    [House Hearing, 108 Congress]
    [From the U.S. Government Publishing Office]

      THE CONSOLIDATED FINANCIAL STATEMENTS OF THE FEDERAL GOVERNMENT FOR
                                FISCAL YEAR 2002

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

                                    HEARING

                                   before the

                     SUBCOMMITTEE ON GOVERNMENT EFFICIENCY
                            AND FINANCIAL MANAGEMENT

                                     of the

                                  COMMITTEE ON
                               GOVERNMENT REFORM

                            HOUSE OF REPRESENTATIVES

                          ONE HUNDRED EIGHTH CONGRESS

                                 FIRST SESSION

                                   __________

                                 APRIL 8, 2003

                                   __________

                               Serial No. 108-34

                                   __________

           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

                                     ______

    88-503              U.S. GOVERNMENT PRINTING OFFICE
                                WASHINGTON : 2003
    ____________________________________________________________________________
    For Sale by the Superintendent of Documents, U.S. Government Printing Office
    Internet: bookstore.gpr.gov  Phone: toll free (866) 512-1800; (202) 512�091800
    Fax: (202) 512�092250 Mail: Stop SSOP, Washington, DC 20402�090001

                         COMMITTEE ON GOVERNMENT REFORM

                         TOM DAVIS, Virginia, Chairman
    DAN BURTON, Indiana                  HENRY A. WAXMAN, California
    CHRISTOPHER SHAYS, Connecticut       TOM LANTOS, California
    ILEANA ROS-LEHTINEN, Florida         MAJOR R. OWENS, New York
    JOHN M. McHUGH, New York             EDOLPHUS TOWNS, New York
    JOHN L. MICA, Florida                PAUL E. KANJORSKI, Pennsylvania
    MARK E. SOUDER, Indiana              CAROLYN B. MALONEY, New York
    STEVEN C. LaTOURETTE, Ohio           ELIJAH E. CUMMINGS, Maryland
    DOUG OSE, California                 DENNIS J. KUCINICH, Ohio
    RON LEWIS, Kentucky                  DANNY K. DAVIS, Illinois
    JO ANN DAVIS, Virginia               JOHN F. TIERNEY, Massachusetts
    TODD RUSSELL PLATTS, Pennsylvania    WM. LACY CLAY, Missouri
    CHRIS CANNON, Utah                   DIANE E. WATSON, California
    ADAM H. PUTNAM, Florida              STEPHEN F. LYNCH, Massachusetts
    EDWARD L. SCHROCK, Virginia          CHRIS VAN HOLLEN, Maryland
    JOHN J. DUNCAN, Jr., Tennessee       LINDA T. SANCHEZ, California
    JOHN SULLIVAN, Oklahoma              C.A. ``DUTCH'' RUPPERSBERGER,
    NATHAN DEAL, Georgia                     Maryland
    CANDICE S. MILLER, Michigan          ELEANOR HOLMES NORTON, District of
    TIM MURPHY, Pennsylvania                 Columbia
    MICHAEL R. TURNER, Ohio              JIM COOPER, Tennessee
    JOHN R. CARTER, Texas                CHRIS BELL, Texas
    WILLIAM J. JANKLOW, South Dakota                 ------
    MARSHA BLACKBURN, Tennessee          BERNARD SANDERS, Vermont
                                             (Independent)

                           Peter Sirh, Staff Director
                     Melissa Wojciak, Deputy Staff Director
                  Randy Kaplan, Senior Counsel/Parliamentarian
                           Teresa Austin, Chief Clerk
                  Philip M. Schiliro, Minority Staff Director

         Subcommittee on Government Efficiency and Financial Management

                  TODD RUSSELL PLATTS, Pennsylvania, Chairman
    MARSHA BLACKBURN, Tennessee          EDOLPHUS TOWNS, New York
    STEVEN C. LaTOURETTE, Ohio           PAUL E. KANJORSKI, Pennsylvania
    JOHN SULLIVAN, Oklahoma              MAJOR R. OWENS, New York
    CANDICE S. MILLER, Michigan          CAROLYN B. MALONEY, New York
    MICHAEL R. TURNER, Ohio

                                   Ex Officio

    TOM DAVIS, Virginia                  HENRY A. WAXMAN, California
                         Mike Hettinger, Staff Director
                     Larry Brady, Professional Staff Member
                              Amy Laudeman, Clerk
              Mark Stephenson, Minority Professional Staff Member

                                C O N T E N T S

                                  ----------
                                                                       Page
    Hearing held on April 8, 2003....................................     1
    Statement of:
        Walker, David M., Comptroller General of the United States,
          U.S. General Accounting Office; Linda M. Springer,
          Controller, Office of Federal Financial Management, Office
          of Management and Budget; and Donald V. Hammond, Fiscal
          Assistant Secretary, Department of the Treasury............     6
    Letters, statements, etc., submitted for the record by:
        Hammond, Donald V., Fiscal Assistant Secretary, Department of
          the Treasury, prepared statement of........................    69
        Platts, Hon. Todd Russell, a Representative in Congress from
          the State of Pennsylvania, prepared statement of...........     3
        Springer, Linda M., Controller, Office of Federal Financial
          Management, Office of Management and Budget, prepared
          statement of...............................................    61
        Walker, David M., Comptroller General of the United States,
          U.S. General Accounting Office, prepared statement of......    10

      THE CONSOLIDATED FINANCIAL STATEMENTS OF THE FEDERAL GOVERNMENT FOR
                                FISCAL YEAR 2002

                                  ----------

                             TUESDAY, APRIL 8, 2003

                      House of Representatives,
    Subcommittee on Government Efficiency and Financial
                                            Management,
                                Committee on Government Reform,
                                                        Washington, DC.
        The subcommittee met, pursuant to notice, at 10:38 a.m., in
    room 2203, Rayburn House Office Building, Hon. Todd Russell
    Platts (chairman of the subcommittee) presiding.
        Present: Representatives Platts, Blackburn and Towns.
        Staff present: Mike Hettinger, staff director; Dan Daly,
    counsel; Larry Brady and Kara Galles, professional staff
    members; Amy Laudeman, clerk; Mark Stephenson, minority
    professional staff member; and Christopher Davis, minority
    staff assistant.
        Mr. Platts. The Subcommittee on Government Efficiency and
    Financial Management will come to order.
        I appreciate everyone attending today and hope we enjoy the
    intimate setting we are in today as it is a little smaller room
    than normal.
        Countless taxpayer dollars continue to be lost each year to
    fraud, waste and financial mismanagement in hundreds of Federal
    programs. In the subcommittee's last two hearings on the
    subject of ``Governing with Accountability,'' we examined the
    President's Management Agenda, the Government Performance and
    Results Act [GPRA] and the Program Assessment Rating Tool
    [PART]. Each of those tools assists in improving financial
    management, but today we will look at the single most
    comprehensive statement of the status of the financial
    management of the Federal Government, the 2002 Financial Report
    of the U.S. Government.
        The Financial Report and the accompanying audit of the
    report performed by the General Accounting Office were released
    on time as usual, on March 31, 2003. For the 6th straight year,
    GAO was unable to render an opinion on the Federal Government's
    financial statements. GAO reported significant material
    deficiencies that affected both the financial statements and
    the management of government operations.
        For fiscal year 2002, an unprecedented 21 out of the 24
    Chief Financial Officer Act agencies received unqualified or
    ``clean'' audit opinions on their individual financial
    statements. This is an improvement over 18 out of 24 agencies
    from fiscal year 2001. Only the Department of Defense, the
    Small Business Administration, and the U.S. Agency for
    International Development failed to receive clean opinions this
    year. GAO points out in their audit report of the consolidated
    statement that the financial management problems at DOD are
    ``pervasive, complex, long-standing, and deeply rooted in
    virtually all business operations throughout the department.''
    President Bush's administration has made improving financial
    performance a top priority, and I certainly commend the
    administration for their efforts. Secretary of Defense Donald
    Rumsfeld is working hard to improve DOD's financial management.
    With each fiscal year, DOD gets closer to obtaining an audit
    opinion. However, until DOD solves their financial problems and
    receives a clean opinion, the entire Federal Government's
    financial statement will continue to be unreliable.
        Congress has placed a great deal of emphasis on the
    financial accountability of publicly traded companies and their
    responsibility to provide accurate information to investors.
    Congress and the Federal Government have an equal, if not
    greater responsibility, to be accountable to our investors, the
    American taxpayer.
        Our witnesses today will shed light on the results of the
    consolidated financial statement and discuss areas that need
    improvement as well as financial management successes. Today,
    we are honored to have the Honorable David M. Walker who is the
    Comptroller General of the United States, who has just
    testified in the Senate; the Honorable Linda Springer, who is
    the Controller from the Office of Federal Financial Management
    at the Office of Management and Budget. I understand this is
    your first official testimony in your new position and we
    welcome you here today. I am going to use the chairman's
    privilege also as a proud son to recognize we have Ms.
    Springer's mom with us today to see her in action. We are
    delighted to have mom with us as well. We also have Donald V.
    Hammond, Fiscal Assistant Secretary, Department of Treasury. I
    look forward to your testimonies.
        [The prepared statement of Hon. Todd Russell Platts
    follows:]

    [GRAPHIC] [TIFF OMITTED] T8503.001

    [GRAPHIC] [TIFF OMITTED] T8503.002

        Mr. Platts. I am pleased to yield to the gentleman from New
    York, Mr. Towns, for the purpose of making an opening
    statement.
        Mr. Towns. Thank you very much, Mr. Chairman.
        Let me begin by saying this is a very important hearing.
    There is certainly a significant amount of good news in the
    General Accounting Office's audit of the Federal Government's
    finances. This year, the GAO was able to give 21 of the 24
    agencies a clean audit opinion, up from 18 last year. We are
    moving in the right direction. However, to ensure that the
    entire Federal Government receives a clean audit, we must
    continue to pressure, cajole, persuade and encourage the
    executive branch agencies through hearings such as these.
        Unfortunately, the prospect of all remaining agencies
    getting complete audits appear dim. The Comptroller General has
    described the financial management problem at DOD as pervasive,
    complex, longstanding and deeply rooted in virtually all
    business operations throughout the department. While it is
    probably difficult to divert additional resources at DOD to
    financial management systems during a time of war, we need to
    remember that correcting such management problems will make the
    department more effective in the long run and that we should
    not forget.
        The Comptroller also noted weaknesses in financial systems
    throughout the executive branch. He specifically pointed out
    the Federal Government's inability to account for billions of
    dollars in transactions across government agencies. To overcome
    such problems, it seems apparent that we must replace all
    current stovepipe systems with the interoperable financial
    management solutions. We must also invest in the human capital
    in these agencies to understand and operate these systems. If
    the operation of financial systems of each agency is farmed out
    to different private companies, we will not be able to develop
    the day to day financial information system which we are
    seeking.
        I look forward to hearing from our witnesses about the
    progress that has been made and what we need to do to overcome
    the remaining barriers to a consolidated financial statement of
    the Federal Government. We have come a long way but we still
    have a great distance to go.
        On that note, Mr. Chairman, I yield.
        Mr. Platts. Thank you, Mr. Towns.
        I would now ask each witness and anyone who will be
    assisting you in the testimony you will provide to stand, raise
    your right hand and take the oath together. We will then
    proceed with the testimony.
        [Witnesses sworn.]
        Mr. Platts. Thank you. We will proceed now to testimony.
    Mr. Walker, we will begin with you. We appreciate your racing
    over from the Senate. Hopefully you have had a chance to catch
    your breath before starting. We will then proceed to Ms.
    Springer and Mr. Hammond.
        We appreciate the substantive detailed testimony in writing
    you all provided to the committee which allowed us a chance to
    review it prior to today's hearing and please summarize that as
    best you can. Because of the detail and importance of the
    information you are covering today, we would extend to each of
    you 10 minutes for your opening statements. Then we will go to
    questions.
        Mr. Walker.

