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




THE FEDERAL FINANCIAL MANAGEMENT IMPROVEMENT ACT OF 1996: ARE AGENCIES 
                         MEETING THE CHALLENGE?

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

                                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

                               __________

                              JUNE 6, 2002

                               __________

                           Serial No. 107-199

                               __________

       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


                                 ______

86-570              U.S. GOVERNMENT PRINTING OFFICE
                            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 
JOHN SULLIVAN, Oklahoma                  (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
                       Henry Wray, Senior Counsel
                        Justin Paulhamus, Clerk
           David McMillen, Minority Professional Staff Member


                            C O N T E N T S

                              ----------                              
                                                                   Page
Hearing held on June 6, 2002.....................................     1
Statement of:
    Alderman, Karen Cleary, executive director, Joint Financial 
      Management Improvement Program.............................    41
    Blanchard, Lloyd A., Ph.D., Chief Operating Officer, Small 
      Business Administration....................................    50
    McLean, Donna, Assistant Secretary for Budget and Programs 
      and Chief Financial Officer, U.S. Department of 
      Transportation.............................................    58
    Thompson, Sally E., Director, accompanied by Thomas R. 
      Broderick, Assistant Director, Financial Management and 
      Assurance, U.S. General Accounting Office..................    10
Letters, statements, etc., submitted for the record by:
    Alderman, Karen Cleary, executive director, Joint Financial 
      Management Improvement Program, prepared statement of......    43
    Blanchard, Lloyd A., Ph.D., Chief Operating Officer, Small 
      Business Administration, prepared statement of.............    52
    Horn, Hon. Stephen, a Representative in Congress from the 
      State of California:
        Federal Financial Management Act.........................     2
        Prepared statement of....................................     9
    McLean, Donna, Assistant Secretary for Budget and Programs 
      and Chief Financial Officer, U.S. Department of 
      Transportation, prepared statement of......................    60
    Schakowsky, Hon. Janice D., a Representative in Congress from 
      the State of Illinois, prepared statement of...............    78
    Sullivan, Hon. John, a Representative in Congress from the 
      State of Oklahoma, prepared statement of...................    77
    Thompson, Sally E., Director, Financial Management and 
      Assurance, U.S. General Accounting Office, prepared 
      statement of...............................................    12

 
THE FEDERAL FINANCIAL MANAGEMENT IMPROVEMENT ACT OF 1996: ARE AGENCIES 
                         MEETING THE CHALLENGE?

                              ----------                              


                         THURSDAY, JUNE 6, 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 2247, 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, GAO detailee; Justin Paulhamus, 
clerk; Chris Barkley, new subcommittee staff; Michael Sazonov 
and Sterling Bentley, interns; David McMillen, minority 
professional staff member; and Jean Gosa, minority clerk.
    Mr. Horn. A quorum being present, the Subcommittee on 
Government Efficiency, Financial Management and 
Intergovernmental Relations will come to order. I thank the 
panel for appearing. And if you'll stand and raise your right 
hand, and if you have any assistants behind you that will be 
also talking, the clerk will take all of the names for the 
record.
    [Witnesses sworn.]
    Mr. Horn. The clerk will note that the oath has been taken.
    The Federal Financial Management Improvement Act requires 
the 24 major departments and agencies in the executive branch 
to have systems that can produce timely, reliable, and useful 
information for managing their day-to-day operations.
    [The information referred to follows:]

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    Mr. Horn. The act requires the agencies to implement and 
maintain financial systems that comply with: Federal financial 
management system requirements; applicable Federal accounting 
standards; and the U.S. Government Standard General Ledger.
    It has been nearly 6 years since the act became law. Yet, 
most agencies still do not comply with these three basic 
accounting requirements. In fiscal year 2001, 20 of the 24 
major departments and agencies failed to comply with the act, 
compared to fiscal year 2000 in which 19 agencies failed to 
comply.
    During the July 9th subcommittee hearing, the Comptroller 
General of the United States, Mr. David Walker, noted that 
``Noncompliance with the Federal Financial Management 
Improvement Act is indicative of the overall continuing poor 
condition of many financial management systems across 
government.''
    We recognize that there are long-standing problems with 
agency financial management systems. We also recognize that 
correcting these deficiencies will take time. However, the 
requirements of this act must be taken seriously, and I don't 
think they have been.
    Today, we will discuss the challenges that are preventing 
many agencies from having financial management systems that 
comply with the act. The basic accounting requirements found in 
the Federal Financial Management Improvement Act can, and must, 
be achieved. American taxpayers deserve no less from their 
government.
    [The prepared statement of Hon. Stephen Horn follows:]

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    Mr. Horn. We welcome each of our witnesses today and look 
forward to your testimony to see why things are not happening 
the way they should be happening. We will begin with Sally 
Thompson, the Director of Financial Management and Assurance, 
U.S. General Accounting Office. She reports to the Comptroller 
General of the United States.
    Ms. Thompson.

STATEMENT OF SALLY E. THOMPSON, DIRECTOR, ACCOMPANIED BY THOMAS 
  R. BRODERICK, ASSISTANT DIRECTOR, FINANCIAL MANAGEMENT AND 
           ASSURANCE, U.S. GENERAL ACCOUNTING OFFICE

