[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


                                 ______

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                            WASHINGTON : 2003
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                     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:]

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    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:]

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    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:]

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    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:]

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    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:]

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