       STATEMENTS OF DAVID M. WALKER, COMPTROLLER GENERAL OF THE
        UNITED STATES, U.S. GENERAL ACCOUNTING OFFICE; LINDA M.
     SPRINGER, CONTROLLER, OFFICE OF FEDERAL FINANCIAL MANAGEMENT,
    OFFICE OF MANAGEMENT AND BUDGET; AND DONALD V. HAMMOND, FISCAL
            ASSISTANT SECRETARY, DEPARTMENT OF THE TREASURY

        Mr. Walker. Thank you, Mr. Chairman and members of the
    subcommittee. I appreciate your understanding. I literally ran
    from a joint Senate/House hearing. I am glad I am in good shape
    because otherwise I may not have made it.
        I appreciate also being able to put the entire statement in
    the record and being able to summarize the key portions.
        I am pleased to be here today to discuss our report on the
    U.S. Government's consolidated financial statements for fiscal
    years 2002 and 2001. As in the 5 previous fiscal years, certain
    material weaknesses in internal control and in accounting and
    reporting prevented us from being able to provide the Congress
    and American citizens an opinion as to whether the consolidated
    financial statements are fairly stated in conformity with U.S.
    generally accepted accounting principles.
        Across government, financial management improvement
    initiatives are under way that, if effectively implemented,
    have the potential to appreciably improve the quality of the
    Federal Government's financial management and reporting. You,
    Mr. Chairman, and members of the subcommittee know I have a 15
    year term. I am now 4\1/2\ years into my term and I hope and
    expect that by the end of my term, there will be a clean
    opinion on the Government's financial statements. I underline I
    hope and expect but there is a lot of work that needs to be
    done to get us there.
        For fiscal year 2002, 21 of the 24 CFO Act agencies were
    able to attain unqualified audit opinions on their financial
    statements, up from 6 agencies for fiscal year 1996. Also, 4
    CFO Act agencies showed improvement by receiving unqualified
    opinions from their auditors this year.
        Although obtaining unqualified audit opinions is important,
    according to the President's Management Agenda, ``most Federal
    agencies that obtain clean audits only do so after making
    extraordinary, labor-intensive assaults on financial records.''
    I have referred to this in past years as ``heroic efforts'' to
    basically be able to recreate the books at the end of the year
    several months after the end of the year. I question the
    prudence or appropriateness of doing that, which is why, as I
    will note in a few minutes, the JFMIP Principles have agreed to
    a number of steps that will help to assure this does not occur
    in the future and that these opinions are truly earned and not
    created due to significant expenditures or human resource
    commitments that are questionable.
        Before discussing the results of the audit of the U.S.
    Government's consolidated financial statements in more detail,
    I would like to discuss why sound financial management is
    especially necessary for the future, as well as for today, to
    meet tomorrow's challenges. I have on the chart the latest 50
    year, long-range budget simulation results from GAO's analysis,
    which we do twice a year and have been doing for about 10
    years.
        It shows that based upon current tax revenues as a
    percentage of the economy, based upon projected spending by the
    Social Security and Medicare trustees, their best estimate, and
    assuming that discretionary spending grows at the rate of the
    economy, if you assume all that is true, this is what the
    future looks like on autopilot. Starting in less than 10 years,
    the current deficits start escalating very rapidly due
    primarily to known demographic trends and rising health care
    costs to levels that we have never seen before.
        As a result, it is critically important that we start
    reviewing all existing Federal programs and policies--spending,
    tax incentives, regulatory, and otherwise--to basically answer
    three fundamental questions. What should the Federal Government
    be doing in the 21st century, how should the Federal Government
    do business in the 21st century and, in some cases, who should
    do the Government's business in the 21st century?
        The current base is unsustainable. We have to make tough
    choices and in order to make those tough choices, it will be
    important to have timely, accurate, and useful financial and
    cost information to be able to make informed choices that are
    going to be difficult but nonetheless necessary.
        The next chart shows a range of existing commitments,
    liabilities, and contingencies that we already have. In some
    cases, these amounts are noted as liabilities in the
    consolidated financial statements of the U.S. Government; in
    some cases they are not and may not ever be but they are huge.
    We have publicly held debt which is a liability of $3.54
    trillion. We also have a significant amount of Government-held
    debt, debt held in trust funds like Social Security and
    Medicare which are backed by an unconditional promise to pay
    from the Federal Government, $2.67 trillion but it is where the
    right hand owes the left hand, so poof, it is gone on the
    consolidated financial statements of the U.S. Government. It is
    not currently shown as a liability.
        Furthermore, we have significant differences between
    projected revenues and projected expenditures under a number of
    programs, such as Social Security and Medicare, where the
    discounted present value of that difference amounts to almost
    $10 trillion just in Social Security and Medicare Part A alone.
    In other words, you would have to have $10 trillion invested at
    Treasury rates today just to be able to fund the gap between
    promised benefits and estimated revenues. These gaps are huge.
    And by the way, these gaps only cover 75 years and are growing
    every year. So it is important that we recognize that we are on
    an unsustainable path, that tough choices will have to be made,
    not only with regard to entitlement programs but also with
    regard to discretionary spending and, in some cases, with
    regard to certain tax incentives. Frankly some tax incentives
    may not be doing what we would like them to do as it relates to
    policy, such as, for example, health care tax incentives, on
    which I will answer questions on if you like. Having sound
    financial management systems is important to understanding
    these issues and making tough choices.
        As I mentioned earlier, as has been the case for the past 5
    years, the Federal Government continues to have a significant
    number of material weaknesses related to financial statements,
    the fundamental recordkeeping and financial reporting problems
    and incomplete documentation. Several of these material
    weaknesses resulted in conditions that prevented us from being
    able to express an opinion.
        The three major impediments to GAO being able to express an
    opinion on the consolidated financial statements are: (1) the
    serious financial management problems at DOD, although they are
    making progress; (2) the Federal Government's continued
    inability to fully account for and reconcile billions of
    dollars of transactions between Federal Government departments
    and agencies; and (3) the Federal Government's inability to
    properly prepare consolidated financial statements.
        Over the past year, the JFMIP Principals, which I had the
    privilege to chair for a 2-year period ending last September
    30, began an effort to accelerate progress in financial reform
    that involved a personal commitment of each of the principals
    to provide leadership in this critical area. Since August 2001,
    the JFMIP Principals have established an excellent working
    relationship and basis for action, a new sense of urgency in
    this area through which significant and meaningful progress has
    been achieved and continues to be achieved.
        In fiscal year 2002, we had a series of regular
    deliberative meetings and took a number of steps outlined on
    page 20 of my testimony. The continued personal involvement of
    the principals is critical to full and successful
    implementation of financial management reforms. I would add it
    is also critical that this subcommittee and others in Congress
    continue to hold oversight hearings in order for us to continue
    to make progress. This subcommittee has been fantastic over the
    last several years in making sure everybody is focused on
    continually making progress.
        Building on the success that has been achieved in obtaining
    unqualified opinions, Federal agency management must continue
    to work to fully resolve the pervasive and generally
    longstanding material weaknesses we have reported. Irrespective
    of the unqualified opinions in their financial statements, many
    Federal agencies do not have sound controls along with timely,
    accurate, and useful financial information and sound controls
    with which to make informed decisions and ensure accountability
    on a day-to-day basis.
        Two audit matters have come to the fore in the last year
    that are key to protecting the public interest. One matter
    involves auditor responsibilities for reporting internal
    control and the other concerns auditor independence. GAO has
    led by example in these two areas, not only within the
    Government but also within the accountability profession at
    large. We are committed to continue to do so.
        In closing, Mr. Chairman and members, our report on the
    U.S. Government's consolidated financial statements for fiscal
    years 2001 and 2002 highlights the need to continue addressing
    the Government's serious financial management weaknesses. The
    requirement for timely, accurate, and useful financial and
    performance information is greater than ever as the Congress
    and the administration prepare to meet our growing fiscal
    challenges.
        Finally, I want to reiterate the value of sustained
    congressional interest in these issues as demonstrated by this
    hearing and by the sustained commitment of this subcommittee.
        Thank you, Mr. Chairman. I would be happy to answer
    questions after my colleagues have their chance to read their
    testimony.
        [The prepared statement of Mr. Walker follows:]

