]
    [Additional information submitted for the hearing record 
follows:]

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