    Ms. Thompson. Thank you, Mr. Chairman. And I'm very pleased 
to be here today to discuss with you and the other members of 
the committee, if they come in, the challenges that most of the 
Federal departments and agencies are still facing in meeting 
the basic expectations outlined in the Federal Financial 
Management Improvement Act of 1996. Many of those you just 
mentioned.
    The primary purpose of FFMIA is to ensure that agency 
financial management systems routinely--and I stress 
``routinely''--produce reliable, accurate, timely data for 
management decisionmaking. Government leaders will be in a 
better position to invest resources, reduce costs, oversee 
programs and, importantly, hold agency managers accountable for 
the way they manage programs.
    I would like to emphasize this morning that FFMIA is not a 
compliance issue; it's a management tool. And getting a clean 
opinion does not mean that people have a management tool and 
comply with FFMIA. We certainly have seen that to be the case 
when, over the last 5 years, we still only have four Federal 
agencies whose IGs say that they are compliant in FFMIA, and 
yet we have 18 clean opinions and that has been increasing from 
about 13, 5 years ago. So we're continuing to get clean 
opinions, but we're not getting success in FFMIA.
    This decrease also means that agencies have been able to 
achieve these clean opinions, first of all, 5 months after 
year-end, but with an enormous amount of resources, as we see 
in the horrendous numbers of adjustments made. Whenever you 
make adjustments to numbers at the year-end or 5 months after 
year-end, that means that you didn't have information on a 
daily basis on which to make management decisions.
    We need to take FFMIA information from the back room and 
into the board room where management decisions are being made. 
What I mean by this is getting a management tool with 
management information is not just a CFO issue, it is more than 
an accounting issue. It's not a CIO issue, which would be 
hardware/software, but it is a combination of the CIO, the CFO, 
and the program managers working together.
    It also includes integrating budget information with 
program information with performance results and accounting, 
and coming up with what we call cost management information for 
decisionmaking.
    This would provide the information that we need, that 
program managers need to make allocation of resources and need 
to be able to determine the outcomes of their programs.
    I look at systems as being much broader than just hardware/
software. I look at it including the business processes and 
procedures and controls and the type of information that's 
needed to be able to assess whether programs are meeting these 
intended results and outcomes.
    It will take a committed involvement from the Secretary's 
level all the way down to achieve success in FFMIA. It's a 
multidisciplinary process of tackling systems modernization in 
order to reach the success. And again I would say that it would 
include the chief operating officer that could spearhead this, 
but it would include the CFO, the CIO, the budget officer and, 
most importantly, program managers. These officials are best 
positioned to determine what kind of information needs to be 
captured in order to be able to measure the outcomes and ensure 
the results by again combining accounting, budget and program 
systems integrated together.
    Probably one of the key elements of success in FFMIA is 
capturing what we're calling the cost management information. 
It is critical to transforming how government manages the 
business of government.
    We have several ongoing assignments in agencies that we 
hope will result in executive guidance. What we found was a 
real lack of guidance out there on how do you get to good cost 
management information. Again, we have seen, and you've 
probably heard a lot about, activity-based costing and now a 
new term, activity-based budgeting. I would say, combining that 
with activity-based performance, all three of those together, 
will get you cost management information.
    The President's Management Agenda has five areas that 
they're looking at, which includes human capital, competitive 
resources, e-government, and budget and performance integration 
and also improved financial management. I would say to you that 
the implementation of FFMIA is the solid foundation to be able 
to get that kind of information together. In other words, you 
cannot achieve any of the five of the President's Management 
Agenda items without a solid financial system. FFMIA success in 
systems and standards, and the policy area depend on this. If 
we look at the problems, they've been long and they haven't 
really changed over the last 5 years. And I'd be glad to answer 
any questions.
    [The prepared statement of Ms. Thompson follows:]

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    Mr. Horn. Well, thank you very much.
    We have on the floor a motion, and we have to go over and 
answer to it. So we're going into recess now. Relax.
    [Recess.]
    Mr. Horn. We were in recess and out of it. And I'm sure 
we've saved the Nation much from taking that amendment that 
would close us down. So we're going to close them up.
    But anyhow--so, we'll go on with Karen Alderman, Executive 
Director, Joint Financial Management Improvement Program. We 
look forward to your testimony.

 STATEMENT OF KAREN CLEARY ALDERMAN, EXECUTIVE DIRECTOR, JOINT 
            FINANCIAL MANAGEMENT IMPROVEMENT PROGRAM

    Ms. Alderman. Thank you, Mr. Chairman. I'd like to submit 
my statement for the record and provide brief remarks.
    Mr. Horn. Your statements are automatically put in the 
record when I call your name.
    Ms. Alderman. OK.
    The President's management goal to improve financial 
management requires quality systems, data and processes. 
Currently, most Federal agencies use custom development--
custom-developed financial systems that are antiquated and 
unable to support current requirements of FFMIA.
    Also, the Federal Government is moving to commercial off-
the-shelf software to meet their needs. In 1998, 40 percent of 
financial applications under development that are being phased 
in were commercial off-the-shelf software. In 2001, 60 percent 
were.
    JFMIP has focused its recent activities on functional 
requirements for financial systems, software qualification 
testing, the intergovernmental transactions and elimination 
study, financial management and human capital and information 
sharing and outreach.
    Regarding financial system requirements, JFMIP's role is to 
identify and clearly describe those requirements in a series of 
documents so that they're readily available to agencies, 
auditors, vendors and other stakeholders. The JFMIP Framework 
for Federal Financial Management Systems, issued in 1995, 
identified 15 components of the Federal financial management 
system including core managerial cost accounting and 13 
subsidiary systems. At the time the FFMIA was passed in 1996, 
the Core Financial System and six of the subsidiary requirement 
documents had been issued one time and many of those were out 
of date.
    Starting in 1998, JFMIP began an intensive effort to update 
these documents, 10 have been issued between 1998 and 2001, and 
we're currently working in partnership with the Procurement 
Executive Council to issue acquisition and financial system 
interface requirements. We have also worked to develop non-
income tax revenue system requirements, and we have recently 
partnered with the CIO Council to update the framework document 
for the incorporation of the Clinger-Cohen Act and produce the 
financial segment of the Federal Enterprise Architecture.
    In addition to the requirements, we have worked to test and 
qualify Core Financial Systems. This process was initiated in 
1999. The components are up-to-date Core Financial System 
Requirements, an open and comprehensive testing and 
qualification process, establishment of an open knowledge base 
for all to see what those test requirements and outcomes are, 
and a change in OMB policy that mandated that Federal agencies 
use qualified software when acquiring new COTS systems for Core 
Financial Systems. This process transition occurred October 1, 
1999. Ten software products offered by eight vendors and one 
government software cross-service provider were qualified under 
the 1999 test and the 2000 incremental test. In 2002, about 
half the existing certificates will expire, and the balance 
will expire in 2003.
    JFMIP designed the test process to ensure that Federal 
requirements and vendor offerings remained aligned. We have a 
feedback mechanism to update requirements, and in 2002 we will 
update that test based on the requirements issued in November 
2001. We updated those requirements based on feedback from the 
agencies about what was working, and what did not work as well 
and needed clarification. Areas like upward and downward 
adjustments and better closing processes were identified, and 
also new requirements were added to capture more information on 
full cost and revenue to unique cost objectives, as well as 
daily internal reports.
    In general, revisions will help ensure that core software 
has functionality to support the financial aspects of 
performance reporting required under the President's Management 
Agenda.
    Our second round of testing, which will be finalized at the 
end of this summer, will basically double the amount of test 
steps to more thoroughly test existing requirements and new 
requirements.
    In addition to these two agendas, I'd like to briefly 
mention intergovernmental elimination and financial management 
human capital. The intergovernmental elimination study 
undertaken in 2001 was to address problems identified that make 
it difficult for the government to properly identify 
intergovernmental transactions and balances and allow the U.S. 
Government a consolidated financial statement to achieve a 
clean opinion.
    The study found that the quality of the financial data 
throughout the Federal Government is poor. Agencies cannot 
identify their true business partners and, consequently, 
reconcile the differences that may exist. Common standards and 
business practices to support consistent recording of events 
are missing and technology needs to be applied. OMB is 
undertaking efforts today to address these issues.
    Thank you very much.
    Mr. Horn. Thank you.
    [The prepared statement of Ms. Alderman follows:]

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    Mr. Horn. And we now move to your colleague, Lloyd A. 
Blanchard, Ph.D., Chief Operating Officer, Small Business 
Administration.
    Glad to have you here, Mr. Blanchard.