        [GRAPHIC] [TIFF OMITTED] T8503.003

        [GRAPHIC] [TIFF OMITTED] T8503.004

        [GRAPHIC] [TIFF OMITTED] T8503.005

        [GRAPHIC] [TIFF OMITTED] T8503.006

        [GRAPHIC] [TIFF OMITTED] T8503.007

        [GRAPHIC] [TIFF OMITTED] T8503.008

        [GRAPHIC] [TIFF OMITTED] T8503.009

        [GRAPHIC] [TIFF OMITTED] T8503.010

        [GRAPHIC] [TIFF OMITTED] T8503.011

        [GRAPHIC] [TIFF OMITTED] T8503.012

        [GRAPHIC] [TIFF OMITTED] T8503.013

        [GRAPHIC] [TIFF OMITTED] T8503.014

        [GRAPHIC] [TIFF OMITTED] T8503.015

        [GRAPHIC] [TIFF OMITTED] T8503.016

        [GRAPHIC] [TIFF OMITTED] T8503.017

        [GRAPHIC] [TIFF OMITTED] T8503.018

        [GRAPHIC] [TIFF OMITTED] T8503.019

        [GRAPHIC] [TIFF OMITTED] T8503.020

        [GRAPHIC] [TIFF OMITTED] T8503.021

        [GRAPHIC] [TIFF OMITTED] T8503.022

        [GRAPHIC] [TIFF OMITTED] T8503.023

        [GRAPHIC] [TIFF OMITTED] T8503.024

        [GRAPHIC] [TIFF OMITTED] T8503.025

        [GRAPHIC] [TIFF OMITTED] T8503.026

        [GRAPHIC] [TIFF OMITTED] T8503.027

        [GRAPHIC] [TIFF OMITTED] T8503.028

        [GRAPHIC] [TIFF OMITTED] T8503.029

        [GRAPHIC] [TIFF OMITTED] T8503.030

        [GRAPHIC] [TIFF OMITTED] T8503.031

        [GRAPHIC] [TIFF OMITTED] T8503.032

        [GRAPHIC] [TIFF OMITTED] T8503.033

        [GRAPHIC] [TIFF OMITTED] T8503.034

        [GRAPHIC] [TIFF OMITTED] T8503.035

        [GRAPHIC] [TIFF OMITTED] T8503.036

        [GRAPHIC] [TIFF OMITTED] T8503.037

        [GRAPHIC] [TIFF OMITTED] T8503.038

        [GRAPHIC] [TIFF OMITTED] T8503.039

        [GRAPHIC] [TIFF OMITTED] T8503.040

        [GRAPHIC] [TIFF OMITTED] T8503.041

        [GRAPHIC] [TIFF OMITTED] T8503.042

        [GRAPHIC] [TIFF OMITTED] T8503.043

        [GRAPHIC] [TIFF OMITTED] T8503.044

        [GRAPHIC] [TIFF OMITTED] T8503.045

        [GRAPHIC] [TIFF OMITTED] T8503.046

        [GRAPHIC] [TIFF OMITTED] T8503.047

        [GRAPHIC] [TIFF OMITTED] T8503.048

        [GRAPHIC] [TIFF OMITTED] T8503.049

        [GRAPHIC] [TIFF OMITTED] T8503.050

        Mr. Platts. Thank you, Mr. Walker for your testimony and
    your very frank assessment of where we are from a management
    sense and why we need to do a lot better as we move to the
    years to come and the challenges we are going to face. Also,
    your comments regarding former Chairman Steve Horn and his
    efforts are very appropriate. I am honored to succeed Chairman
    Horn in this position.
        Ms. Springer.
        Ms. Springer. Thank you, Mr. Chairman.
        I am honored to testify for the first time as the
    Controller, Office of Management and Budget before this
    subcommittee. I feel today as I have many times before
    reporting to the audit committee of corporate boards of
    directors. As I did in those meetings, I am here to provide you
    with a response by management to the issues presented in the
    auditor's report on the Federal Government's consolidated
    financial statements for the fiscal years ended September 30,
    2002 and 2001.
        The General Accounting Office has issued a disclaimer of
    opinion on the consolidated financial statements for these
    periods as Mr. Walker has noted. In so doing, material
    weaknesses were noted in the following areas: (1) the area of
    assets, property, plant, and equipment and inventories and
    related property; (2) the area of liabilities, and commitments
    and contingencies; (3) cost of government operations and
    disbursement activity; (4) accounting for and reconciliation of
    intragovernmental activity and balances; and (5) preparation of
    consolidated financial statements. The primary source of
    weakness in the first three areas is the Department of Defense.
    Items four and five are process impediments that have
    governmentwide impact.
        GAO also identified the following material weaknesses in
    internal control throughout the executive branch: (1) loans
    receivable and loan guarantee liabilities; (2) improper
    payments; (3) information security; and (4) tax collection
    activities. OMB agrees with GAO that these are areas of
    weakness. We are not satisfied with this result. In fact, we
    believe that even unqualified audit opinions and the absence of
    material weaknesses do not necessarily indicate the presence of
    first class financial management. First class financial
    management requires integration of the financial impact of
    agency decisions and activities in operational execution and
    senior management decisionmaking. These things would be
    accompanied by accountability standard setting, performance
    tracking and other analyses. These are among the
    characteristics we should seek in government every bit as much
    as they are expected in the private sector. These are the
    objectives of the Improved Financial Performance Initiative
    which the President's Management Agenda is focused on.
        The administration is making a concerted effort to address
    the weaknesses identified by GAO and agency Inspectors General
    and independent auditors. For example, we are working to
    identify the root causes and current status of, as well as
    action plans to remedy, the deficiencies at the Department of
    Defense. Some of these actions will be near term. Others will
    take longer and will be dependent on the new financial
    management systems implementation. OMB has reviewed with DOD
    its assessment and plans for each area identified by GAO. Our
    most recent update was just last week when I met with not only
    Comptroller Zakheim but also with the Inspector General. These
    meetings are typical of planning sessions we have with every
    CFO Act agency's CFO and their IG. These meetings will be an
    ongoing series and at those we will be reviewing plans to
    review how to achieve clean audits and also remove other
    material weaknesses, and meeting accelerated reporting
    deadlines. As you know, our reporting deadline in 2004 has been
    accelerated to November 15 with the governmentwide report
    coming out 1 month later in December.
        In our judgment, DOD is identifying its problems and is
    engaged in both short and long term remediation activities.
    These activities would substantially address the first three
    material weaknesses I noted previously. OMB will continue to
    monitor this progress with both the department and its IG.
        Regarding intragovernmental transactions, we have new rules
    in place that govern the manner in which agencies record
    intragovernmental transactions. Simply put, these rules once
    and for all standardize the governmentwide processing and
    recording of intragovernmental activity. In conjunction with
    the automated process by which we will compile the
    governmentwide financial statements in the near future, will go
    a long way toward resolving the other material weaknesses that
    contribute to the disclaimer of opinion by the auditors.
        As you have heard at the recent testimony on the
    President's Management Agenda, notable progress was made in
    fiscal year 2002 in agency financial reporting. For 2002, a
    record number of the government's major departments and
    agencies received unqualified opinions on their annual audited
    financial statements, 21 of 24 up from 18 in fiscal year 2001.
    I appreciate Mr. Walker going back even farther than that to
    six to show even further progress over the years.
        Two agencies, Treasury and the Social Security
    Administration, met the new governmentwide standard for
    timeliness of reliable financial information 2 years early, the
    November 15 deadline. All agencies for 2003 have targeted
    earlier dates required to make a step forward, about half of
    them looking to meet the November date in 2003.
        In addition to DOD, only the Small Business Administration
    and the U.S. Agency for International Development are keeping
    us from our goal of unqualified audit opinions on the financial
    statements of the major departments and agencies. I met with
    the DOD Comptroller just last week to assess the department's
    status. I am also meeting with officials from USAID and SBA in
    the coming weeks to begin regular updates on their progress in
    getting clean audit opinions. I want to note for the
    subcommittee that USAID received an unqualified opinion for
    four of its five financial statements and a qualified opinion
    on the fifth statement. The fifth statement is the statement of
    net costs and there are still some remaining material
    weaknesses with which we concur with GAO. There are plans in
    place to remediate the weaknesses on that statement. I should
    mention this is up from three statements that were unqualified
    and two disclaimed in the previous year.
        Part of the President's Improved Financial Performance
    Initiative is our effort to reduce erroneous payments. While
    GAO in the past had tallied just $20 billion in erroneous
    payments, OMB reported to the Congress last year that our
    effort, which requires erroneous payment estimates for major
    benefit programs has raised that total estimate to $35 billion
    annually. We are expanding our efforts in this area with the
    implementation of the Improper Payments Information Act of
    2002, which originated in this subcommittee. This act requires
    an estimate of the extent of erroneous payments from all
    Federal programs. Program-wide erroneous payment estimates can
    only help stem the loss to the Federal Government in waste,
    fraud, and abuse, too much of which is taking place without
    accounting.
        Our erroneous payment efforts are not just about estimates.
    The President's fiscal year 2004 budget includes a $100 million
    increase to clarify Earned Income Tax Credit rules and to help
    ensure only eligible taxpayers receive payments. This
    investment could help us reduce the more than $9 billion in
    erroneous EITC payments we make annually. The administration
    has also proposed a number of tools to give agencies the
    ability to further save us billions of dollars over time.
        Mr. Chairman, I would be derelict not to mention one of the
    great challenges before us, the migration of the component
    agencies to the new Department of Homeland Security which will
    pose a major challenge from a financial management perspective.
    Disparate systems at different stages of implementation are
    just one of the complicating factors that will be dealt with by
    the new department. We plan and are working closely with Under
    Secretary Hale and her staff in meeting these challenges.
        Our auditor, GAO, has highlighted many of our weaknesses,
    but I don't want to pass up the opportunity to highlight some
    of the favorable assertions made in GAO's report about the
    efforts the Bush administration is making to improve financial
    management throughout the government. ``Across government,
    financial management improvement initiatives are under way
    that, if effectively implemented, have the potential to
    appreciably improve the quality of the Federal Government's
    financial management and reporting. A number of Federal
    agencies have started to make progress in their efforts to
    modernize their financial management systems and improve
    financial management performance as called for in the
    President's Management Agenda. The President's Management
    Agenda includes improved financial performance as one of the
    top five governmentwide management goals. This is a step in the
    right direction to improving management and performance.
        The attention we are paying to improving financial
    performance and the progress we have made thus far move us down
    the playing field, but still short of the goal line. It is
    important that we not lose sight of these achievements,
    however. Even though no score appears on the board until we
    have crossed the line, we have moved inside the red zone and
    the goal is in sight. This administration is committed, with
    the help of this subcommittee, to achieving the first class
    financial management of which we and the American people can be
    proud.
        Thank you, Mr. Chairman.
        [The prepared statement of Ms. Springer follows:]

