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




          FIXING THE FINANCIALS: FEATURING USDA AND EDUCATION

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

                                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

                               __________

                             JUNE 10, 2003

                               __________

                           Serial No. 108-58

                               __________

       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


                                 ______

89-718              U.S. GOVERNMENT PRINTING OFFICE
                            WASHINGTON : 2003
____________________________________________________________________________
For Sale by the Superintendent of Documents, U.S. Government Printing Office
Internet: bookstore.gpr.gov  Phone: toll free (866) 512-1800; (202) 512ï¿½091800  
Fax: (202) 512ï¿½092250 Mail: Stop SSOP, Washington, DC 20402ï¿½090001

                     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
                      Rob Borden, 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 June 10, 2003....................................     1
Statement of:
    McPherson, Edward, Chief Financial Officer, Department of 
      Agriculture; Jack Martin, Chief Financial Officer, 
      Department of Education; McCoy Williams, Director of 
      Financial Management and Assurance, U.S. General Accounting 
      Office; and Linda Calbom, Director of Financial Management 
      and Assurance, U.S. General Accounting Office..............     6
Letters, statements, etc., submitted for the record by:
    Calbom, Linda, Director of Financial Management and 
      Assurance, U.S. General Accounting Office, prepared 
      statement of...............................................    39
    Martin, Jack, Chief Financial Officer, Department of 
      Education:
        Followup questions and responses.........................    64
        Prepared statement of....................................    16
    McPherson, Edward, Chief Financial Officer, Department of 
      Agriculture:
        Followup questions and responses.........................    66
        Prepared statement of....................................     8
    Platts, Hon. Todd Russell, a Representative in Congress from 
      the State of Pennsylvania, prepared statement of...........     3
    Williams, McCoy, Director of Financial Management and 
      Assurance, U.S. General Accounting Office, prepared 
      statement of...............................................    25

 
          FIXING THE FINANCIALS: FEATURING USDA AND EDUCATION

                              ----------                              


                         TUESDAY, JUNE 10, 2003

                  House of Representatives,
Subcommittee on Government Efficiency and Financial 
                                        Management,
                            Committee on Government Reform,
                                                    Washington, DC.
    The subcommittee met, pursuant to notice, at 2:05 p.m., in 
room 2154, 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, Kara Galles, and Tabetha Mueller, 
professional staff members; Amy Laudeman, clerk; Mark 
Stephenson, minority professional staff member; Jean Gosa, 
minority assistant clerk; and Cecelia Morton, minority office 
manager.
    Mr. Platts. Good afternoon. A quorum being present this 
hearing of the Subcommittee on Government Efficiency and 
Financial Management will come to order. Today the subcommittee 
brings before it two executive departments, the Department of 
Agriculture and the Department of Education who have 
demonstrated significant progress on improving their overall 
financial management. I would like to thank the chief financial 
officers of those departments who are before us today as well 
as the leadership at the departments for their efforts.
    You are to be congratulated on achieving clean audit 
opinions on your financial statements for fiscal year 2002. 
While clean audit opinions are certainly a goal that each of 
the Chief Financial Officer Act agencies shares, there are many 
of us who believe that a clean financial audit tells only a 
small part of the story. All too often we hear stories of 
agencies that achieve clean opinions only through last minute 
heroic efforts or recreating their books at the end of the 
year. This is not what Congress intended under the CFO Act. 
Obtaining a clean audit opinion should be a by-product of good 
year round financial management and not just a test that 
agencies try to pass at the end of the fiscal year.
    USDA and Education have implemented real changes designed 
to improve the overall management of their agencies, and as a 
consequence, were able to obtain clean audits. USDA achieved a 
clean opinion by focusing on improving internal controls and 
accountability. They have retooled business and accounting 
processes and placed greater emphasis on data integrity, 
internal controls and getting results from their programs. 
While USDA has made enormous strides in improving financial 
management, the Forest Service a component of the USDA remains 
on the GAO's high risk list.
    Department of Education has also made great improvement on 
managing its finances. Education learned from suggestions that 
were made on the previous financial audits and implemented 
solutions that addressed those suggestions. They now produce 
financial statements on a quarterly basis and utilize strategic 
planning. In addition, the Department installed and updated a 
financial accounting system and coordinated a management and 
improvement team who seeks areas of opportunities to improve 
financial processes and data integrity. However, there are 
still internal control concerns, especially in the area of 
student loan programs, which also need to be addressed. Today, 
we look forward to hearing about the improvements that have 
been made at the USDA and the Department of Education, the 
lessons that can be learned from the successes at these two 
departments, and the plans each of these departments has to 
overcome their remaining financial management challenges.
    [The prepared statement of Hon. Todd Russell Platts 
follows:]