    STATEMENT OF LLOYD A. BLANCHARD, Ph.D., CHIEF OPERATING 
             OFFICER, SMALL BUSINESS ADMINISTRATION

    Mr. Blanchard. Thank you, Mr. Chairman, and good morning. 
Thank you for inviting the Small Business Administration to 
offer testimony today on the agency's financial management 
program, and specifically its efforts to comply with Federal 
Financial Management Improvement Act of 1996.
    Let me start by saying that improving financial management 
is one of the goals of the President's Management Agenda and 
therefore is a top priority of SBA. With the active involvement 
of SBA's Administrator, Hector Baretto, the Agency has recently 
put into place a top-flight management team to accomplish this 
goal. As one of the 24 principal agents, he's named in the 
Chief Financial Officers Act of 1990. SBA has a career CFO, Tom 
Dumaresq, who is here with me today and reports directly to the 
Administrator to oversee SBA's financial management program.
    As Chief of Operations, I work closely with the CFO to 
ensure coordination and integration of all strategic management 
decisions and general operations with SBA's financial 
management program.
    The Federal Financial Management Improvement Act requires 
enhanced compliance in three specific areas: financial 
management system requirements, Federal accounting standards, 
and the general ledger and the standard general ledger. These 
requirements and the other budget and performance initiatives 
SBA has undertaken are part of the Agency's comprehensive 
financial management program to provide the taxpayer and 
Congress full assurance that SBA is acting as good stewards of 
its appropriated resources.
    SBA has an aggressive internal control program, one that 
mitigates risk by ensuring a positive control environment. The 
best written procedures in the world would not be effective 
without the active involvement of senior management conveying 
the message that integrity cannot be compromised. Moreover, SBA 
produces annual financial statements that are audited by an 
independent public accounting firm under contract with SBA's 
Office of the Inspector General.
    I am proud to report that SBA has been recognized as a 
leader in its development of a cost information management 
system which is based on an activity-based costing model 
allowing for full cost allocation on all SBA activities. SBA 
continues to fine tune this model.
    As required by the President's Management Agenda, SBA is 
integrating this cost information into its planning and 
decision processes for the fiscal year 2003 and 2004 budget 
cycles. While President Bush has recognized the need for 
improvement in this area, Federal financial management 
guidelines are extremely complex, and SBA faces a difficult 
task to make the changes necessary for improvement. Thus, in an 
effort to stay ahead of the curve on new statement reporting 
requirements, SBA implemented OMB bulletin 01-09 for its fiscal 
year 2001 reporting 1 year earlier than required.
    In the attempt to understand and implement these 
substantial changes, production of the fiscal year 2001 
financial statements was delayed in getting to the auditors and 
included some mathematical and classification errors. While 
these errors were corrected in the final statements and the 
audit was completed on time, the delay in the internal review 
process produced material weakness on the timeliness and 
quality of information provided in SBA's reporting process.
    Mr. Chairman, although this was very disappointing, SBA 
believes it made the right decision at the time and will be in 
a better position for the future because of it. More challenges 
still lie ahead for us, and to be successful, SBA will need to 
place more attention on improving its financial management, 
especially in replacing ineffective and outdated financial 
systems and processes.
    In fiscal year 2000, SBA decided to purchase a financial 
management system using Oracle software and implement this 
system beginning in fiscal year 2002. As planned, SBA did bring 
the new system online at the beginning of the fiscal year. 
While the later versions--while the later versions have been 
implemented throughout the government, their earlier Oracle 
system has not been widely implemented in the Federal 
Government, and consequently, the true results and cost of the 
system to SBA are still relatively unknown. To date, the system 
has had much less functionality and produced much higher cost 
than we expected. SBA is still in the process of working out 
these implementation bugs, Mr. Chairman.
    Closing fiscal year 2002 under this system can still prove 
to be a challenge to SBA at the end of the year as the end of 
the fiscal year rapidly approaches. These difficulties have led 
SBA to review contingency options, including moving to the 
latest release much earlier than we had originally expected.
    Mr. Chairman, let me conclude my statement by reiterating 
that SBA is fully committed to continuing the improvements of 
its financial management processes and systems. While the 
Federal guidelines and the President's Management Agenda drive 
SBA toward accomplishing this end, it is simply the right thing 
to do. It is only with modern systems, transparent reporting, 
sound and accurate financial information and accountability 
that the performance of SBA's programs will be able to be 
accurately evaluated. This will give SBA the opportunity to 
improve efficiency and effectiveness in services and programs. 
This is what the President and Congress expect, the taxpayer 
demands, and SBA intends to deliver.
    Thank you, Mr. Chairman. I'm happy to answer any questions 
that you or other members of the subcommittee may have.
    Mr. Horn. Thank you.
    [The prepared statement of Mr. Blanchard follows:]

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    Mr. Horn. Our last presenter is Donna R. McLean, Assistant 
Secretary for Budget and Programs and Chief Financial Officer 
of the Department of Transportation.
    Give my regards to your Secretary. It doesn't matter 
whether he's a Democrat or a Republican; he's a great public 
servant.

 STATEMENT OF DONNA McLEAN, ASSISTANT SECRETARY FOR BUDGET AND 
   PROGRAMS AND CHIEF FINANCIAL OFFICER, U.S. DEPARTMENT OF 
                         TRANSPORTATION