        [GRAPHIC] [TIFF OMITTED] T8503.051

        [GRAPHIC] [TIFF OMITTED] T8503.052

        [GRAPHIC] [TIFF OMITTED] T8503.053

        [GRAPHIC] [TIFF OMITTED] T8503.054

        [GRAPHIC] [TIFF OMITTED] T8503.055

        Mr. Platts. Thank you, Ms. Springer, for your substantive
    statement. We commend you for having already met with the DOD
    Comptroller and having SBA and USAID meetings scheduled to get
    your arms around the challenges in those agencies. We look
    forward to working with you.
        Ms. Springer. Thank you.
        Mr. Platts. Mr. Hammond.
        Mr. Hammond. Thank you, Mr. Chairman and members of the
    subcommittee.
        Thank you for the opportunity to discuss the Financial
    Report of the U.S. Government. I would ask that the Chairman
    include the full text of my statement in the record but on
    behalf of the Secretary, I would like to thank you for focusing
    on and promoting the improvement of Federal Government
    financial accountability and reporting. We appreciate the
    subcommittee's continued leadership in this area.
        Before I continue, I wish to congratulate you, Chairman
    Platts, on your appointment to chair this important panel. We
    had the pleasure of working very closely with Chairman Horn in
    previous Congresses and look forward to the same effective
    working relationship with your subcommittee.
        The financial report is prepared pursuant to the Government
    Management Reform Act of 1994 to provide the President, the
    Congress and the American people with reliable financial
    information on an accrual basis about the Federal Government's
    operations. The Federal Government does not have a single
    bottom line that reflects its financial status. Therefore the
    information included in the financial report provides a
    comprehensive view of the Federal Government's finances that is
    not available elsewhere. The report covers all accounts from
    the executive branch but since the legislative and judicial
    branches are not required to prepare financial statements,
    recording information included from those branches is limited.
        The Department of the Treasury is committed to producing
    accurate and useful governmentwide financial statements and
    continues to devote considerable resources at both the
    departmental level and at the Financial Management Service to
    making the government's finances as clear and transparent as
    possible. Everyone should be able to understand the cost of
    government operations and the implications of its commitments.
    The financial report is important in this respect because it
    highlights the difference between budget and accrual-based
    reporting. Accrual results offer a longer term view that
    extends the horizon for making budget decisions. This year, for
    the first time, we have grouped together all of the significant
    liabilities, stewardship responsibilities and other commitments
    in the front of the report, specifically on page 6. They total
    an estimated $31.1 trillion, almost 10 times the size of the
    debt held by the public. These amounts reported separately for
    several years become more transparent we believe when they are
    presented together for analysis.
        The importance of this report is also highlighted in this
    year's results. For fiscal 2002, the Financial Report indicates
    an accrual-based net operating cost for the Federal Government
    of $365 billion. This compares to the more familiar $158
    billion budget deficit reported last fall. The principal
    difference between these two figures is the accrual recognition
    of an additional over $157 billion of veterans benefit costs
    and liabilities. Without accrual-based reporting, these
    differences would be lost and would not be visible to the
    American taxpayer.
        For Treasury to achieve its goals for improved financial
    reporting, continued strong support from OMB and all the Chief
    Financial Officers Act agencies will be critical. We have
    charted a course for continued improvements and we expect to
    implement them fully in the fiscal 2004 statements.
        In my remaining time, Mr. Chairman, I will discuss our
    progress over the last year and outline some of the planned
    improvements.
        As noted, this is the 6th year we have prepared
    consolidated, governmentwide financial reports. Each year there
    have been significant improvements in the agency data. This
    year, 21 of the 24 CFO Act agencies received clean audit
    opinions, up from 6 agencies only 7 years ago. Also, three
    major agencies, the Social Security Administration, Treasury
    Department and yes, the U.S. Postal Service, completed their
    financial statement audits by November 15, 3\1/2\ months
    earlier than statutorily required for the first two and the
    Postal Service has no due date on their financial statements
    that I am aware of.
        Data for the Financial Report primarily comes from the 24
    CFO Act agencies, 9 other significant entities such as the
    Postal Service and 180 smaller entities. Preparing the report,
    as you can imagine, is a complex task based on a foundation of
    over 2,000 individual reporting components' standardized
    Standard General Ledger reporting, highlighting the importance
    of good data quality. In other words, the data has to be right
    the first time coming from the agency level. There is really
    very little opportunity to massage it at the end.
        In auditing the Financial Report, GAO was unable to express
    an opinion on the reliability of this year's financial
    statements, primarily due to three areas: data and financial
    system problems at the Department of Defense, preparation
    issues relating to intragovernmental balances both in agency
    data quality and consolidation eliminations, and consistency
    with agency financial reporting. However, GAO did acknowledge
    in its audit report that financial management improvement
    initiatives are being undertaken that will improve the quality
    of financial management and reporting in the Federal
    Government. These include DOD improving its financial
    management and related systems, Treasury and OMB taking a
    number of steps to address the intragovernmental issues and
    development of a new preparation process for the financial
    report itself. The above indicates that the current state of
    Federal financial reporting needs improvement.
        I am confident that a creative and committed effort by top
    management at Treasury, program agencies, OMB, the CFO Council,
    and GAO can result in breakthrough changes. Later this year,
    for example, Treasury will provide agencies with a detailed
    account statement monthly to help them reconcile their fund
    balance with Treasury. The production of this account statement
    is the next step in a Web-based, governmentwide accounting
    modernization project that, when completed, will provide
    agencies with better tools for both reporting their financial
    information and monitoring its status. This new approach will
    enable agencies to eliminate duplicative reporting and costly,
    manually intensive reconciliations.
        After extensive consultation with our auditors and
    financial managers throughout the government, it was clear that
    broad and sweeping changes in the compilation process of the
    Financial Report were necessary to address the ``process''
    related material weaknesses. Treasury, in coordination with
    OMB, is adopting a new process to collect agency financial
    information that will be used to prepare the fiscal 2004
    Financial Report. Agencies will follow an automated process to
    convert their audited financial statements to a standardized
    statement format which will ensure the data in the report is
    consistent with the data in the agency's audited financial
    statements. These changes, along with modifications in the
    manner in which we perform eliminations and consolidate the
    data, should eliminate the material compilation weaknesses
    identified by GAO.
        We are also in the process of accelerating agency budget
    reporting. To facilitate the accelerated deadlines for
    submission of annual agency-level financial statements and the
    governmentwide financial statements, Treasury's Financial
    Management Service has accelerated the monthly agency budget
    reporting timeframes. The accelerated timeframes will support
    agencies accelerated preparation of their year-end audited
    financial statements and provide for more timely information to
    improve decisionmaking.
        Treasury is the first to acknowledge that reporting
    financial results 6 months after the close of a fiscal year is
    simply not good enough. Accordingly, the scheduled date for
    issuing the fiscal 2004 financial report is December 15, 2004.
    Meeting this timeframe is dependent on agencies meeting their
    accelerated reporting dates. I currently chair the CFO council
    committee charged with assisting agencies in meeting the
    accelerated issuance dates for fiscal 2004 and believe these
    dates are in fact achievable. This is a significant step
    forward since we will finally have actual data about the prior
    year for use in the budget deliberations for the coming year
    and managers throughout government will have accurate data for
    day-to-day decisionmaking at all levels.
        A core responsibility of the Treasury Department is to
    accurately and effectively report on the Nation's finances.
    Long ago we accomplished transparency of budget results. Our
    challenge is to bring that same transparency to the full extent
    of our financial operations. We have made great progress in
    that quest, and the Federal financial community working
    together will soon realize that vision.
        Thank you again for the opportunity to testify and I would
    be happy to answer any questions the committee may have.
        [The prepared statement of Mr. Hammond follows:]