[GRAPHIC] [TIFF OMITTED] T9718.001

[GRAPHIC] [TIFF OMITTED] T9718.002

    Mr. Platts. Joining us here today are Ted McPherson, Chief 
Financial Officer at the Department of Agriculture. And as I 
was pleased to disclose, first time you are before us, native 
of the 19th Congressional District, and glad to have you with 
us again. Followed by Jack Martin, Chief Financial Officer at 
the Department of Education, and Mr. McCoy Williams and Linda 
Calbom, Directors of Financial Management and Assurance at the 
General Accounting Office, who will testify about the financial 
management issues at the Department of Agriculture and 
Education, respectively. Nice to have both of you with us again 
as well. Appreciate all of you for coming and we look forward 
to your testimonies. Now yield to the ranking member, 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 thank 
you, Mr. Chairman, for holding this hearing today. In April, we 
began this series of hearings with the look at the consolidated 
financial statement of the United States. Today we will hear 
testimony regarding the Department of Agriculture and 
Education. Both agencies received clean audit opinions on their 
fiscal year 2002 financial statements for the first time in 
many years. And I want to congratulate Mr. Martin and Mr. 
McPherson for their efforts and also their staff. You have 
achieved an important milestone.
    However, as I am sure all of our witnesses would agree, 
much work still remains to be done. Internal controls and 
financial management system weaknesses remain at the Department 
of Education that impede the agency's ability to produce timely 
and accurate financial information. Education also continues to 
make billions of dollars of adjustments to previous years 
financial statements for which auditors cannot identify a 
definite cause. Despite significant improvements, student 
financial aid at the Department of Education, which makes more 
than $50 billion a year in grants and loans, continue to be 
rated a high risk area by the General Accounting Office.
    USDA faces problems with--similar to Education with 
internal controls and financial management systems, which have 
led some to question whether achievement of receiving a clean 
audit opinion can be repeated. With resources this year of 123 
billion in assets and a budget of 72 billion, resolving the 
problem is critical. The Department of Agriculture and several 
of its bureaus and agencies have had longstanding and very 
complex financial management problems. While there is still 
clearly much more to be done, the Department has made some 
significant improvements and progress seems to be continuing.
    Perhaps most important, the Department's transition from 
its outdated inadequate accounting system to the new foundation 
financial information system is complete and should go a long 
way toward addressing some of the Department's problems. Of 
particular concern at USDA is the Forest Service, which has 
been designated as high risk by GAO since 1999. I look forward 
to hearing from our witnesses about the progress that has been 
made and what steps we need to take to overcome the remaining 
barriers to sound financial management at USDA and Education. 
Thank you, Mr. Chairman. And again, let me thank you for 
holding this hearing. I think it's very timely. I yield back.
    Mr. Platts. Thank you, Mr. Towns, we will now proceed to 
our witnesses and would ask that each witness and anyone who 
might be advising them during their testimonies to stand and 
raise their right hands and take the oath together, and then we 
will proceed to your testimony.
    [Witnesses sworn.]
    Mr. Platts. The clerk will note that all witnesses affirmed 
the oath and we will proceed directly to the testimony.
    Mr. McPherson, starting with you, followed by Mr. Martin, 
Mr. Williams and Ms. Calbom. We appreciate the testimonies you 
presented to us ahead of time in writing. And we use 5 minutes 
as a rough gauge. With a more intimate setting here with the 
ranking member and myself, we're not going to stick to that 5 
minutes, but if we can use that as a guideline that would be 
great.
    Mr. McPherson if you would like to begin.

   STATEMENTS OF EDWARD McPHERSON, CHIEF FINANCIAL OFFICER, 
    DEPARTMENT OF AGRICULTURE; JACK MARTIN, CHIEF FINANCIAL 
 OFFICER, DEPARTMENT OF EDUCATION; McCOY WILLIAMS, DIRECTOR OF 
  FINANCIAL MANAGEMENT AND ASSURANCE, U.S. GENERAL ACCOUNTING 
OFFICE; AND LINDA CALBOM, DIRECTOR OF FINANCIAL MANAGEMENT AND 
           ASSURANCE, U.S. GENERAL ACCOUNTING OFFICE