    Ms. McLean. Thank you, sir.
    Mr. Chairman, I appreciate the opportunity to discuss DOT's 
progress in achieving its goals for the Federal Financial 
Management Improvement Act of 1996. And today I will answer 
your questions regarding why DOT is not yet compliant with 
FFMIA, what we are doing about it, and the challenges we are 
still facing in trying to become compliant with the FFMIA.
    Within DOT, we take financial management very seriously and 
put a significant amount of energy and effort into taking care 
of the public's money. Part of our stewardship role is to 
clearly show DOT's performance and what benefits have been 
provided by the funds received.
    Our performance report was selected as the ``Best in 
Government'' this year by the Mercatus Institute. We want our 
financial management to reach this same level. The standards 
for success for financial management, as outlined in the 
President's Management Agenda, lay a roadmap showing us the 
way, and clearly achieving full compliance with the 
requirements of FFMIA is critical to our success.
    In our quest for success, DOT has faced a number of 
challenges in reaching full compliance with FFMIA. First, we've 
been hampered by an old accounting system that does not use the 
Standard General Ledger; second, our financial statements are 
not produced directly by our core accounting system; third, our 
old accounting system does not have the capability to provide 
cost accounting information in a timely manner; finally, our 
inspector general has reported that DOT has two material 
weaknesses, one in FAA's property and another in DOT's 
information security program.
    The first question one might ask is, how did we get into 
this position? The legacy accounting system in DOT was 
developed in the 1980's as a single agency accounting system. 
Over several years in the mid-80's we expanded the system to 
cover all of DOT. In 1997 we determined that this unique old 
system could not meet FFMIA and was not cost effective, and we 
needed to find a new accounting system to meet FFMIA 
requirements.
    In 1998, we selected Oracle Financial--Federal Financials, 
a commercial off-the-shelf package that has been identified by 
JFMIP as meeting the Federal accounting requirements. Oracle 
Financials meet the requirements of FFMIA by providing the 
ability to use the Standard General Ledger, producing the 
financial statements as part of the core system, providing the 
capability to give us cost accounting system information in a 
timely manner, and having the capability to account for 
property, plant, and equipment.
    We are now about halfway through implementing Oracle 
department-wide. Within the DOT, we have called this system 
Delphi. We have about eight agencies up on Delphi right now, 
and the rest will be completed over the next 11 months. Getting 
all agencies onto this new financial system will provide a 
major step toward full compliance with FFMIA. Oracle will 
largely solve the problems associated with the Standard General 
Ledger and financial statements. We still face the challenge of 
providing cost accounting data to our managers.
    Three DOT agencies are making good progress in the area of 
cost accounting. FAA is leading the way in providing accounting 
data to program officials. They have completed the installation 
of a cost accounting system covering approximately 75 percent 
of its cost and expect to have 100 percent of its cost covered 
by November 2002.
    The Coast Guard is also making progress on moving toward 
cost accounting. At this point, they're able to identify the 
cost by activity on an annual basis. The newly created TSA, or 
the Transportation Security Administration, has the advantage 
of being set up in Oracle with cost accounting from scratch. 
TSA's cost accounting structure has already been established 
and a pilot project is under way to capture labor costs at the 
activity level. Our goal is, for all of DOT agencies, to meet 
the cost accounting requirements within the next 2 years, and I 
believe we are on track to accomplish that goal.
    We are also addressing the IG's concerns from our 2001 
audit. FAA continues to have material weaknesses in its plant, 
property and equipment. This weakness relates to the proper 
calculation of the net book value of property held by FAA. The 
final solution requires that FAA's property accounting system 
be integrated with the core accounting system. This will occur 
when FAA moves to Oracle in November 2002.
    The IG also noted material weaknesses in our information 
security program. Regarding our need to certify our financial 
feeder systems, we have instituted a policy that requires the 
agencies to have their feeder systems accredited and certified 
before they can interface with the Oracle system.
    Regarding the IG's concerns on our network security and the 
completion of a background check, this falls under the purview 
of our Chief Information Officer, and we are actively working 
with this office and the affected agencies to resolve these 
items within the next year.
    Achieving compliance has been and continues to be a 
challenge for the Department. We have a plan and we are on 
track. Upgrading our accounting system addresses many of the 
system-related issues that have caused us problems in the past.
    Implementing changes in the accounting processes that will 
allow us to take advantage of the cost accounting capabilities 
in the new system is still a work in progress. I am committed 
to staying on the path to reach compliance with FFMIA and 
improving the financial management at the Department of 
Transportation.
    Again, Mr. Chairman I thank you for the opportunity to 
testify before you, and I would be happy to answer any 
questions you might have.
    Mr. Horn. Thank you very much.
    [The prepared statement of Ms. McLean follows:]