        [GRAPHIC] [TIFF OMITTED] T8503.056

        [GRAPHIC] [TIFF OMITTED] T8503.057

        [GRAPHIC] [TIFF OMITTED] T8503.058

        [GRAPHIC] [TIFF OMITTED] T8503.059

        [GRAPHIC] [TIFF OMITTED] T8503.060

        [GRAPHIC] [TIFF OMITTED] T8503.061

        [GRAPHIC] [TIFF OMITTED] T8503.062

        [GRAPHIC] [TIFF OMITTED] T8503.063

        Mr. Platts. Thank you, Mr. Hammond. I appreciate your
    testimony, as with each of the witnesses and the in-depth
    presentations and your shared efforts and interest in truly
    getting us to where the American taxpayer knows how their
    dollars are being spent.
        We are going to proceed to questions now and for the most
    part we will follow in the first round 5 minutes each and then
    maybe a second time around when we are not as strict on the 5-
    minute rule.
        For Mr. Walker and Ms. Springer, your testimony certainly
    makes the picture clear. We have made some progress but have a
    long way to go, and even some of the agencies that have gotten
    that clean audit, it was through Herculean labor intensive
    efforts after the fact not internal throughout the year. That
    is what we really need to get to so any day of the year we can
    say where are you and we know it as opposed to much afterwards.
        I don't expect you to be able to do this today but if you
    could followup with us and give us your summation of each
    agency and where they stand in their efforts to modernize and
    be more accountable. That would help guide this committee where
    we may need to bring some additional attention from an
    oversight perspective.
        Could you today give us your best opinion on what agency is
    the closest to having a financial reporting system in place
    that nears what a large private corporation would have in
    accounting for their records?
        Mr. Walker. I would note for the record my understanding is
    the only agency that is green, based upon the President's
    Management Agenda in financial management is the National
    Science Foundation. I would imagine that Controller Springer
    can tell us whether there is anyone else getting close in OMB's
    view, but I would argue that unless you are green, then you are
    not even a candidate for being able to give an affirmative to
    your question.
        Ms. Springer. Yes, that is exactly right. The two that are
    getting close, there are several, the two closest in addition
    to NSF would be the Social Security Administration and the
    Environmental Protection Agency that are kind of knocking at
    the door at that same point.
        There are currently 17 of 24 CFO Act agencies that have
    significant financial management system modernization efforts
    going on right now. The Government right now invests over 1,900
    financial management systems. In the current budget proposal
    for 2004, there is about $1.5 billion included for financial
    management systems, so it is a significant effort
    governmentwide. With the exception of just a few agencies, it
    is active with all those. Even with that, NSF is the only one
    today that really meets that standard.
        Mr. Platts. You are noting 1,900 initiatives or efforts and
    it seems that speaks to the size of the problem we have, that
    many initiatives trying to get us on track. Is it also a part
    of the problem that we have so many diverse efforts as opposed
    to a more unified, cohesive approach?
        Ms. Springer. Yes, it is. I think one of the comments
    earlier from Representative Towns discussed having solutions
    that span across a variety of agencies as opposed to just one.
    One of the strategies we will be looking at will be to find
    where we can have meaningful joint efforts so that we are not
    having redundant investments. It seems with financial systems,
    there ought to be that opportunity, so we will be looking at
    that.
        Mr. Platts. Is it going to be your office specifically kind
    of watching the progress on those 1,900 efforts and birding
    from OMB's perspective?
        Ms. Springer. Yes, along with the IS group headed by Mark
    Forman. In the CFO Act, the Office of Federal Financial
    Management has specific responsibility for overseeing those
    activities and monitoring them as they go forward.
        Mr. Walker. Mr. Chairman, I think it is important to note
    the Federal Government is a late entrant to the financial
    management business as well as the financial auditing area. The
    fact of the matter is that for many, many years, the Federal
    Government focused all of its time and attention on getting the
    money and spending the money. It was called the budget. It
    didn't focus enough on transparency and accountability which is
    something we need to do now for some of the reasons that I
    previously articulated.
        We have come a long way in a fairly short period of time
    but we don't have the type of market forces the private sector
    has. If you are going out there to try to raise stock or if you
    have publicly traded debt which by the way State and local
    governments have, so they have had better financial management
    for years. They have had to have it because in order to be able
    to have publicly traded debt, in order to get a decent bond
    rating, they had to have it. We haven't been subject to those
    same market pressures.
        If Brazil can do it, namely have a modern, effective,
    credible, integrated financial management system for their
    government, we ought to be able to do it.
        Mr. Platts. The focus on having that system in place and
    also renewed focus through PART as the Bush administration
    asking is not just how much you are spending and where it is
    coming from but what are we getting in return. That is part of
    government efficiency as well.
        I am going to defer to Mr. Towns now but I would make the
    analogy in the very frank but stark picture you painted, Mr.
    Walker, for future years, that I have been one to always
    balance my checkbook to the penny every month. When my wife and
    I met, she didn't worry about balancing her checkbook because
    she knew there was money in there, so she didn't worry month to
    month. Once we were engaged, married and both graduate students
    and the excess dollars got less and less, the importance of
    having a very detailed management system in place, balancing it
    was more important. That is kind of where we are going as a
    Federal Government. We look to those out years and we need to
    make sure every dollar is being used effectively and we know
    how much we have to spend to set those priorities.
        Mr. Walker. I would respectfully suggest we need to do it
    now because we are already in deficits.
        Mr. Platts. Absolutely.
        I will now yield to Mr. Towns for the purpose of questions.
        Mr. Towns. Thank you very much, Mr. Chairman.
        Let me thank all of you for your testimony. Let me start
    with you, Ms. Springer.
        You mentioned the fact that the Homeland Security Agency
    would create a substantial challenge. I was sort of looking at
    it differently. Maybe you could help me with this, that being
    it was a new agency, certain things would be put in place that
    would be able to prevent us from making the mistakes we made in
    the past. Am I looking at it wrong?
        Ms. Springer. No, you are not. I think it is just two
    aspects. I think starting with a fresh sheet of paper as you
    described, I think there is that aspect there but at the same
    time, we are bringing in agencies that have a legacy of history
    of challenges in their own financial management systems for
    example and we are not starting from the ground up necessarily
    with all of those pieces, at least for right now.
        In order to meet the financial reporting requirements that
    we expect of an agency that size and that type of
    responsibility to the public, we are going to have to use, at
    least in the interim, some of their own existing systems as at
    the same time we are building from that clean sheet of paper. I
    think both aspects are in play right now.
        Mr. Walker. Mr. Towns, I would say it is both a challenge
    and an opportunity. In the short term, it is a challenge
    because we have all these non-integrated legacy systems,
    different cultures, and numerous players that have to be
    involved, but it is also an opportunity because one would hope
    we could create enterprise architecture never mind keep the
    same basis from which you could end up building the future and
    making all your future IT decisions based upon that so they
    ought to be able to get to a better place quicker if it is
    handled the right way.
        Short term, it is going to be a big challenge, but it is
    also an opportunity, as well.
        Mr. Towns. Thank you. Why is it we have all this problem
    with DOD?
        Mr. Walker. I would respectfully suggest DOD is an ``A''
    No. 1 in the world in its mission which is fighting and winning
    armed conflicts; it is a ``D'' on economy, efficiency,
    transparency and accountability. It is a ``D'' for several
    reasons. One, until recently, it really has not had sustained
    commitment from the top down. Deputy Secretary Hamry was very
    interested in this and some of their players. They got started
    at the end of the last administration but the level of
    commitment and attention from the top is very evident now,
    Secretary Rumsfeld down, on this issue. It is being made a
    priority, with a commitment from the top.
        In the past, they have had everybody kind of do their own
    thing. The Army did its own thing, the Navy, the Air Force, the
    military side as well as the civilian side. Furthermore, the
    culture was such that they focused on mission, war fighting.
    They didn't focus on basic management and accountability
    systems and they didn't have the right type of responsibility
    and accountability mechanisms in place in order to make sure
    the people were focusing on them.
        One of the things I think Defense needs to do in addition
    to what they are already doing is they need to think seriously
    about creating a chief operating officer position or a chief
    administrative or chief management officer, call it whatever
    you want, a level two position that focuses day to day on
    strategic planning and integration of these basic management
    type functions and activities because they are going to take
    years and are going to have to span different Secretaries of
    Defense as well as different Presidents of the United States.
        Mr. Towns. The privacy issue, how does this play into it?
    Does this create a problem for you in terms of ascertaining
    information? Does that issue come up?
        Mr. Hammond. Let me start as the collector of the
    governmentwide information. I think the information we collect
    for preparing financial statements either for budget-based
    reporting or for accrual-based reporting doesn't involve
    individual privacy concerns. It is done at a high enough level
    and without identification to individual issues that we have
    not seen privacy related issues with related financial
    reporting.
        Where we do find it and have to take it very seriously is
    with regards to the debt collection issues which are another
    part of the operations of the Financial Management Service,
    where you are dealing at a more individual level and sometimes
    dealing with tax-related information. With regard to financial
    reporting itself, no, we have not experienced any privacy
    issues.
        Ms. Springer. I would say that is also true at the general
    agency level as well, similar to the debt collection when we
    initiate some of these improper payment collection activities.
    That will be another place where we will have to be mindful
    about privacy issues.
        Mr. Walker. I don't think we have any problems from a
    financial statement standpoint. I would say one of the things
    we also have to look at if we are talking about incentives and
    accountability mechanisms, we need to look at the incentives
    for people we have overpaid to pay us back in a more timely
    manner. Right now, the way the law works, if we don't pay
    promptly, we have to pay interest and penalties but on the
    other hand, if they get overpaid and don't tell us, they don't
    suffer any penalty. I would argue that needs to be revisited.
        Mr. Towns. I see my time has expired, Mr. Chairman.
        Mr. Platts. Thank you, Mr. Towns.
        I will now yield for 5 minutes to our vice chair, Ms.
    Blackburn from Tennessee.
        Ms. Blackburn. Thank you, Mr. Chairman. Thank you all for
    being here today.
        I am new to this committee and new to Congress but I am an
    old hand at State government and led reform initiatives in
    Tennessee. I look forward to being here and working with you
    all to be sure that we move toward some efficiency efforts.
        Mr. Walker, if my little hen scratching serves me well, as
    I am sitting here and looking at your chart, which I thank you
    for, looking at consumption, our composition of spending and
    where we would be at 2050 and 2030, it looks like at 2030, we
    would be well over the 50 percent mark for the total
    expenditure of our citizens on State, local and Federal tax
    costs. Right now we are pushing the cost of government at about
    45 percent when you combine the State, local and Federal cost
    of government, taxes being the largest budget.
        I would recommend and suggest with this in mind that we
    would soon be crossing that 50 percent threshold that we do
    have a market force that should be helpful in helping you
    achieve the goal of reducing the cost of government and that
    market force would be the taxpayers of the United States who
    will not stand for over 50 percent of the GDP going to support
    government.
        You each have mentioned material weaknesses in the
    reporting and accounting measures. My question to each of you
    is what are you doing to address the material weaknesses in
    being sure that the reporting and the accounting methods are
    cleaned up and that we are on the right track? What are your
    benchmarks, what are your penalties, what is the recommended
    course of action, and who is responsible for that recommended
    course of action?
        Ms. Springer. Let me take a first answer at that one. The
    CFO Act agencies in particular which comprise most of the
    financial statement information, the OMB is meeting with every
    single agency, every quarter at least and frequently as needed,
    but very specifically right now coming off this audit, we are
    asking each agency to give us in writing a plan weakness by
    weakness for how they are going to deal with it and how they
    are going to achieve reductions in those weaknesses. We are
    asking them for plans that have names of individuals who are
    accountable, we are asking for dates and an actual work plan
    for having achieved that.
        Admittedly, some of those are shorter term fixes that could
    be remedied within the 1-year horizon. A lot of them will
    extend a lot longer, particularly the ones related to financial
    systems.
        We also have put up a data base on-line that shows in real
    time the status of those weaknesses, so it is very transparent,
    very out in the open. If one of them gets remedied, we go right
    on-line and fix it but you can drill down from starting from
    the highest level of here is the total number of weaknesses to
    the type to a very detailed description and that is maintained.
    So again, it is very out in the open, there is nothing
    secretive about it.
        Ms. Blackburn. What are the penalties if something is not
    brought into compliance in a given period of time?
        Ms. Springer. I think the penalties from this standpoint
    differ from the private sector I think my colleagues would say
    as well, that it is not as if you are going out to the
    marketplace to raise capital and you need to have a clean
    opinion as if you are dealing with the SEC and you need a clean
    financial statement.
        At the same time, within the administration, I can tell you
    for a fact, the President will go into the Cabinet meetings and
    say to Cabinet officers, how come you are still at red. We have
    a scorecard process of red, yellow and green and one major
    component is the financial condition inclusive of the material
    weaknesses and audit opinions for each major Cabinet agency.
    That is known up to the highest level. There is no greater
    incentive for a Cabinet Secretary to get their house in order
    than to know that the President has it on his radar screen.
        Ms. Blackburn. Mr. Walker.
        Mr. Walker. I think one of the things that has to be
    considered is the Chief Management Officer/Chief Operating
    Officer concept at selected departments and agencies and I
    would respectfully suggest those type of individuals should be
    term appointments, probably 7 year terms with performance
    contracts. You would then have accountability for results in
    this area that span between administrations and I would be
    happy to talk further about this concept.
        The last thing is I agree we have a potential market force,
    namely the taxpayers. The problem is there are very few people
    talking about this. A lot of people don't want to talk about
    this. In fact, if you look at Congress' own budgeting
    mechanism, you will see decisions are made based upon 1 year
    and 10 year cash-flow implications, not economic present value,
    long term implications. As a result, what you get is that a lot
    of the things Congress is talking about doing will quite
    frankly make our long term fiscal situation worse not better.
        Ms. Blackburn. That leads me to another question. As you
    all can tell, I am one of those geeks who sits around and reads
    the budget. I really enjoy this stuff and I do want to work
    with you to be sure the taxpayers are getting a good buy on the
    government they have. I think that is incredibly important. I
    think there are far more people that are watching this. I think
    the Internet has been wonderful to help make government
    transparent. I applaud you all for trying to move toward a Web-
    based system, Mr. Hammond as you mentioned.
        I did have two questions. Ms. Springer, this may be better
    to you or to Mr. Hammond, I am not sure.
        What do you consider to be the true cost of a piece of
    legislation when we pass a bill, say like No Child Left Behind,
    or combining homeland security? As you look at the cost of
    implementation, do you work through this on a dollar basis or
    on a percentage basis if this is an $11 billion program, what
    is that going to cost you to change your accountability
    standards to put new bureaucracy in place, new management in
    place? How do you go about estimating that cost of all these
    good ideas we come up with?
        Ms. Springer. I think there are a couple of pieces to that
    answer. Obviously to the extent there is legislation involved,
    we would support the scoring process that the Congressional
    Budget Office has in assigning it a value and a cost figure to
    any kind of legislative action.
        To the extent that we have an investment that doesn't
    require legislation, an investment in a new system for example,
    there are case studies required by OMB that will essentially
    lay out the cost benefit as you would in any other business
    decision if you are a good business person, private sector
    trying to bring that same principle to light in the Federal
    Government so you would go through a very detailed case study
    to essentially prove the value of that investment.
        Ms. Blackburn. Right, but I think many times those
    estimates are quite low going back to what Mr. Walker was
    saying, that they look at it on a 1 year or 10 year basis and
    not run it out as you have done.
        Ms. Springer. Most of the ones that would come into my
    realm, if I saw a systems investment, a modernization
    investment that took 10 years, I would send it back to them and
    ask them to redo it. Most of mine don't have a very long
    timeframe.
        Mr. Hammond. I think if you are looking at entitlement
    programs or permanent programs, you need to build in an
    appropriate long-term planning horizon and then do a discounted
    present value calculation of the net cost based on the
    assumptions available. That really is what accrual-based
    reporting supports after the fact but I think the goal would be
    to try to bring something like that in at the beginning of the
    process.
        Mr. Walker. I think that is critically important, it is too
    late after the fact. One example is no matter what you think
    about the merits of this, the fact is that Congress passed a
    couple of years ago Tri-care for life for dependents of
    military personnel. Congress went to the CBO who scored it.
    They scored it based upon 10 year cash-flow, $50-$60 billion.