    Mr. McPherson. Mr. Chairman and members of the 
subcommittee, thank you for the opportunity to continue to work 
together on improving financial management in the Federal 
Government. My written testimony details the valuable results 
we have produced in implementing sufficient internal control 
and data integrity to achieve the first clean audit opinion at 
the Department of Agriculture during fiscal year 2002. 
Rehabilitation of this environment is a continuing process of 
massive change, not an event. You have asked me to describe 
today the management changes we made that, in turn, resulted in 
USDA's first unqualified opinion on its financial statements.
    George Bernard Shaw, the British playwright, believed great 
innovation starts with an unreasonable person. Four principles 
guide our unreasonableness in leading valuable change at USDA. 
First, we focus on real results by setting clear goals and 
achieving tangible value. For example, while improving internal 
controls leading to the first clean audit at USDA, we increased 
the referral rate on $364 million of loans eligible for 
Treasury cross-servicing to 96 percent from 14 percent the 
prior year. That one change alone results in as much as $300 
million more each year of cash collections returned to the U.S. 
Treasury each year for the foreseeable future.
    Second, we behave as owners in taking full responsibility 
to complete any task. Laser-like clarity of individual 
accountability or ownership is key to unlocking the natural 
strengths of bureaucracies. By substituting the behavior of 
owners in USDA's culture, we have created a bias to action for 
producing results, resourcefully using existing levels of 
funding and career civil servant staffing. Third, we operate at 
a constructively aggressive pace. Speed is important and 
usually contributes to better outcomes. To cut the time 
required to execute, I immediately inserted three hand-picked 
individuals with controller skills and one person with an 
outstanding background in information technology as catalysts. 
Each of these people understands internal control, data 
integrity, business processes and application of information 
technology. Perhaps most important, each of these individuals 
is interpersonally astute and knows how to make change by 
substituting successes for rhetoric.
    Simultaneously, I injected a team of a dozen carefully 
selected practitioners, not consultants, in an intense 
assignment to perform deferred work that had accumulated over 
several previous years, such as clearing 6 million unreconciled 
cash items totaling several billion dollars and accounting for 
$10 billion of real and personal property. Fourth, we value 
leadership and talent individual excellence and collective 
success are attributes of most successful teams and talent will 
outperform methodology in many turn-around situations. 
Specifically, leadership and talent achieved 17 accounting 
systems conversions on time and within budget for all USDA 
agencies.
    Leaders in challenging settings such as this are simply 
purveyors of hope, and hope becomes realty measured by how many 
other associates in an enterprise are recognized for 
significant achievements. This week, 18 career civil service 
leaders from my Office of the Chief Financial Officer and USDA 
agency Chief Financial Officers, are receiving the Secretary of 
Agriculture's Plow Award, as in many people are glad to 
harvest, few are willing to plow, the top recognition for 
employees of USDA.
    Recently I had the pleasure of recognizing 600 associates 
throughout USDA and at the National Financial Center each 
individually for their valuable work in regard to financial 
management. One of our associates, Jesse King, is receiving the 
National Achievement of the Year Award from the Association of 
Government Accountants for the value he has added in 
controllership and accounting operations. So people are the 
only source of a sustainable competitive advantage and I 
believe in people, especially unreasonable people.
    Thank you for the opportunity to work together. I look 
forward to listening carefully to what is important to each of 
you and participating in our discussion today.
    Mr. Platts. Thank you, Mr. McPherson.
    [The prepared statement of Mr. McPherson follows:]