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    Mr. Horn. And we'll start on the various questions with 
Sally Thompson of the General Accounting Office, and let's 
start with the simple ones.
    In your opinion, what it will take for agencies to become 
compliant with the Federal Financial Management Improvement 
Act?
    Ms. Thompson. I think it starts at the top, Mr. Chairman. 
The Secretary must be committed to reaching success and 
compliance of FFMIA. They also need to then hold people 
accountable.
    We had thought that one way to do that would be to delegate 
to their COO the responsibility for reaching success in 
financial management information. The COO could then pull 
together a team made up of the CFO, the CIO, program managers, 
budget people, and the IGs. They could put a master plan 
together, a roadmap, a blueprint. If you don't have a plan and 
don't know where you're going, you don't know how to get there. 
And then that plan could have milestones, good project 
planning, holding people accountable; then they could report 
back up to the Secretary, and then it goes up to OMB and to the 
President.
    And we do also feel there needs to be public reporting on 
this.
    Mr. Horn. When you say ``public reporting,'' what do you 
mean?
    Ms. Thompson. Well, I think that, again, to continue with 
the type of oversight hearings that you're having; you know, 
it's one thing to issue a report, it's another thing to also 
have a hearing on it and to raise the visibility of the 
importance.
    I think here, over the years, we've been able to determine 
not only the issues we have over there on the board that have 
continued, but what you heard today is the importance of cost 
management information. It's not all about just systems; it's 
about getting the information--using the information to make 
decisions.
    Mr. Horn. In your study of all this, do you think the 
person on the level, let's say, below the GS-12, if we're still 
in that group, do they really take it seriously? Or is this 
simply for the Assistant Secretaries and the Under Secretaries?
    Ms. Thompson. It has to be permeated through the agencies, 
I think. And you know, my background, coming out of the 
agencies when I was previously a CFO, is that it was a CFO 
problem. And it was the CFO and maybe the deputy and maybe the 
person that was head of systems under the CFO. It was never 
considered a program manager's issue. And that is what I feel 
needs to--we didn't actively engage the program managers. They 
are the ones to tell us what information needs to be captured, 
and then have the CFO and the CIO get the hardware/software 
together to be able to capture that. I think we need to focus 
on performance management outcomes and results, how are we 
going to measure it, where is the data going to come from, how 
are we going to capture it, and then how do you get it in the 
system and report it out.
    Mr. Horn. In the General Accounting Office document, it's 
expressed concern that auditors are not doing enough to 
determine whether agencies really are complying with the 
Federal Financial Management Improvement Act.
    What's the problem and what should be done to correct it?
    Ms. Thompson. Well, we believe that the act says that both 
the agency head, as well as the auditor, should report whether 
an agency is in compliance; and we believe that reporting will 
require a yes or a no.
    What is happening is that for agencies that are compliant, 
the auditors are saying that nothing came to our attention, 
which in the auditing standards is ``negative assurance,'' and 
that means that they didn't necessarily specifically test for 
all of the compliance of FFMIA.
    To do ``positive assurance'' quite often requires 
significantly more testing. And we believe that the act says 
reporting whether that is a yes or a no is positive assurance. 
We are getting negative assurance.
    Mr. Horn. What about OMB, do you--do you ensure any 
compliance with the FFMIA in your work? How helpful has OMB 
been?
    Ms. Thompson. I think that they have put some guidance out 
there. We do not feel that the processes are rigorous enough 
for it. And we believe that the agencies and the auditors are 
interpreting that to say that negative assurance is just fine, 
that nothing came to our attention; and we believe that if 
there were positive--if it were interpreted by positive 
insurance--there would be more rigorous testing on that.
    It's not been a big issue right now because, as you know, 
we only have four agencies that the auditors say that they are 
complying. But we're hopeful, as the new systems come into 
place and get implemented, and more data is getting captured, 
we believe that the auditors need to have a specific audit plan 
just to look for compliance with FFMIA.
    Mr. Horn. The views of the Office of Management and Budget 
on this issue are very important. Accordingly, the record will 
remain open for the purposes of including OMB's testimony.
    I note that Mark Everson, Comptroller at OMB, will testify 
before us on the Single Audit Act, and we will question him on 
this issue as well. He was a breath of fresh air, as far as I 
was concerned. I hate to see him not have the chance to give us 
some perspective from a control agency such as OMB.
    The few agencies that bother estimating their erroneous 
payments reported that they improperly spent about $20 billion 
last year.
    How does compliance with the Federal Financial Management 
Improvement Act relate to improper payments? And is that an 
accurate figure of $20 billion?
    Ms. Thompson. Let's start, is that an accurate number.
    I do not believe that we know that for sure. The work that 
the General Accounting Office has done--and I have our 
Assistant Director, Tom Broderick, here today, who's been in 
charge of a lot of that work--would tell you that we suspect 
that it's a lot larger than that. And the reason we don't know, 
again is because there hasn't been a rigorous process in place 
for the agencies to really determine what their improper 
payment total really is.
    And we could certainly answer that: Is it a part of FFMIA? 
I believe it is. We talk about good management information in 
which to make management decisions. Part of that decision 
should be to minimize improper payments. So therefore I would 
consider it a part of FFMIA, even though I think it needs a 
very specific focus on it.
    Mr. Horn. Now, to what degree are the improper payments 
relevant to the Federal Financial Management Improvement Act?
    Ms. Thompson. Well, certainly $20 billion that we know, 
that has been identified, could be very relevant to the Federal 
Government's management of its resources. I think right there 
that makes it incredibly important to FFMIA.
    I think it goes back to then having the right kind of 
information to manage from, to make resource allocation 
decisions. How are we going to know whether a program is 
achieving results if we don't know that it's going to the right 
people?
    Mr. Horn. We'll get into some of that later--but what 
should agencies do to reduce these massive overpayments?
    Ms. Thompson. Can I let our Assistant Director, Mr. 
Broderick, answer that for you?
    Mr. Horn. Certainly.
    Mr. Broderick. I think there are several things that need 
to be done to really address the improper payments problem. We 
issued a report back in October that kind of provided a 
structure for that.
    Essentially what we're looking at is improving internal 
controls over programs. There's really five areas within that 
control structure that have to be addressed. We need to make 
sure that there is a strong control environment over the whole 
area of improper payments. When we're talking about a control 
environment, we're talking about establishing a culture of 
accountability.
    We have to make sure that the program managers and the 
assistant directors or the assistant secretaries and the 
secretaries and even the people over at OMB understand that 
this is an important area, understand that we expect results, 
understand that we expect improvements.
    The agencies also have to go through a process which we 
refer to as risk assessments. Essentially, it's critically 
important for the agencies to understand if they have problems 
in their programs, what those problems are, and the extent of 
those problems. By knowing that information, you can determine 
where you should focus your efforts, what your high-risk areas 
are, and you could have a much more logical approach to just 
focusing on those areas where the problems are, as opposed to a 
shotgun approach and trying to look at everything in the world, 
when in fact a whole lot of those efforts might then be 
useless.
    Once you've identified where your problems are, then you 
have to determine what is the most cost-beneficial or cost-
effective way to address those problems. You have to determine 
the actual actions that you're going to take. And there's a 
whole laundry list, basically, of the kinds of things that 
agencies have used. As part of the work that we did, we went to 
several foreign countries to see what they were doing in some 
areas where they seemed to have some success. That laundry list 
includes not only computer kinds of applications and data 
sharing and different things along that line, but it also gets 
down to educational activitie--making sure that their people, 
the agency people, understand the programs, so that when 
somebody comes in as a beneficiary and says, what do I qualify 