        We have to deal with discounted present value concepts
    which is how you ought to make informed decisions. When you
    look at it on that basis, when we issued the audit report on
    the financial statements at the end of the year, it wasn't $50-
    $60 billion in cash-flow, it was $297 billion. The Government
    would have to have $297 billion today invested in Treasury
    rates to deliver on that promise.
        Congress is thinking about doing the same thing with regard
    to the issue of not having an offset in connection with VA
    disability benefits. This is likely to cost even more money and
    yet Congress doesn't even have the numbers available to it.
        For prescription drugs, we are talking about 10 year
    numbers. Ten year numbers are small change compared to what
    kind of number we are untimately talking about here. They are
    just misleading.
        Ms. Blackburn. Thank you.
        Mr. Platts. We will come back for an additional round.
        I want to followup with Ms. Springer. Mr. Walker talked
    about a chief management officer and appointment of maybe a
    fixed term performance contract type position. I would be
    interested in knowing OMB and the administration's position on
    such positions specifically for DOD?
        Ms. Springer. I think from my perspective, we are
    interested in getting the right skill sets and the right
    capabilities applied to the effort. As far as the actual
    position whether it is a political position or a career
    position, whether it is a chief operating officer concept, I
    personally haven't reviewed it but I am sure the administration
    has a position but my main objective would be to assure that
    whoever that individual is, they have the right skill set to
    apply to the problems and get it resolved.
        Second, would be the structure, but I am sure there is an
    administration position on that.
        Mr. Platts. I agree that having the right people in place
    who have that drive and whether their political or career is
    important. If you could followup on what the administration's
    position would be on the non-political position at DOD that
    would be great.
        Mr. Walker. If I can provide some information that might be
    helpful to you and to Linda as well, I have had conversations
    with Mitch Daniels, with high level DOD officials as well as
    others on this concept. I know that the Secretary of Defense's
    Business Process Transformation Advisory Board has recommended
    the creation of this position. I don't know that the
    administration has a position yet. I think it would be great
    for them to have one.
        Obviously, they have had some changes in players. Mark
    Everson, who was involved in the conversation, is now going to
    be the IRS Commissioner. You have Clay Johnson coming on board.
    So I look forward to hearing what they have to say.
        Mr. Platts. It sounds like the Department is embracing it
    and that goes to the leadership from Secretary Rumsfeld at the
    top of the department and having that is certainly a good step
    in the right direction.
        Mr. Hammond, Treasury, Social Security and the Postal
    Service are to be commended for meeting the November 15
    deadline 3 months early and really 2 years early. What would be
    your advice as to the other agencies as to how they could
    emulate and seek your success in providing that information in
    a more timely fashion?
        Mr. Hammond. I think it is an excellent question because
    what you look at initially is the daunting task of trying to
    speed up issuing the year-end report. The success story of each
    of these three agencies indicates it has nothing to do with
    what you do at the end of the year, but everything to do with
    what you do during the year.
        It really gets to changing the way you look at the data
    throughout the year, closing your books monthly, analyzing that
    information to check for trends or inaccuracies and in essence,
    isolating problems long before the end of the year so that at
    the end of the year, you are just compiling that which you
    already understand and know.
        You will find in all three of those organizations a strong
    culture of financial management, a serious commitment beyond
    just the accounting operations to understanding those numbers
    and recognizing what they are all about. They come from very
    different reasons but they share this common theme.
        If you look at the Postal Service, they are running a
    business. They have to know what is going on. Social Security
    has a huge stewardship responsibility to the American public.
    They want to have confidence people know their money is being
    properly managed. The Treasury Department issues the debt on
    behalf of the Government and collects all the tax revenues,
    again a huge public responsibility that needs to have
    credibility. That culture of financial management that kind of
    seeps throughout all three organizations makes it easier for
    program agencies to get good information and accept the
    additional monthly change in business.
        Mr. Platts. By that internal process, we are not having
    what Mr. Walker talked about, that end of the year labor
    intensive catch-up game being needed?
        Mr. Hammond. Right.
        Mr. Walker. There is still some of that going on at the IRS
    but they have come a long way and I commend them for their
    efforts.
        I will say one of the other common denominators you have
    with those three agencies, in addition to what Mr. Hammond
    said, is committed leadership from the top. For the record, let
    me note that former Treasury Secretary Paul O'Neill was a
    person of incredible ability and integrity and was very
    dedicated to this area. That should be noted.
        Ms. Springer. One other comment in this regard. The proof
    is in the pudding and we have had for the first quarter, for
    the first time across all 24 agencies, all getting first
    quarter financial results and financial statements submitted.
    This was the first year it was required and they all came in on
    time. Many of those agencies are now going to monthly and also
    doing full annual statement requirements with footnotes and
    everything else even though they are not required. It all will
    support being in a better position at year end.
        Mr. Platts. I know Mr. Towns is pressed for time and I am
    going to yield to him. If you need to, take more than 5 minutes
    to get through your questions.
        Mr. Towns. On that note, what does that really mean when
    you say they all got in on time? I am trying to figure out what
    does that really say? Does that mean they are more committed?
    What does that really tell you?
        Ms. Springer. In order to do just the year-end financial
    statements, it is possible to work through the course of the
    year and apply some of these heroic efforts and work over the
    course of the year's period to be able to get your statements
    compiled and submitted.
        You can't really employ and rely on that kind of effort on
    a 3-month repeating basis. It really means you have to go back
    and look at your processes and look at your methodology for
    developing statement entries because the timeframe is just so
    much shorter, only 3 months as opposed to 12. The significance
    of 3 months in getting those in on time is it forces the agency
    to really break out of that old culture and to adopt new
    processes. Even if they are still undergoing their systems
    modernization, there is a lot they can do on the process side.
    That is what that forces.
        Mr. Walker. One of the primary reasons the JFMIP Principals
    agreed to accelerate the due date for financial reporting is to
    take away the option for departments and agencies to engage in
    these heroic efforts after the end of the year. There is just
    no way you can engage in these herculean efforts and hit that
    November 15 date, so that forced them to be able to start
    dealing with some of the underlying systemic problems. That
    coupled with having them adopt modern financial management
    practices, it really isn't rocket science but pretty basic
    stuff, including quarterly reporting, and you can get a lot of
    progress pretty quickly.
        Mr. Towns. Mr. Walker, I think you outlined some of the
    major problem areas of the Federal Government in achieving a
    clean opinion. One of these areas, reliability estimating and
    reporting the liability the government has for environmental
    remediation and disposal of hazardous waste, this problem is
    primarily in the Department of Defense. How badly is this area
    under reported? Are we talking about $1 billion, $10 billion?
        Mr. Walker. Probably tens of billions. It is difficult to
    say. They have come up with an estimate now but we are not
    comfortable with their methodology, or the basis of their data.
    In fact, the DOD now has a process by which each year they have
    to make a statement to the Inspector General, the Congress and
    others as to whether or not they believe they are in a position
    to even have an audit. Last year, they said they were not. This
    is one of their major challenges, not their only challenge, but
    it is too early to tell how big the imbalance is. I would say
    tens of billions.
        Mr. Towns. I noticed the Department of Energy for a number
    of years also had problems estimating its environmental
    liabilities which it has actually corrected. How did they
    manage to correct their problem and can these solutions be used
    at the Department of Defense?
        Mr. Walker. I would be happy to provide some additional
    information for the record. I know they have made progress and
    would be happy to do that for the record. No doubt one of the
    things we ought to be doing is looking at where we have had
    some successes, where we have had progress and what can be done
    in order to share best practices, along with lessons learned so
    we can proliferate these throughout government.
        Mr. Towns. Do you want to add something?
        Ms. Springer. I would agree with that and I think we have
    also employed that best practices sharing in the committee of
    the CFO Council on Acceleration that Mr. Hammond chairs. We
    endorse that.
        Mr. Towns. I want to go back to the whole security privacy
    question. Are you comfortable with the security system actually
    being used in terms of the computers being used? Do you feel
    that is adequately secured in order for you to get the kind of
    information you really need?
        Mr. Walker. There is a difference between what type of
    information we need in order to do the audit on the financial
    statements or to prepare the financial statements which is the
    executive branch's responsibility. I would note for the record
    that information security is one of the material control
    weaknesses governmentwide. It is also an area that is on GAO's
    high risk list governmentwide as well. So there are issues
    associated with information security and privacy but they are
    really not issues that deal with financial reporting and
    auditing the consolidated financial statements of the U.S.
    Government.
        Mr. Towns. I was wondering if through that process
    inadequate information might come out?
        Mr. Walker. One of the real problems we have in some areas
    is the lack of timely, accurate and useful information. It is
    particularly problematic at the Department of Defense because
    they have thousands of systems by themselves, legacy systems
    that are non-integrated. For example, if you look at our high
    risk series reports, we have one that deals with information
    security, we have one that deals with DOD financial management,
    and anouther one that deals with DOD's information technology.
    It shows an example of how many systems you have to enter one
    purchase transaction into in order to be able to record it at
    DOD. I think it is something like 22 times. No wonder we have
    data problems.
        Mr. Towns. Are you having difficulty getting information
    from agencies? Are they cooperating?
        Ms. Springer. The level of cooperation is very high. There
    is no question about that. I would say it is probably at its
    highest level from what I can tell, but at the same time, they
    are constrained in providing performance information, if you
    will, financial performance information by virtue of the
    cumbersome processes they have in place and systems. So I think
    there is certainly a willingness to provide information. It is
    provided but it is the timeliness factor that is not always
    there. Some of these things took a long time to develop, they
    are going to take a long time to fix but we are seeing
    progress. That is what our job is going to be, to make sure
    that progress continues to completion.
        Mr. Towns. I guess I am trying to see if there is anything
    on this side we can do, from the Congress, in terms of any
    action we might take that might be helpful in terms of being
    able to obtain the information you need because I see this as
    being very serious?
        Ms. Springer. There is certainly no lack of statutory
    requirement and existing legislation and requirements for each
    of the agencies whether it is the Integrity Act and
    certification of systems, that they are timely and can produce
    the information and other certifications required by the agency
    heads around their control environment. I think Congress has
    certainly done its part in setting forth what the requirements
    are. The burden is on the agencies to be able to remedy these
    problems.
        Mr. Hammond. I think if you look at what the subcommittee
    is doing today and has done in the past is a great example of
    where Congress can help, continued oversight and interest in
    these important issues. It is one thing to have a statutory
    requirement; it is another thing to have periodic reporting and
    measurement against the progress to doing that. Certainly
    agencies are all interested, focused and committed to doing
    this but I think continued oversight is a very, very helpful
    way of keeping that focus.
        Ms. Springer. If I could add one other thing. Last year,
    the passage of the Improper Payments Information Act gave, I
    think, the force of law to the efforts of the executive branch
    which will improve on that effort significantly. I think that
    is a good example of a particular area where the legislative
    support will help us get to the problem a lot sooner.
        Mr. Towns. I don't want to be guilty of blaming everybody.
    I think we are all in this together and we have to work
    together. That is the reason I asked that question.
        I yield back, Mr. Chairman. Thank you.
        Mr. Platts. Thank you, Mr. Towns.
        I would note this committee does plan oversight in the near
    future on SBA and USAID and DOD later this year as well to try
    to bring some additional oversight to those specific agencies
    as they work toward their clean audits.
        I want to get to the improper payments issue a little, but
    I want to come back to the DOD issue. Mr. Walker, in your
    opening statement you talked about being 4\1/2\ years into your
    15 year term and your hope and expectation that we will have a
    clean record before your term ends. Clearly, DOD is critical to
    that achievement. What is your best guesstimate of the process
    with the leadership we have there now of how soon we could
    expect DOD to have a financial management system in place that
    will allow an unqualified audit to begin?
        Mr. Walker. It is going to take several years. The fact of
    the matter is there is a lot of focus on this, not only within
    DOD but also within OMB. I participated in more than one
    meeting on the subject matter within the last several months.
    DOD is in the process of trying to put together a plan which
    will be a multiyear plan of what they plan to do in order to
    address this area.
        We are coordinating in a very constructive fashion with the
    executive branch because obviously they can put together a plan
    but we are ultimately the ones that have to issue the opinion
    on the consolidated financial statements of the U.S.
    Government, so we have to be comfortable with what they are
    proposing to do as well as the Inspector General of the
    Department of Defense. I would note for the record the
    Inspector General was in the last meeting as well. Unless and
    until that plan is completed and reviewed by all the
    appropriate parties, it is tough to say but it is going to be
    several years.
        Mr. Platts. Does appointment of the Chief Management
    Officer reduce that in a substantive manner?
        Mr. Walker. It could help but it could help not just in the
    area of financial management. It could help with regard to
    providing sustained attention and focus on a range of
    management issues and to take a more integrated approach to
    addressing these issues which I think is needed not only within
    administrations but between administrations. DOD has been in
    existence for over 56 years and has been on the GAO's high risk
    list from the very beginning in 1990. It is going to take
    sustained attention over a period of time to really get to
    where they need to be.
        Ms. Springer. If I could add to that. Having participated
    in those meetings as well, I have found them to be a good first
    step. There would be a big leap from no opinion to a clean
    opinion. The first step, is if we could get this, it would be a
    fantastic achievement, just to get to a qualified opinion. It
    is important to recognize there are steps along this process.
    The DOD system itself is targeted to go live in 2007, so
    certainly before that it would be a great challenge to be able
    to make significant progress overall toward getting a qualified
    opinion. The planning has started now, you don't wait until you
    get there to plan. You have to look over a period of time.
        Mr. Walker. I think realistically that has to be the plan.
    You need to try to work toward a qualified opinion before you
    get to a clean opinion. To note the challenges at DOD, for
    example, Jeff Steinhoff, our Managing Director for Financial
    Management and Assurance, just gave me a note saying, ``80
    percent of the financial information that is needed to do the
    audit for DOD comes from non-accounting systems.'' It is all
    the more important that you take an enterprise-wide, integrated
    approach to this and you need somebody focused beyond just
    accounting and financial management. You have to focus on a
    broader perspective in order to really get the job done. That
    chief operation officer position would allow that to better
    happen, bringing all that together.
        That is not a slight to the people who are there. Dove
    Zakheim is truly committed, and Secretary Rumsfeld and Deputy
    Secretary Wolfowitz are truly committed but they have other
    things they have to do, too. Realistically, it is going to take
    a while and we can't keep on changing the players. We must
    assure that we are making progress and have appropriate
    accountability for results.
        Mr. Platts. Taking the DOD experience to DHS, and some of
    the previous questions touched on not getting behind the eight
    ball with DHS, while acknowledging that we are bringing
    together a lot of existing agencies that have problems. DHS is
    not covered under the CFO Act. Would it be your recommendation
    that they should be statutorily required to further comply with
    that act?
        Ms. Springer. DHS, as other agencies not covered by the CFO
    Act, are subject to the Accountability of Taxpayers Act enacted
    last year. So they do have a requirement to produce audited
    annual financial statements. In that respect, they are not
    exempt. I think whether it is that act or whether the CFO Act,
    for an agency of that size there is a very high bar and
    standard they need to meet. So we have talked with them about
    producing the quarterly financial statements that are required
    of the CFO Act agencies every bit as much as if they were. They
    do have a reporting requirement.
        Mr. Platts. Having that quarterly requirement I think goes
    to Mr. Towns' comment that we up front start on the right foot
    instead of trying to play catchup.
        Mr. Towns, did you have other questions?
        Mr. Towns. No.
        Mr. Platts. I am going to turn to the Improper Payments Act
    and implementation of that. We heard $20 billion, $35 billion.
    Is there any additional insight on the amount? As a guy who
    lives in a community where you can still get a 99 cents
    breakfast special, $35 billion every year of improper payments
    is staggering to me.
        Mr. Towns. Where is that?
        Mr. Platts. Come on up, Mr. Towns. My guess is if that is
    what we are thinking, it is probably more. Would you hazard to
    guess how much higher we may find it to be?
        Ms. Springer. I will give you some figures that helped me