    [GRAPHIC] [TIFF OMITTED] T9718.003
    
    [GRAPHIC] [TIFF OMITTED] T9718.004
    
    [GRAPHIC] [TIFF OMITTED] T9718.005
    
    [GRAPHIC] [TIFF OMITTED] T9718.006
    
    [GRAPHIC] [TIFF OMITTED] T9718.007
    
    Mr. Platts. Mr. Martin.
    Mr. Martin. Mr. Chairman and members of the subcommittee 
good afternoon. I would like to thank you for the opportunity 
to discuss the Department's improvements in financial 
management which resulted in the Department's first unqualified 
audit opinion of its financial statements in many years. When 
Secretary Paige arrived at the Department of Education back in 
January 2001, he discovered that there were serious management 
problems. The Department had not received a clean audit opinion 
in years and there was not any expectation of one in the near 
future. The Department of Education, Inspector General's Office 
and the General Accounting Office, had identified hundreds of 
problems that needed immediate attention before the Department 
could receive a clean audit. Secretary Paige promised that one 
of his top priorities would be to identify and correct all of 
the management problems that were preventing the Department 
from operating at its peak performance. I am proud to say the 
Department is keeping the Secretary's promise.
    Most importantly, the Department has received its first 
unqualified or clean independent audit opinion since 1997 and 
only the second in its history. This is a critical milestone in 
our effort to address concerns surrounding the Department's 
financial reporting, reconciliation of financial records and 
control over our information systems. Earlier this year, Deputy 
Secretary Bill Hansen testified before the Subcommittee on 
Select Education, Committee on Education in the Workforce to 
discuss the Department's significant progress toward overcoming 
our management challenges.
    While many challenges remain, we are proud of the progress 
we have made. From a financial management perspective, the 
Department of Education is a complex Federal agency. We have a 
high number of separate appropriations, over 200 to manage, 
consolidate and account for. We maintain the smallest number of 
FTE's while managing the third largest discretionary budget of 
cabinet level agencies. We must also manage multiple program 
types, such as Federal Family Education Loans and William D. 
Ford Direct Student Loans, revolving funds, grants and trust 
funds. Pell and direct loans have very complex accounting 
mandates under the Federal Credit Reform Act of 1990.
    One of the most significant audit issues the Department 
addresses each year involves FFEL and Direct Loan program cost 
estimates. The Department's financial statements include cost 
estimates of total loans outstanding for these programs and 
anticipated losses stemming from loan defaults, discharges and 
other costs. Taken together, these programs involve a $280 
billion portfolio and 22 million borrowers, making the 
Department one of the largest lenders and guarantors in the 
world.
    Consistent with the Federal Credit Reform Act, cost 
estimates for these programs reflect the net present value of 
Federal cost associated with all projected future cash-flows, 
disbursements, repayments, interest, defaults, subsidy payments 
to loan holders and others for loans originated in each given 
fiscal year. We base program cost estimates on a complex set of 
econometric assumptions regarding interest rates and borrower 
behavior, given the size and complexity of these estimates as 
well as periodic fluctuations in the underlying variables, the 
Department's auditors devoted a significant portion of time 
reviewing the estimates and estimation process. I worked with 
auditors and the Department received its first clean opinion 
since 1997.
    We also improved our financial management by setting out to 
accomplish three short-term and six long-term goals set by 
Secretary Paige shortly after he took office. Short-term goals 
were to install new leadership in the financial and management 
areas of the Department, assemble a task force of career 
department leaders to identify and address as many short-term 
management improvement recommendations as possible and develop 
a blueprint to address longer term and structural issues and 
solicit the counsel and advice of external advisors. Long-term 
goals were to obtain a clean audit opinion. Establish effective 
internal controls that addressed credit card abuses and 
duplicate payments and protect the Department's assets from 
waste, fraud and abuse. Create a culture of accountability. 
Create a structure for measuring progress. Modernize student 
aid delivery. And remove the student financial assistance 
programs from GAO's high risk list.
    Specific steps the Department took to reach the Secretary's 
objectives were: first, we updated our organization structure. 
My appointment as Chief Financial Officer gave the Department 
its first CFO in 3 years. We more clearly defined the roles and 
responsibilities of CFO management. And we made a concerted 
effort to recruit and retain talented accountants and financial 
management personnel. We also worked more cooperatively with 
the Office of Federal Student Aid CFO, who temporarily reported 
directly to the Department CFO, and the Department's Budget 
Service. Leadership from all three organizations ensured that 
the Department achieved its financial reporting objectives. We 
improved management of the audit process.
    The Department has improved its audit and management 
process through implementation of several initiatives. A key 
initiative which significantly enhanced quality control was the 
creation of a single point of contact to manage the audit 
process. We replaced our financial systems. Last year the 
Department replaced its financial accounting system with the 
Oracle Federal financials. This new system enhances financial 
integrity by providing more timely, accurate and reliable 
financial information for managing the Department's programs. 
Education is the first Cabinet level agency to successfully 
implement Oracle Federal Financials department-wide. Under the 
new system, the Department produced financial statements 
directly from the accounting system for the first time and now 
continues to produce these financial statements on a monthly 
basis.
    We strengthened reconciliation efforts. The Department 
performed reconciliations on a regular basis with regard to 
fund balances with Treasury; feeder systems to the general 
ledger; budgetary to proprietary accounts, accounts payable and 
related disbursements in transit; suspense accounts; and 
accounts receivable/guaranty agency reserves. The Department 
benefited from having additional reviews of these 
reconciliations to improve the accuracy, completeness, and 
timeliness of the reconciliations. We improved monitoring and 
tracking of confirmed grant and guaranty agency data. The 
Department benefited from independent confirmations of 
financial data from grant recipients at the award level such as 
available funds, obligations and cash drawdowns, and FFEL loan 
receivable balances at the guaranty agency level. The 
Department completed GA loan portfolio reconciliations for the 
first time in a number of years. These two confirmation efforts 
helped ensure that the Department's and our partner's records 
were in balance. We performed ongoing reviews of the core 
financial aid eligibility system we call the National Student 
Loan Data System. The Department continued its ongoing efforts 
to review the accuracy of data in the National Student Loan 
Data System. NSLDS is a data base that includes loan level data 
for all student loans, 22 million.
    The No. 1 priority of the Department of Education is to 
help educate children and close the achievement gaps so no 
child is left behind. Maintaining our financial management and 
integrity will help us create the culture of accountability 
necessary to ensure this priority is met. I believe you will 
find that our efforts over the last 2 years demonstrate our 
commitment to making the Department of Education a model agency 
of financial management excellence and to maintaining the level 
of effort it took to achieve our first unqualified opinion 
since 1997.
    One of the objectives in our strategic plan is to earn the 
President's Quality Award. I hope to be able to tell you a year 
from now that we have accomplished this goal as well. I would 
be happy to answer any questions you may have. Thank you for 
your attention.
    Mr. Platts. Thank you, Mr. Martin.
    [The prepared statement of Mr. Martin follows:]