for, that the agency people ask the right questions and make 
the right determinations and collect the right information.
    We have a lot of problems in some of those areas.
    Once the different activities are implemented, then it's 
also critical that information be fed back to the program 
managers, the agency management, OMB and the Congress so that 
they can evaluate and judge what is going on, the progress that 
is being made in those different areas, so they can establish 
performance measures and set targets for what the expectations 
would be for future efforts and for improvement in the future.
    In a capsule, those are the general areas where we think 
the agencies need to focus attention if they are going to 
address their improper payments problems.
    Mr. Horn. I think the General Accounting Office has done a 
wonderful job on risk assessments. They put out their pamphlets 
to everybody in the Congress of the new Congress. I'd be 
curious as to whether the IG, the Inspector General, or the 
Chief Financial Officer or the Chief Information Officer, 
should they be the ones to be the oversight within an agency; 
or how do you look at that?
    Or is it--it obviously ought to be the budget--budget 
people within an agency. Where is the best place to----
    Mr. Broderick. I think something that Ms. Thompson said a 
few minutes ago is appropriate here, just as appropriate as it 
was for FFMIA.
    Basically, what we have in the different agencies is, we 
have program managers, we have CIOs, we have CFOs, we have our 
IGs, we have a lot of individuals with institutional knowledge, 
based on the work they do about programs and different kinds of 
activities and systems. Things that work and don't work.
    I think we need a coordinated effort within each of the 
agencies to pull those people together to try to address the 
problem areas and come up with solutions, so that you don't 
just have one group over there trying to figure out what has to 
be done and what fixes are needed when, in fact, there might be 
other people who could provide a lot of best-practice kinds of 
information that might be useful in helping come up with best 
ways of addressing these problems.
    Mr. Horn. Should agencies be required by law to estimate 
their improper payments?
    Mr. Broderick. How far do you want me to go on this, Sally?
    I think that it's critically important because of the 
magnitude of improper payments that we're looking at now--and 
that's just what we know about--that improper payments be 
reported in a public manner. Certainly legislation is much more 
binding than any kind of administrative activity or a circular 
or whatever from the Office of Management and Budget. It would 
certainly raise the level of interest, I think, at the 
different agencies that this kind of thing has to be done and 
that there is interest here.
    I think it could certainly be a benefit to have it in 
legislation, as opposed to possibly some of the other 
mechanisms that might be put in place to require reporting.
    Mr. Horn. Ms. Thompson, it looks like she wants to get her 
seat.
    Mr. Broderick. I have no doubt.
    Mr. Horn. You're happy--or you can have two or three chairs 
over there.
    Ms. Thompson. I would definitely agree with everything Mr. 
Broderick said, Chairman Horn.
    First of all, if you don't measure it, you can't fix it. If 
it doesn't get reported there, it doesn't have the visibility 
that it needs to get the problem solved.
    Mr. Horn. And you would agree with his answer, I take it, 
in terms of improper payments and this kind of thing?
    Ms. Thompson. Absolutely.
    Mr. Horn. Later today I will introduce a bill that will 
require all departments and independent agencies in the 
executive branch to estimate their erroneous payments. Congress 
and the administration must understand the scope of this 
problem before we can find the appropriate means to correct it. 
We welcome your thoughts on that.
    Ms. Thompson. Thank you.
    I believe that Mr. Broderick has been working with the 
staff on some issues. I think he identified, first of all, it 
has to start at the top. It has to create the environment that 
there is an awareness there, that there is a process for 
measuring it and, more importantly, a commitment to correct it 
and to hold accountable people that are going to be working on 
reducing what we know is the $20 billion and which may be 
significantly more.
    Mr. Horn. Is it right to use ``erroneous'' or should we use 
``improper''?
    Ms. Thompson. We consider the two terms synonymous. OMB, in 
the President's Management Agenda, has used ``erroneous 
payments.'' We have used ``improper payments'' for a long time, 
so we've continued to do that. But in any public reporting 
since the President's Management Agenda has come out, we have 
made it clear that we consider those two terms synonymous. So 
if you're comfortable with using ``erroneous payments,'' which 
then ties into the President's Management Agenda, we're fine 
with that.
    Mr. Horn. What I'm thinking about is, if it's really 
improper, maybe it should be turned over to the U.S. attorney. 
That's never happened, to my knowledge, when somebody went 
beyond their budget, I don't think for 100 years anything's 
been done about it. But there might be such a tremendous amount 
for one area or one agency or one department, and the question 
is, if we write into law that's going to be looked at very 
carefully, what do you mean by that?
    Ms. Thompson. I think when there's been fraud identified in 
improper payments, from my background at the Ag Department, 
those were turned over to the Justice Department. And so I 
think in that respect, they----
    Mr. Horn. Did they ever do anything, the Justice 
Department?
    Ms. Thompson. I can't answer that. I didn't followup on it.
    Mr. Horn. Did you send it over there to the Department of 
Justice?
    Ms. Thompson. There was the starting of investigations when 
I left.
    Mr. Horn. So it's still in, or what?
    Ms. Thompson. I don't know for sure. I've been gone for a 
while.
    Mr. Horn. Well, they have a lot of big dark corridors and 
maybe it's passed away in one of those corridors. So, you know, 
that's fascinating, and we'll try to followup on that.
    Ms. Thompson. OK.
    Mr. Horn. What's the name of the improper activity on that.
    Ms. Thompson. It would be----
    Mr. Horn. Is it a particular case of people or something 
that happened erroneously?
    Ms. Thompson. It's been a while, so for the record, I 
couldn't really state; but we'd be glad to followup on that and 
see where things are.
    Mr. Horn. Well, to quote Connie Chung, maybe ``just whisper 
in my ear.''
    OK, Karen Alderman, Joint Financial Management Improvement 
Program. In your testimony, you stated that most financial 
management systems used by Federal agencies are internally 
developed products, but that the agencies are rapidly moving to 
commercial off-the-shelf software. What's been the agency's 
experience in implementing commercial off-the-shelf software?
    Ms. Alderman. I would say there's been a history of change 
within the software market. Basically, in the 1980's, Core 
Financial Systems started to be COTS, but they're highly 
customized commercial off-the-shelf product. What has occurred 
in more recent history is that the Federal Government has tried 
to organize the market for COTS more systematically. The JFMIP 
testing and qualification process is an example of that. The 
goal is to create a set of capabilities in the commercial off-
the-shelf marketplace that meets Federal requirements without 
customization.
    The reason for that is to manage cost and risk. A fully 
custom designed commercial Core Financial System would cost 
about $120 million and take 5 years to implement before the 
first transactions ever pass through the system. A comparable 
noncustomized COTS product or Core Financial System would take 
$28 million and 3 years to implement if you can successfully 
implement it without customization.
    We say we're on a continuum.
    Success is more than just the software. It's senior 
leadership commitment to the new system, it is trained staff 
and capabilities, it is changed management, and it is training 
of the work force for new systems. So it's more than just 
software. So there's been improved success, but it's certainly 
not an easy process today.
    Mr. Horn. Does the company that has the off-the-shelf 
software also have training plans? They've put it all together. 
Do they provide you with that training or is there something 
unique here?
    Ms. Alderman. I don't think it's a unique process. I think 
that there are different requirements, system to system; you 
know, each company presents their products, some are easier to 
use than others.
    But basically, aside from providing some training--the 
trainer type of service, it is up to the agency to retrain its 
work force and to implement the business process changes 
inherent in that product that are necessary to support that 
product. So it's really an agency responsibility to retrain the 
work force to support a new system.
    Mr. Horn. In my background and reincarnation as a 
university president, I decided after numerous problems with 
software/hardware, everything else, that they would--I would 
always be at the top to get something done, and that's the 
alpha program. But, frankly, I would never again, and it would 
be the zebra program, because somebody else can easily try to 
deal with this problem. And if we can copy what's done in 