    put it into perspective and I think would lead you to the
    answer. The $35 billion was based on a base of payments of
    about $900 billion, so the rate is roughly 3.9 percent, close
    to 4 percent. There is a budget of $2 trillion, so there is
    another $1.1 trillion that hasn't even been measured yet.
    Admittedly that is not all going to be erroneous but if you
    apply that same type of percentage, there is a lot more money
    yet there that is likely to raise that $35 billion.
        Mr. Platts. Maybe another $15-$20 billion if you applied
    the percentage?
        Ms. Springer. I think that is conservative. I think we are
    going to see that number go higher but you have to diagnose the
    illness, not before but as you are curing it, you need to know
    the extent of the illness. We find that number is going up and
    I think it will go up.
        Mr. Platts. With your efforts in addressing that, I know
    with every agency having to identify what their improper
    payments are, OMB is working, and in your testimony you talked
    about proposed common sense approaches for student financial
    assistance. How far along is OMB with each agency in trying to
    get them in good shape for making that more definitive
    identification occur?
        Ms. Springer. Two things. For the budget, the 2004 budget
    is part of that process. We asked agencies kind of in advance
    or in anticipation of the act for identifying their baseline of
    erroneous payments and what efforts are being made. The
    response was mixed. I would say about half the agencies had
    things in the works. So there is a long way to go there.
        OMB is also on target to issue its guidance related to the
    act. That is due by the end of May. We will get that out and
    that will require some very specific action steps related to
    estimating and showing progress.
        Mr. Platts. The end of May?
        Ms. Springer. The end of May is the due date.
        Mr. Walker. I think there is no question it is higher than
    $35 billion. I think the act passed by the Congress last year
    will only help us to ascertain what the number is but I think
    it is important to note that progress is being made. For
    example, at the Center for Medicare/Medicaid Services, when the
    first improper payment estimate was done, that agency was over
    $20 billion. I think last year it was down about $12-$13
    billion, still unacceptable and still too high but they have
    made a considerable amount of progress in that regard. So we
    need to know what the base is to have focused attention on it.
        I think it is also important to note what improper payments
    are and what they aren't. Some of these are duplicate payments
    you need to recover; some of these are payments where we don't
    know whether they were proper or not because we don't have the
    adequate documentation. So it is not all fraud, waste and
    abuse. It is not money that is down the drain. Some of it is,
    but we need to focus more attention on this area in order to
    solve the problem.
        Mr. Platts. Ms. Springer, you identified with the earned
    income tax credit that the proposal to spend $100 million to
    try to better explain the tax credit so we can save the $9
    billion that we think we are overpaying and if those efforts
    are successful, those are going to be great.
        When you talk about the proposals with eligibility for
    applicants for student financial aid, you say you proposed
    those. How have they been received?
        Ms. Springer. Some of those are still in the works. For
    example, where there is an opportunity to have access to a tax
    data base or where there is an opportunity to have access to a
    new hires data base. So some of those just in the past month
    have come up to the Hill for discussion.
        Mr. Platts. So you are still kind of in the early stage?
        Ms. Springer. Early stage, yes. They have been met with
    good receptivity.
        Mr. Platts. This is a question for all three but it starts
    with Treasury. In your 2001 and 2002 consolidated financial
    statements, there was roughly $17 billion each year that was
    unreconciled transactions and that is how the $17.1 billion and
    $17.3 billion amounts in each year were identified to really
    reconcile the Treasury books. What does that mean? Is that
    money that was lost, we just don't know what happened to it, is
    it part of improper payments? What is your best estimate of
    what that accounts for?
        Mr. Hammond. We think that it is the various balances that
    are misidentified between the agencies dealing with business
    taking place between themselves. When you are pulling together
    a consolidated financial statement across various
    organizations, you have to make sure you eliminate the activity
    that takes place internally because otherwise, you will be
    overstating to the public the net results of the joint
    activity. As we go about that, it is inherent on proper data
    quality and data identification coming into the system.
        To give you an example, this year we put together a system
    to be able to compare based on trading partner information, the
    various components of activity between the various parts of
    agencies. When we went back and forth and looked at what agency
    A said they did in business with agency B and what agency B
    acknowledged they did in business with agency A, when we
    compared all that, we had a net difference of $55 billion. That
    gives you a rough order of magnitude of the idea that the data
    coming in isn't properly classified and in many cases, frankly,
    isn't booked the same way on both sides of the transaction.
        Mr. Platts. Does that go to the internal control issue, if
    they are $55 billion off?
        Mr. Hammond. There is an internal control aspect to it,
    there is also a data identification aspect to it. Some agencies
    look at other agencies as being the same thing as the public,
    so it is hard for them to pull out of their systems and
    differentiate between activity they do outside the government
    and activity they do inside the government.
        The third piece of it is they treat data differently. For
    example, some agencies will book a receivable for business they
    are doing with other agencies but the other agency may not book
    a payable.
        Mr. Platts. It is comparing apples and oranges, how the
    different agencies look at the same information. There is not a
    unified analysis of how they credit it which accounts for
    different treatment in their books.
        Mr. Hammond. Exactly, so we have done a couple of things
    over the years to narrow that problem as well as to try to
    isolate the differences and then deal with those. We have with
    regard to the large dollar components, the investment activity
    that agencies have buying Treasury securities, the funding for
    the Civil Service Pension Program, isolated those and resolved
    or explained virtually all of those differences. We are now
    left to the routine activity between the agencies and to do
    that, OMB issued some intergovernmental business rules this
    summer that have gone into effect to create standardized
    business practices all agencies will have to follow. The second
    piece is that there is a joint agency effort building a system
    for the commercial activities between agencies that will
    hopefully capture and record all that information at the point
    of initiation and go a long way to solving that. It is a fairly
    daunting task.
        Mr. Platts. Hopefully as we get to more transparency and
    credible testimony or evidence because to the person looking at
    that, you balance, but there is this $17 billion sum that is
    unreconciled. The more we can reconcile; the more credible the
    balance statements will be.
        Mr. Walker. In accounting parlance, it is referred to as a
    plug but it is a $17.1 billion plug, which is a net number. We
    don't know what the gross number is. It is the net number, the
    net difference. It is something that has to be resolved. I do
    agree with Mr. Hammond it is primarily dealing with these
    intragovernmental transactions we need to get our arms around
    and that is too high.
        Mr. Platts. Ms. Springer talked about the formal process of
    having across the board treatment of those intergovernmental
    transfers.
        Ms. Springer. Right and that was a large part, and I can't
    take any credit for it, but getting out these rules and getting
    the system support for catching all those things.
        Mr. Hammond. It may be a small sense of comfort, and I
    prefer the term my Canadian colleagues use for their plug in
    their financial statements which is a harmonizing entry.
    [Laughter.]
        Mr. Walker. It is a plug. You can't make it sound like it
    is not.
        Mr. Hammond. You will notice it is actually an addition,
    not a cost, actually a negative cost in the statements, again
    providing some sense that it is intragovernmental activity, if
    properly eliminated, would hopefully explain that.
        Mr. Platts. I apologize; I am listening. I am supposed to
    be in a mark-up and they are telling me that I am voting but
    now they tell me the vote is over, so I don't have to run off,
    the usual of being in two or three places at once.
        Harmonizing plug?
        Mr. Hammond. It is the same thing.
        Mr. Platts. And we all share the hope that we stop plugging
    but just reporting and certainly steps like the uniform
    approach to these transfers is a step in the right direction so
    we are all on the same page.
        Mr. Hammond, with that part sounding more specifically
    related to the transfers, when we talk about improper payment
    specifically with Treasury as far as your history, are there
    any obstacles Treasury sees to having more success in avoiding
    improper payments?
        Mr. Hammond. The biggest improper payment I am familiar
    with at the Treasury Department deals with the earned income
    tax credit at the IRS. I think that is a very daunting task
    because part of the reason there is a level of improper
    payments with regard to that category has to do with the design
    of the program itself. It is driven the way it is statutorily
    created and the way it has to be administered in the Tax Code
    puts certain barriers on the effective management of the actual
    improper payment amount.
        One of the questions you have to look at as we dig deeper
    into improper payments and look at them with regard to various
    programs is the cost benefit analysis related to reaching a
    point of zero or minimal improper payments. If you look at any
    business today, you will find they have certain losses. There
    is an unacceptable level of loss and an acceptable level of
    loss. They make that judgment based on the cost related to get
    below that threshold.
        The Government is not to that point I don't think in being
    able to assess the various programs on improper payments but at
    some point we will have to get there and understand at what
    point do you say, it will cost so much more to go from this
    level to this level that we have to live with that or
    alternatively, redesign the program. I think the EITC is kind
    of a case study in that.
        Mr. Platts. With the hope to spend the $100 million to
    address that, are we going to be closely scrutinizing the cost
    benefit of that $100 million, is it actually going to reduce
    that $9 billion in improper payments? I assume that would be
    part of that process?
        Ms. Springer. That is right. Actually before that even got
    into the budget, I had the opportunity to sit in and kind of
    audit that session. Clearly the expectation on the investment
    of $100 million, while it is not a small number, is to make a
    significant dent in what right now is a $9 billion problem.
        Mr. Platts. For all three of you on the Medicare fee for
    service, $12 billion, 6.3 percent of improper payments
    identified, while we want to aggressively go after any improper
    payments, Mr. Walker you kind of identified this, some of that
    may not be improper. We just don't know.
        I spend every couple of months, and it is harder to do now
    than when I was in the State House, but a day on the job with a
    constituent. I have had great experiences with truck drivers,
    postal workers, teachers, you name it. One day I spent in an
    emergency room with a physician and staff nurses for a 12-hour
    shift. Part of that day was watching the emergency department
    physician do recordkeeping for Medicare. The concern he
    expressed about improper payments is that while we are trying
    to identify them that we do so in a responsible way. His point
    was he was sitting here today identifying what he believes is a
    proper treatment and that translates to where they fall as far
    as reimbursement. Nine months from now Medicare would come back
    and say you were intentionally defrauding the government and it
    should have been level 3 not level 4 and the burden is on the
    physician to prove they were right.
        Do you see anything that raises concerns as we go after
    improper payments that we need to keep our eye on that we are
    not doing in a wrongful way and being overzealous and maybe
    trying to recoup money not improper but not appropriately
    identified?
        Ms. Springer. That situation is certainly not the intent of
    any of these programs. It is just to go after whether it is
    fraud, waste or abuse, or inefficiencies or just getting better
    information to know where we stand. It certainly wouldn't be to
    comprise the integrity of any of the programs or the intent of
    the mission of the programs.
        Mr. Walker. The other thing you have to look at is that
    obviously the act passed last year was intended to increase the
    amount of transparency, the amount of light associated with
    these amounts. You manage what you measure, so until you start
    measuring it, you are not going to be able to effectively
    manage it.
        The other thing we have to do is look at what types of
    incentives and accountability mechanisms can be put in place if
    it turns out that there were behaviors or actions that were
    inappropriate. I come back to what I said before. If we made a
    duplicate payment, after a certain period of time I would
    expect that if somebody economically benefited from that, we
    ought to be able to recover some of that benefit. Maybe for
    some major contractors, we ought to require them to tell us
    after a period of time.
        Also to the extent it turns out there is improper upcoding,
    what that refers to, if it is innocent it is one thing but if
    there is intentional upcoding, I think you have to more
    sanction than just getting the money back. That is not enough
    to prevent undesirable behavior.
        There has to be reasonable transparency, appropriate
    incentives for people to do the right thing and assured
    accountability when they don't do the right thing. If you don't
    have that, the system is not going to work.
        Mr. Platts. There has to be a consequence.
        I am going to wrap up with a final question. Mr. Walker,
    talking about us getting to maybe 10 years that clean,
    consolidated financial report, I would be interested with OMB
    and Treasury if you want to guesstimate from your perspectives
    and in a broad sense what is the biggest hurdle or obstacle
    that it is going to take 10 years? Is it just because DOD is
    such a big part of getting our arms around that it is going to
    take so long?
        Mr. Walker. First, since we are the ones who have to
    express the opinion, I would say I hope and expect that no
    later than the end of my term we will be in a position to issue
    a clean opinion, but that is going to require sustained
    commitment and attention not only within the executive branch
    but also in the Congress in order to make that happen. We have
    made a lot of progress over the last several years. At the same
    point in time, that progress could quickly wane if the
    executive branch or Congress do not continue to be dually
    committed to this effort. People could easily go back to where
    they were before.
        It could be quicker than that. I think realistically we are
    going to see a qualified opinion before we get to a clean
    opinion and it is too early to tell when it is going to be.
        Ms. Springer. One week into this position, I am certainly
    not going to go out on a limb with a date but I would say it
    will take a consistent sustained effort by certainly the
    executive branch. Plans are in place. Clearly the first
    objective is going to be a qualified opinion. To the extent we
    can lay the groundwork for a qualified opinion, then we go to a
    clean opinion. The challenge is there. DOD understands. We
    understand what our material weaknesses are.
        We would like to think within a couple of years we could be
    talking or planning for working with GAO toward getting that
    qualified opinion, within a shorter timeframe than 10 years.
    Qualified is within our sight. However, that is not to say it
    isn't a major task. It is a cultural issue. You can have the
    best systems in the world, the best processes in the world, but
    unless you have a culture that is the best of the private
    sector approach for this thing, you couldn't achieve it. I
    think it is doable. I think a qualified opinion is certainly
    within the next couple of years or so. I think we could be
    planning toward that.
        Mr. Hammond. As my colleagues will tell you, I have been
    known for my unbridled optimism, so I will continue to be
    optimistic.
        It is my sense that as we are working to resolve the
    governmentwide issues dealing with preparation of the report
    and the intergovernmental transactions and data quality, DOD
    will continue to make progress in specific areas. The
    combination of those two items should position us within the
    next few years to get a qualified opinion. The state of those
    remaining DOD issues will then determine how qualified that
    opinion may be, but I think that it is certainly not going to
    be 2003 but I do believe we can see a qualified opinion in a
    realistic time period.
        Mr. Platts. I share the optimistic approach day in and day
    out and hope we are right. I will tell you as the new Chair of
    this committee, I am encouraged by things like the Improper
    Payments Act that everybody now is going to put a number for
    their agency, what is it so we can, as you say, manage once we
    think we know what the number is.
        The President's Management Agenda in total, the PART
    program evaluation are all positive signs that encourage me to
    be optimistic that we are heading in the right direction. As a
    committee, we certainly look forward to working with each of
    you and the administration to have more transparency and more
    accountability. As we started the meeting with Mr. Walker's
    testimony, it is a necessity for what is coming down the pike
    in the years to come when my children and future generations
    are going to be challenged financially to deal with the needs
    of our citizens.
        In closing, I want to thank our great staff on both the
    majority and minority side for their work in putting together
    this hearing. Again, let me thank each of you for your written
    testimony, your comments here today and the followup materials
    you will be sharing with us.
        Based on the testimony we have heard today and also at the
    previous two hearings, it is evident that agencies are
    increasingly placing more emphasis on financial management.
    Today we are especially pleased with the Treasury Department's
    example of accelerating the issuance of its audited financial
    statements to November, 2 years ahead of the required
    timeframe. It is my hope that other agencies are going to
    follow and we don't have to wait for 2 more years. One year out
    maybe we will have a few more not just the three that were
    ahead of the game this time. We are moving in the right
    direction but we all remain concerned about the financial
    management practices of agencies that did not receive
    unqualified opinions. As I mentioned earlier, later this month
    we will be having a hearing with the Small Business
    Administration and in early May, with USAID to try to bring
    some more light, some more attention and get to the bottom of
    what their challenges are. It is my hope these agencies will
    give us some insight from within of how they are working to
    rectify their inability to receive unqualified opinions.
        We will hold the record open for 2 weeks from this date for
    those who want to forward submissions for inclusion.
        This meeting stands adjourned.
        [Whereupon, at 12:23 p.m., the subcommittee was adjourned,
    to reconvene at the call of the Chair.]
        [Additional information submitted for the hearing record
    follows:]