    [GRAPHIC] [TIFF OMITTED] T9718.008
    
    [GRAPHIC] [TIFF OMITTED] T9718.009
    
    [GRAPHIC] [TIFF OMITTED] T9718.010
    
    [GRAPHIC] [TIFF OMITTED] T9718.011
    
    [GRAPHIC] [TIFF OMITTED] T9718.012
    
    [GRAPHIC] [TIFF OMITTED] T9718.013
    
    [GRAPHIC] [TIFF OMITTED] T9718.014
    
    Mr. Platts. Mr. Williams.
    Mr. Williams. Mr. Chairman and members of the subcommittee, 
I am pleased to be here today to discuss the major financial 
management challenges faced by the U.S. Department of 
Agriculture, its progress in addressing them and challenges 
that remain. As you know, in January we issued our performance 
and accountability series on management challenges and program 
risks at major agencies, including USDA. The report for USDA 
focused on a number of major management challenges including 
enhancing financial management and continued the high risk 
designation for Forest Service financial management. For many 
years, USDA struggled to improve its financial management 
activities, but inadequate accounting systems and related 
procedures and controls hampered its ability to get a clean 
opinion on its financial statements. After 8 consecutive years 
of not being able to render an opinion, USDA's Office of 
Inspector General issued an unqualified, or clean opinion, on 
USDA's fiscal year 2002 financial statements reporting that 
significant progress had been made in improving overall 
financial management. To achieve this unqualified opinion, USDA 
made progress in its financial accounting and reporting in 
areas such as estimating its food stamp program receivables and 
improving its implementation of the Federal Credit Reform Act 
of 1990. Also, the Forest Service received its first-ever 
unqualified opinion on its fiscal year 2002 financial 
statements, which represents noteworthy progress from prior 
years when the OIG was unable to express an opinion.
    To achieve this unqualified opinion, the Forest Service's 
top management dedicated considerable resources and focused 
staff efforts to address accounting and reporting deficiencies 
that had prevented a favorable opinion in the past. For 
example, during fiscal year 2002, the Forest Service formed a 
reconciliation strike team to resolve longstanding real and 
personal property accounting deficiencies. While we considered 
obtaining a clean opinion, a positive step, USDA and the Forest 
Service need to continue their efforts to address material 
internal control weaknesses that still exist. For example, USDA 
and the Forest Service need to continue to address the problems 
with their legacy systems to improve integration of the 
financial management architecture, make timely reconciliation 
of their property systems with the general ledger, and correct 
inconsistencies in their accounting processes.
    As provided in the President's management agenda and by the 
Joint Financial Management Improvement Program principles, 
obtaining financial accountability goes far beyond an 
unqualified opinion on financial statements and includes 
measures such as financial management systems that routinely 
provide timely, reliable and useful financial information and 
no material internal control weaknesses or material 
noncompliance with laws and regulations and Federal financial 
management improvement act of 1996 requirements.
    In closing, Mr. Chairman, I want to emphasize that USDA has 
made significant progress in addressing this major challenge 
relating to financial management and continues to do so. At the 
same time, before USDA is able to achieve and sustain financial 
accountability and produce relevant, reliable and timely 
information to effectively manage the Department, it and its 
component agencies, particularly the Forest Service, must 
resolve some very difficult issues. This concludes my statement 
and I would be happy to answer any questions that you or 
members of the committee may have.
    Mr. Platts. Thank you, Mr. Williams.
    [The prepared statement of Mr. Williams follows:]

    [GRAPHIC] [TIFF OMITTED] T9718.015
    
    [GRAPHIC] [TIFF OMITTED] T9718.016
    
    [GRAPHIC] [TIFF OMITTED] T9718.017
    
    [GRAPHIC] [TIFF OMITTED] T9718.018
    
    [GRAPHIC] [TIFF OMITTED] T9718.019
    
    [GRAPHIC] [TIFF OMITTED] T9718.020
    
    [GRAPHIC] [TIFF OMITTED] T9718.021
    
    [GRAPHIC] [TIFF OMITTED] T9718.022
    
    [GRAPHIC] [TIFF OMITTED] T9718.023
    
    [GRAPHIC] [TIFF OMITTED] T9718.024
    
    [GRAPHIC] [TIFF OMITTED] T9718.025
    
    [GRAPHIC] [TIFF OMITTED] T9718.026
    
    Mr. Platts. Ms. Calbom.
    Ms. Calbom. Thank you, Mr. Chairman, Mr. Towns. As Mr. 
Williams just mentioned this January GAO issued our performance 
and accountability series which included the Department of 
Education as well as Agriculture and others. The report for 
Education focused on a number of management challenges, and as 
you were mentioning, continued the high risk designation for 
student aid programs. You asked me to focus my testimony today 
on two areas in that report. These are first Education's 
efforts to reduce fraud, waste, abuse and mismanagement in its 
student aid programs; and second, to improve its financial 
management to help build a high-performing agency.
    As Mr. Martin outlined, Education has spent significant 
time and effort in addressing these challenges and has been 
very successful in making real management improvements across 
the agency. However while Education has made significant 
progress similar to Agriculture, internal control and system 
weaknesses remain in both the student aid program and with 
financial management overall that will require continued 
commitment and vigilance on the part of Education's management 
to resolve.
    In the student aid program, education has faced challenges 
in four areas. The first continuing challenge relates to 
systems integration issues. Education has spent millions of 
dollars to integrate and modernize its many financial aid 
systems in an effort to provide more information and better 
service to students, parents, institutions and lenders. 
However, the Department still needs to complete development of 
an institutional blueprint for how it will carry out these 
activities. And this is commonly called an enterprise 
architecture. This is really key to ensuring that you have 
consistent system design and compatibility across the 
organization. The second challenge has been reducing fraud and 
error in student aid application and disbursement processes.
    In a major effort to address this issue, the Department has 
instituted pilot programs with the IRS to match income reported 
on student aid applications with Federal tax returns and 
continues to work to achieve legislation needed to implement 
these efforts on a broader scale. The third continuing 
challenge is minimizing and collecting defaulted student loans. 
Education has made great strides in this area but needs to 
communicate its progress by issuing timely and complete 
performance reports to the Congress. And finally like other 
Federal agencies, education must address serious human capital 
issues. In 2002, the Department issued a comprehensive 5-year 
capital human plan that outlines steps and timeframes for 
improving human capital management. It will be an important 
that education focus continuously on implementation of the plan 
to achieve results.
    I would now like to turn more specifically to financial 
management challenges. Weaknesses in Education's financial 
management and information systems have limited its ability to 
achieve one of its key goals, which is improving financial 
management to help build a high performing agency. Significant 
progress toward this goal was recently made when Education 
received an unqualified opinion on its financial statements.
    And as many of us have already discussed today while this 
is an important milestone for the Department, significant 
internal control and system weaknesses remain that must be 
addressed for Education to meet the end goal of timely, 
relevant, reliable information to manage the agency on a day to 
day basis. Education has taken many actions over the last 
several years to improve its financial management and address 
the weaknesses identified in previous financial statement 
audits. Education's auditors recently reported that they have 
put in place several new processes during fiscal year 2002 to 
improve financial management and that a new general ledger 
system was installed. These are key steps in achieving the 
ultimate end goal.
    However the auditors reported that inadequate internal 
controls continued to impair the Department's ability to 
accumulate, analyze and present reliable financial information. 
While improvements were noted in the latter part of the fiscal 
year, the auditor reported that the Department needs to place 
additional focus on reconciliation procedures, account analysis 
and the overall financial reporting process. This will be 
especially critical when beginning with fiscal year 2004, 
Education and other major agencies will be required to produce 
their audited financial statements within 45 days after the 
fiscal year compared to the 120 days currently.
    In closing, Mr. Chairman, I would like to commend Education 
management for their dedication and persistence in addressing 
major challenges relating to the student aid programs and 
financial management. I would also like to encourage them to 
remain steadfast in their efforts to reach their end goal of 
producing timely, relevant, reliable information to efficiently 
and effectively manage the agency and provide full 
accountability to stakeholders. That concludes my statement, 
Mr. Chairman.
    [The prepared statement of Ms. Calbom follows:]