industry in some of this, we ought to take advantage of it, see 
how it works.
    Ms. Alderman. I agree, sir.
    But I would also comment that industry has had similar 
challenges for implementing new systems. Surveys of private 
industry implementations of enterprise resource programs or 
large IT projects, only 9 percent come in on time and budget on 
function. So the government shares the challenge that industry 
shares with new systems.
    Mr. Horn. How many and which agencies currently use systems 
that have been certified by the Joint Financial Management 
Improvement Program?
    Ms. Alderman. The Core Financial System, which is the only 
area where we do qualification tests, between 1999 when we 
started this process and 2006, 20 of the 24 CFO agencies have 
indicated plans to replace their Core Financial Systems, and 
virtually all these replacements will be COTS and the COTS will 
be qualified by the JFMIP functional testing process.
    Mr. Horn. Could you elaborate on the system's software 
qualification process and the impact this process could have on 
an agency's ability to become compliant with the Joint 
Financial Management Improvement Program?
    Ms. Alderman. Our process includes requirements definition 
and testing; and what it does is provided assurance at the 
point of acquisition of software that the software will meet 
the functional requirements--many of which are critical to 
FFMIA: That includes general ledger management, funds 
management, payables management, receivables management, cost 
management, and reporting.
    At the time we started this process, we were a follow-on 
process to an earlier process which was called a ``mandatory 
FFMS schedule.'' About 25 percent of Core Financial System 
Requirements were tested as part of that procurement process. 
This didn't provide a lot of assurance to the agencies; plus 
the testing process was--as part of the procurement process, 
and it wasn't visible to agencies how products were tested.
    In 1999 and 2000 incremental tests, we tested about 95 
percent of requirements in part or in whole. We have 
subsequently reviewed all our tests and agency implementations 
for issues. We've clarified requirements further, added cost 
requirements, enhanced some areas where we found that the 
agencies were having difficulties. The follow-on test in 2002 
will be even more robust.
    So we have raised the bar over time, and all software 
vendors in this market have had to improve their software. So 
it provides a step-up, it provides a better tool. But there are 
still these other issues in implementation that have to be 
done. Feeder system information, conversion success, training, 
leadership, all these types of things to be successful in an 
agency.
    Mr. Horn. Can an agency upgrade its certified software 
without additional approval by the program?
    Ms. Alderman. What we do is, we qualify software by 
version. OMB sets policies that the agency use qualified 
software. It's our process to just keep versions and agency 
requirements aligned, and OMB sets the policy.
    Mr. Horn. Does GSA have a role in this? They're out there 
buying products for agencies all over town.
    Ms. Alderman. GSA is required to make sure if a vendor 
that's qualified requests to be on one of their schedules, they 
will place it on their schedule for the normal process of 
procurement of schedules.
    Mr. Horn. What impact does the poor condition of the 
financial systems have on the goals of financial management 
reform legislation?
    Ms. Alderman. Which legislation?
    Mr. Horn. What impact does the poor condition of financial 
systems, which seem to be--have on the goals of financial 
management reform legislation? Is there--is there an impact in 
that area?
    Ms. Alderman. Yes, there is. Basically, agencies have used 
manual processes to connect all the dots, and that's where they 
are today; and they will not be able to do that in the 
accelerated timeframe for financial reporting unless they 
change their business processes, have more automated systems 
and less data reentry.
    Modern tools are available. It's just the challenge of 
getting them implemented and supported in the agencies. So it's 
a critical tool. It's not the whole answer; they're a critical 
tool.
    Mr. Horn. OK, we'll move to one of the key agency members, 
and that will be Dr. Blanchard, Chief Operating Officer for the 
Small Business Administration. In your testimony you stated 
that the Small Business Administration's noncompliance with the 
Joint Financial Management Improvement Program in fiscal year 
2001 caused a slippage on the President's Management Agenda 
score card from a ``yellow'' to a ``red.'' What caused the 
noncompliance?
    Mr. Blanchard. Yes, sir, we did slip in spite of the 
improvements in all of the other areas in the financial 
management arena.
    We tried to implement new reporting requirements as per OMB 
bulletin 01-09. What we wanted to do was try to implement that 
1 year early so that we can get a handle on these new 
requirements. In that process, in trying to wrestle with some 
of those new requirements. We fell short in terms of timely 
reporting.
    The auditors caught a couple of errors, and they were 
ultimately corrected. It was that lack of timeliness that 
created the material weakness and, therefore, automatically 
downgraded our score in the President's Management Score Card.
    Mr. Horn. Well, we all make those mistakes. In your 
testimony, you stated the SBA has received a clean or 
unqualified opinion for the past 6 years, yet the SBA did not 
comply with the Federal Financial Management Improvement Act 
until fiscal year 2000.
    Mr. Blanchard. That is correct, sir. I guess the standards 
for FFMIA compliance are quite a bit different from standards 
used by the auditing community, and I would say that FFMIA 
probably has more stringent standards, which are welcomed by 
this agency, but still present a challenge for us in meeting.
    Mr. Horn. The General Accounting Office stated that most 
agencies do not have timely, accurate, and useful information, 
including cost data. How useful has the implementation of 
activity-based costing been for your agency?
    Mr. Blanchard. Well, it has been very useful. Activity-
based costing allows us to determine the full cost of a 
particular activity. As you know, organizations--public 
agencies are organized with overhead in support departments and 
then provide different programs through different program 
offices, and to determine what the cost of one program is is 
quite a daunting task, because you have to determine what 
proportion of the HR function was dedicated to that program and 
what proportion of the accounting function was dedicated to 
that program.
    So the implementation of that model has helped us very 
clearly identify the unit costs, so that we can make program 
cost comparisons and, therefore, measure our performance with 
that cost component included, and make judgments about 
budgetary allocations based on those various cost differences 
and performance differences.
    Mr. Horn. Do you believe that other agencies would benefit 
from using this method of costing?
    Mr. Blanchard. I do indeed, sir. We have been contacted by 
other agencies, in fact, asking about how we have implemented 
and how we have--you know, what type of model we use with 
regard to the activity-based costing. So it does seem that 
other agencies are interested.
    Mr. Horn. What is the greatest challenge for SBA in 
becoming compliant with the Federal Financial Management 
Improvement Act?
    Mr. Blanchard. I think the greatest challenge for us is 
really making sure that the automated system, the COTS 
software, operates properly.
    As I mentioned in my testimony, Mr. Chairman, we started 
early, trying to move in this direction, and procured a 
software package that predates the software package that is now 
used by other agencies in the government. Our use of that 
earlier system has caused us some problems, and we are working 
to change that.
    I have learned, even just today, that some of my colleagues 
in other agencies have found success with the later release 
from the same company. So we are--we obviously have pause in 
going with that related release because of our lack of success 
in the earlier release, but we are considering options, and 
they include moving to that more recent package.
    Apparently, our problems have been--it is the recent 
package that is being supported; the earlier package, the 
support has dropped off. So we are a little disturbed by that 
and are working with that company to----
    Mr. Horn. Join the club.
    Mr. Blanchard. Well, thank you, sir.
    Mr. Horn. It is a long club, starting with me.
    Mr. Blanchard. But I think for us, the keys of compliance 
that were mentioned by Ms. Thompson earlier, including senior 
management leadership with regard to delegating budgetary and 
financial responsibility to the chief operating officer are 
something we have already achieved at SBA. I am the lead person 
on financial matters at the agency, and of course we do engage 
in cost information management and the public reporting that 
Ms. Thompson also referred to. So we feel like it is just the 
implementation of the COTS package that prevents us from being 
compliant.
    Mr. Horn. Well, Ms. McLean, I have a couple of questions 
for you, and then I think we will move on.
    What are the greatest challenges for the Department of 
Transportation in being compliant with the Federal Financial 
Management Improvement Act?