    [GRAPHIC] [TIFF OMITTED] T8503.064

    [GRAPHIC] [TIFF OMITTED] T8503.065

    [GRAPHIC] [TIFF OMITTED] T8503.066

    [GRAPHIC] [TIFF OMITTED] T8503.067

    [GRAPHIC] [TIFF OMITTED] T8503.068

    [GRAPHIC] [TIFF OMITTED] T8503.069

    [GRAPHIC] [TIFF OMITTED] T8503.070

    [GRAPHIC] [TIFF OMITTED] T8503.071

    [GRAPHIC] [TIFF OMITTED] T8503.072

    [GRAPHIC] [TIFF OMITTED] T8503.073

    [GRAPHIC] [TIFF OMITTED] T8503.074

    [GRAPHIC] [TIFF OMITTED] T8503.075

    [GRAPHIC] [TIFF OMITTED] T8503.076

    [GRAPHIC] [TIFF OMITTED] T8503.079

    [GRAPHIC] [TIFF OMITTED] T8503.080

    [GRAPHIC] [TIFF OMITTED] T8503.081

    [GRAPHIC] [TIFF OMITTED] T8503.082

    [GRAPHIC] [TIFF OMITTED] T8503.083

    [GRAPHIC] [TIFF OMITTED] T8503.084

    [GRAPHIC] [TIFF OMITTED] T8503.085

    [GRAPHIC] [TIFF OMITTED] T8503.086

    [GRAPHIC] [TIFF OMITTED] T8503.087

    [GRAPHIC] [TIFF OMITTED] T8503.088

    [GRAPHIC] [TIFF OMITTED] T8503.089

    [GRAPHIC] [TIFF OMITTED] T8503.090

    [GRAPHIC] [TIFF OMITTED] T8503.091

    [GRAPHIC] [TIFF OMITTED] T8503.092

    [GRAPHIC] [TIFF OMITTED] T8503.093

    [GRAPHIC] [TIFF OMITTED] T8503.094

    [GRAPHIC] [TIFF OMITTED] T8503.095

    [GRAPHIC] [TIFF OMITTED] T8503.096

    [GRAPHIC] [TIFF OMITTED] T8503.097

    [GRAPHIC] [TIFF OMITTED] T8503.098

    [GRAPHIC] [TIFF OMITTED] T8503.099

    [GRAPHIC] [TIFF OMITTED] T8503.100

    [GRAPHIC] [TIFF OMITTED] T8503.101

    [GRAPHIC] [TIFF OMITTED] T8503.102

    [GRAPHIC] [TIFF OMITTED] T8503.103