    [GRAPHIC] [TIFF OMITTED] T9718.027
    
    [GRAPHIC] [TIFF OMITTED] T9718.028
    
    [GRAPHIC] [TIFF OMITTED] T9718.029
    
    [GRAPHIC] [TIFF OMITTED] T9718.030
    
    [GRAPHIC] [TIFF OMITTED] T9718.031
    
    [GRAPHIC] [TIFF OMITTED] T9718.032
    
    [GRAPHIC] [TIFF OMITTED] T9718.033
    
    [GRAPHIC] [TIFF OMITTED] T9718.034
    
    [GRAPHIC] [TIFF OMITTED] T9718.035
    
    [GRAPHIC] [TIFF OMITTED] T9718.036
    
    Mr. Platts. Thank each of you for your testimonies and we 
will proceed to questions. Again, we'll use 5 minutes as a 
rough framework for the three of us who are here today. I guess 
Mr. McPherson and Mr. Martin, in reading your testimony, Mr. 
McPherson, yours was focused more on the personnel and kind of 
empowering the personnel to take the lead and I quote, ``the 
unreasonable individual or person to get the job done.'' Mr. 
Martin, your testimony was on the personnel, but also more on 
the structural changes, internal changes. And we are certainly 
grateful for all of our public servants who are doing their 
best to serve the public. Given that the clean audit was the 
first in your 140-year history at the Department of 
Agriculture, and just the second for the Department of 
Education and the first clean audit in 5 years, what is your 
comfort level that the changes you have made will result in, 
say, 3 years from now if not all different personnel, but 
different personnel are there that the structural changes, 
internal controls, data integrity that we will have a 
continuation of a clean audit history and not be talking about 
once again, the first one in another 3 years or another one in 
5 years, your comfort level that your changes are going to 
result in truly clean audits?
    Mr. McPherson. There are several factors that give me 
comfort in that regard. One, all except one of my direct 
reports are career civil servants so that leadership operating 
with the principles that we have implemented will sustain 
itself. Second, we have made progress in depth, meaning it is 
not a mile wide and an inch deep. We have changed business 
processes. We have changed to a common computing system by 
converting 17 agencies. We have reorganized the National 
Financial Center into lines of business with one separate line 
of business called the Controller Operations Divisions 
dedicated for the first time solely to performing work for the 
USDA agencies. So I think those rudimentary but fundamental 
changes are of a sustaining nature. We have not just gone for 
quick hits, but where we have made changes, we have done it so 
the process sustains itself.
    Mr. Martin. We at the Department are currently producing 
very accurate monthly financial statements from our Oracle 
system. We push a button and we generate statements monthly. I 
think this system will permit us to continue as far as we can 
see into the future to be able to produce accurate financial 
statements. We also have revised and improved our 
reconciliation and account analysis procedures. We have 
numerous working groups in place that address specific account 
groups. So we think we have the structures in place for us to 
continue improving our reconciliation processes going into the 
future. And we have a very strong and committed staff of career 
civil servants. I believe that they are as serious about all of 
our changes and improvements as the political employees are.
    So I am very confident that the Department of Education 
will be able to obtain clean opinions this year on an 
accelerated basis, and going forward in future years.
    Mr. Platts. I hope we are accurate in those statements and 
I do commend you on the tremendous improvements you have made 
and your personal commitments to continuing that effort, and 
that it's not just for this year or next year, but a long-term 
change in the mentality that we don't go another 140 years 
without a clean audit. The OMB issued some new guidelines in 
May regarding a number of the issues under the President's 
Management Agenda, including financial management guidelines. 
And if both of you could comment on these new guidelines and 
how you think they'll impact you and what you are doing or 
perhaps not because you are already on track to fulfill these 
new guidelines?
    Mr. Martin. I support the initiative. It gives us a 
deadline on which to focus the numerous actions on which we're 
already working; the accelerated November 15 deadline for 
audited statements; resolution of auditor identified integrity 
act; material weaknesses and internal control, particularly the 
material weakness related to IT security. We believe many 
actions will be successfully completed prior to the July 1, 
2004 target date, for example, the foreign school 
recertification material weakness and the material data quality 
weakness and we are making a lot of strides in IT security.
    Mr. McPherson. I support the standards that have been set. 
We had already set a goal of reducing material weaknesses by 50 
percent this year and eliminating them by 2004. We have adopted 
1 year early the November 14 date for our Performance and 
Accountability Report. We have turned in quarterly statements 
in fiscal year 2003 in accordance with the OMB guidelines, in 
fact, a week or two early. So we seem to be on track for 
meeting the standards, all of which are very valuable and 
legitimate standards.
    Mr. Platts. I now yield to the ranking member, Mr. Towns 
for the purpose of questions.
    Mr. Towns. Thank you, Mr. Chairman. To you, Mr. McPherson, 
the Forest Service is an agency which was singled out by the 
GAO as needing significant improvements. In fact, it has been 
on GAO's high risk for the last 4 years. What are the root 
causes of the problems that the Forest Service has? Does senior 
management at these agencies give financial management a great 
enough priority or are the accounting systems inherently worse? 