    Ms. McLean. Well, as Dr. Blanchard mentioned, just the 
transition to a new financial system has been a big challenge, 
and it will be a 5-year effort, once we are finished. Again, 
even though we are using the Oracle off-the-shelf package, 
these systems often were designed really for the private sector 
and then sort of forced into a Federal package. And so when we 
are the first ones out of the box trying to put it in place, 
you end up sort of spilling blood for the folks who are going 
to come behind you. But that would have been the case in any of 
the packages we would have taken.
    So, luckily, I think with the new module we have, 11, which 
is the Oracle package we are using, it is dealing with a lot of 
the issues we had previously with Oracle.
    I think the second challenge we are going to have is the 
cost accounting piece, and, in fact, not just creating and 
collecting the cost accounting data, but training our managers 
so they actually use it and make decisions on those--based on 
that information.
    Mr. Horn. In your testimony, you stated the Department of 
Transportation is expected to be in compliance with the 
Federal--whatever that thing is, you know, I hate these 
initials; they drive me nuts--Federal Financial Management 
Improvement Act, in the next 2 years.
    Ms. McLean. Yes, sir.
    Mr. Horn. How realistic is this 2-year timeframe?
    Ms. McLean. Well, I think it is quite realistic, because 
again, we are in the last stretches of implementing Oracle for 
our financial--our accounting system, and we should have that 
done in the next 11 months. And then the cost accounting 
systems, our biggest agencies within the Department--FAA, Coast 
Guard, and the Transportation Security Administration--are 
either finished or well on their way to finishing their cost 
accounting system. So what we have to finish in 2 years is 
actually our smaller agencies to come-up on cost accounting.
    Mr. Horn. Now, has that program--has that been across the 
whole department? Because I remember in the last 10 years with 
the FAA, and it was chaos.
    Ms. McLean. For cost accounting?
    Mr. Horn. I do not know if it was for cost accounting, but 
it was just--I knew when I walked in the room, these people do 
not know what they are doing, and I was right. It turns out 
that, first, it was $4 billion, then it was $12 billion, then 
it was $40 billion, and finally, somebody had the guts to pull 
the plug.
    So where are we with the FAA in relation to the Department 
of Transportation?
    Ms. McLean. Well, regarding the FAA's accounting systems, 
in their cost accounting system, FAA had a--there was an 
aviation law passed, I believe--in 1996, I think--that required 
FAA to have a cost accounting system, and that was running 
ahead of when the Department was planning to implement an 
accounting system, the new accounting system. So FAA actually 
has Peoplesoft for their cost accounting system. They had to 
develop that at the same time they were transitioning to a new 
accounting system.
    So it has been a huge challenge for FAA, but I really think 
we are coming to the end of that, because we do have FAA, right 
now, using cost accounting information to make decisions.
    I know you don't have a lot of time, but I can give you 
some examples if you have some time.
    Mr. Horn. That is fine. If you want to add some more, we 
will put it at this point in the record.
    Ms. McLean. Certainly.
    Mr. Horn. What is the Department of Transportation doing to 
address computer security weaknesses, and do you have a lot of 
hackers trying to get into your systems?
    Ms. McLean. Regarding our accounting systems, I know we 
have not had--we are fortunate enough not to have had many 
attempts to get into the system. But Oracle is an Internet-
based system, so we are taking a lot of precautions to make 
sure that the security is in place and; as I mentioned, all of 
the feeder systems, we have 25 financial feeder systems that 
have to go into Oracle. They must all be certified before we 
turn on the Oracle financials.
    I think it is something we are going to have to just 
continually watch.
    Mr. Horn. It has been 6 years since the passage of the 
Federal Financial Management Improvement Act. Is there any 
legislative action--is there any legislative action that 
Congress should consider to refine or modify the requirements 
of the act? What do you think?
    Ms. McLean. I think one of the things that--and this is a 
big one, so I do not think necessarily this will be adopted. 
But one of, I think, the problems with the time it takes the 
Department to, in fact, implement a cost accounting system is 
because the appropriations that are passed for the agencies 
tend to be in buckets of people, capital, grants. You know, you 
have different accounts; that money cannot be blended or moved 
between those accounts. So our Appropriations Committee 
basically identifies money in these pots.
    Of course, the philosophy----
    Mr. Horn. Do you have reprogramming authority?
    Ms. McLean. We do not, not within those specific accounts. 
We do within the accounts, but not between them.
    So then you have the philosophy of cost accounting, which 
of course is absolutely the opposite of this accounting 
approach, which is, let's see the fully loaded cost. So in the 
case of DOT, what is the cost of providing search and rescue 
for the Coast Guard? We have to pull the money out of the 
people account--I mean the appropriations account; you have to 
pull the capital money out from the appropriations account, you 
have to pull the benefits out of that account, and you have to 
have basically two systems, one system to manage it because the 
law requires you to have your appropriations by these specific 
accounts, and then another system over top that pulls the 
information for cost accounting purposes. So this is a big one.
    But if we had accounting--or if our Appropriations 
Committee had more service-based appropriations, I think we 
would have a quicker leap from accounting system to cost 
accounting, and it would cause, I think, managers to think more 
holistically of what is my budget, not just my pieces.
    Mr. Horn. Yes. Forty years ago, all they thought in House 
Appropriations, how many people do you have, etc. And we got 
through that, and we have programmatic approaches. That was 
helped by GAO, where until Mr. Rayburn died and Mr. Cannon, 
Clarence Cannon, head of Appropriations, died; at last, they 
could have what we had put on the books in 1946 to look at 
things in a programmatic way. GAO has done a wonderful job of 
looking at that.
    Obviously, if there are problems here, we ought to--we 
would welcome the--which we should deal with. You are the 
people that have to do that every day, and you probably say, 
what idiot put this in?
    Ms. McLean. No, sir, we do not say that.
    Mr. Horn. I will not tell you that if I find the idiot, I 
will say that you led me there. But just to give us some, 
either on plain paper or anything else, but we will put it in 
the right place. We ought to do that.
    Do not be scared. In Congress, we are trying to get things 
done.
    So I would like to know, do others have a feeling here that 
we ought to modify the requirements of the act? Any thoughts on 
that?
    Ms. Alderman. I think that there is a big challenge just to 
get to the current level. I think that the appropriations full 
cost visibility is a big challenge. It might be possible with 
technology, but there is a mindSet that would have to be 
overcome. It is not just technology, it is a mind set, and I 
think Congress does set that mindset in the appropriations 
process.
    Ms. Thompson. Culture.
    Ms. Alderman. Culture.
    Mr. Horn. Dr. Blanchard.
    Mr. Blanchard. I would agree with Ms. McLean and others. 
The appropriations mechanism does create a challenge for the 
kinds of accounting that are required of us today. There are 
ways to overcome that, but they are difficult, and many have 
yet to figure that out.
    We have been successful through developing crosswalks which 
simply communicate between the two systems, in effect, building 
a patch between the two systems. But it is an evolutionary 
process as everything changes. So I would think that the 
requirements that we face today would benefit from some change 
in the appropriations structure.
    Mr. Horn. I think you are right. And when I testified 25 
years ago, I think we were moving ahead, and a lot of things 
have happened since those days.
    I would like to thank each one of you, and I want to thank 
the staff of both the majority and the minority behind me: Mr. 
Russell George, the staff director and chief counsel; Bonnie 
Heald is the deputy staff director; Henry Wray is here, who is 
the senior counsel; Rosa Harris to my left and your right is a 
General Accounting Office detailee and is on loan to us, and 
she has done a tremendous job, and we thank her profusely; 
Justin Paulhamus is our majority clerk; Chris Barkley, a new 
subcommittee staff member; Michael Sazonov, subcommittee 
intern, Sterling Bentley, also a new subcommittee intern.
    And the minority staff: David McMillen, a professional 
staff member; and Jean Gosa, minority clerk. We thank you. And 
the court reporters are Julie Thomas and Julie Bryan, and we 
thank both of you.
    With that, we are adjourned, and thank you.
    [Whereupon, at 11:35 a.m., the subcommittee was adjourned.]
    [The prepared statements of Hon. John Sullivan and Hon. 
Janice D. Schakowsky follow:]

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