Do they face structural or programmatic problems. What is 
really going on over there?
    Mr. McPherson. Congressman, my observations since coming on 
board, the root causes are the following: One, a lot of 
deferred work, meaning work that simply had not been performed 
in previous years, manifesting itself in a number of 
unreconciled cash items or not having performed current 
physical inventories on the property. That work was performed 
in 2002 to get current. The other things you mentioned, we have 
had excellent support from the leadership of the Forest Service 
starting with Under Secretary Mark Ray and the Chief of the 
Forest Service, Dale Bosworth, as my business partners in 
addressing these issues forthrightly and realistically.
    You mentioned systems and systems are a root cause. Forest 
Service had converted to this standard general accounting 
system a few years ago. The remaining work relates to feeder 
systems and feeder systems involving the management of 
property, for example. So that is a remaining area of 
attention, the subsystems or the feeder systems that support 
accounting operations. Finally in the area of financial 
management, because the Forest Service is a decentralized 
organization with 32,000 employees in some 600 units in the 
field, we are looking for ways to concentrate knowledge, skill 
and process to take the excitement out of some of the 
accounting for Forest Service to make it simpler and to reduce 
some of the complexity.
    I'll give you a specific. When I came aboard, Forest 
Service had 620 million account records, and I assure you there 
is no enterprise in the United States that has that many 
accounting records. Half of those are in a data warehouse, half 
of them are in the general accounting system. And it has to do 
with cost allocation and tracking of costs, and it is just an 
inordinate amount of complexity that does not bring with it 
additional value and accountability. So we have worked with the 
Forest Service to take out some of the unnecessary complexity. 
So those are some of the items.
    Mr. Towns. You know I am trying to figure out and don't 
think I am not happy about it. I want you to know that I'm 
happy that you are able to accomplish this, but I am not sure 
as to how you did it. Did you use consultants or hire some new 
folks? Did they wake up--I mean the people that were there? I 
am trying to figure out how did you get to this point. I want 
you to know that I am happy you are there.
    Mr. McPherson. I appreciate both your happiness and your 
support. I started with helping people to believe it was 
possible. The first Forest Service meeting I had was with their 
leadership group in October 2001 shortly after I came aboard 
just prior to September 11 at the Shoreham Hotel over here. And 
I set the goal of sufficient internal and data integrity to get 
a clean audit in Forest Service for the year 2002.
    The technical work really was taking their business 
processes that related to their financials, that is how do they 
reconcile cash, how do they maintain the accounting on property 
and reengineered those processes and perform work that had not 
been performed previously to bring them current. Along the way 
we reinforced that with the proper organizational structure and 
the proper staffing particularly at home office here in 
Washington, the central headquarters. There is work that needs 
to be done in the field in that regard. So, it really was being 
effective and being bold in the changes because what was there 
was not working properly and so we had to change it.
    Mr. Towns. My time has expired. Thank you.
    Mr. Platts. I would like to recognize the vice chair of the 
subcommittee, the gentlelady from Tennessee, Mrs. Blackburn.
    Mrs. Blackburn. Thank you all for being here. I know Mr. 
Williams and Ms. Calbom have been with us before, and we 
appreciate that you come back and that you take the time to 
come before us. I have a series of questions that I want to 
ask, and Mr. McPherson and Mr. Martin, I am going to start with 
you and if we could kind of move these back and forth I would 
appreciate it.
    First of all looking at FFMIA, does it really matter and do 
you see it as a help or a hindrance when you are choosing 
Federal management systems. And Mr. McPherson and Mr. Martin, 
if each of you would answer that.
    Mr. McPherson. I think it's helpful. I am not sure any 
document or one set of standards is a driver. I think the 
experience of people who have worked with accounting processes 
and chosen systems and implemented systems is as important. But 
I think it's helpful in setting common expectations but it by 
itself does not cause change.
    Mr. Martin. I believe that FFMIA does indeed matter. It 
serves as a driver for agencies to become compliant with the 
U.S. Standard General Ledger and Federal accounting standards. 
It also sets high standards for systems security and 
integration. The Joint Financial Management Improvement Program 
testing establishes a floor for financial systems operability. 
However a JFMIP certificate does not convey compliance with 
FFMIA. It does however mean that the system has the ability, if 
configured and integrated correctly, to become FFMIA compliant.
    For example, the standard general ledger chart of accounts, 
an agency's specific pro forma accounting entries, must be 
established in a new system by an agency. The collating 
structure established in the system must also enable staff to 
perform reconciliations of agencies specific feeder systems. 
The system must be able to handle data transformations and 
other types of summarizations. Reporting should be keyed off 
the general ledger and be produced with the push of a button. 
This often requires an agency to design complex report mappings 
that tie appropriations to statement line items. And this is 
especially true for the statement of net costs, which is tied 
to strategic initiatives that are agency specific.
    Mrs. Blackburn. Thank you. Mr. Williams and Ms. Calbom, 
what immediate steps should USDA and Education take to be in 
compliance with FFMIA. What, in your opinion, are the immediate 
steps that they need to take? Mr. Williams.
    Mr. Williams. I think Ted has hit on that point about the 
systems, subsystems, the feeder systems that the agency is in 
the process of reengineering, replacing, upgrading, etc. I 
think once the agency gets control or gets a handle on that 
particular control weakness then it will be headed in the right 
direction to address some of the weaknesses and noncompliance 
issues that the IGs reported in the past as far as the Act of 
1996.
    Ms. Calbom. Education put in a new financial management 
system in 2002, the Oracle system, and it is designed to be 
compliant with FFMIA. The problem for fiscal year 2002 that was 
reported by the auditors really had a lot to do with some of 
the system's implementation issues and those kind of cascaded 
into other things, into reconciliations and some other 
problems. So hopefully, if the system is up and running, as it 
is supposed to be now, then we should see an improvement in 
that area once we go through the next financial statement audit 
for 2003.
    Mrs. Blackburn. Now how extensive do you think the needed 
management reforms are? Do they need to go through all the 
field offices with this or is everything pretty much 
headquartered here and then what do you think the compliance 
will end up costing?
    Ms. Calbom. I would have no idea of the cost of the 
compliance. I think you are still talking about just FFMIA 
compliance? I think we are talking about really getting over 
some of the glitches that were experienced in implementing a 
new system. So the system is already in place, it is up and 
running, so hopefully if the glitches are cleaned up then you 
know they will be in compliance. But time will tell and the 
next audit will tell.
    Mrs. Blackburn. Mr. Williams, same for you.
    Mr. Williams. It's going to be a process in which, as 
stated earlier, if they get these systems in place, the agency 
did not get in this position overnight. It's going to take some 
time. I think USDA has got a strategic plan which lays out over 
the years what it intends to do to address the problems. And 
once it is implemented and those systems are modified, 
upgraded, etc., they should be able to be in compliance. Now 
what that will cost and whether the current timeframe that the 
agency's laid out is reasonable, only time will tell. I think 
the office has put procedures in place where they can go back 
and revisit the plan to make sure we are on track and people 
are being held accountable for various steps along the way. And 
as they go through that process, time will tell the success and 
getting compliant.
    Mrs. Blackburn. And you do not have an estimation of what 
you think the time on the cost would be.
    Mr. Williams. There's a plan that the office has put 
together, a remediation plan that calls for being in compliance 
by the year 2006. That is the current document. But what it 
will cost, I could not say at the current time.
    Mrs. Blackburn. Thank you, sir. May I continue? Thank you, 
Mr. Chairman? The other thing, Mr. Williams and Ms. Calbom, I 
will come back to you on this, if the timeline and the 
benchmarks are not met, do you think it proper be appropriate 
to have a penalty in place, some type of penalty format for 
these--for the accountabilities, the stated accountabilities 
not being met or either with the dollars budgeted to bring this 
into compliance, if it is overbudgeted, there should be some 
penalties that are enacted there.
    Ms. Calbom. We haven't really assessed that issue and I 
wouldn't want to comment on that since we really haven't done 
any kind of a study to determine what the potential benefit of 
that type of a procedure would be.
    Mrs. Blackburn. Mr. Williams.
    Mr. Williams. I would like to focus more on the phrase of 
the word ``accountability.'' I think we need to hold people 
accountable for what they are supposed to be doing in their 
jobs. But as Ms. Calbom said, as far as the penalty, we have 
not done an assessment to determine if there should be certain 
penalties for not meeting certain dates but there should 
definitely be some accountability.
    Mrs. Blackburn. Mr. Chairman, just as I thought through 
this process as we go through this, I think that you know we 
hear repeatedly of--and I commend the departments and all 
involved for having time lines and for having stated goals, but 
I think it may be worth our efforts to look at possibly what 
would be a method for some penalties for not meeting 
accountability standards or time lines or projects that run on 
and continue to go over budget year after year and see if there 
is something that in so doing, if we can help these departments 
and these individuals who are managing through these situations 
to meet those time lines, and some way to incentivize that 
process.
    Mr. Platts. I think what we're all after is that at the end 
of the day is having accountability, and how best to achieve 
it. I think within the administration, there certainly is that 
focus in how they are establishing their annual budget request 
and accountability and what they are requesting. And that 
certainly, at the end of the day, hits each of the departments. 
If you are not meeting timeframes and goals set that may be 
reflected in what the White House sends over and asks for your 
departments and how much faith you want to continue to have in 
putting additional dollars in the programs if you are not 
meeting what you have established as your ultimate goals.
    Certainly, Ms. Blackburn, it is something that we are glad 
to continue to look at as a subcommittee and with your staff. 
Coming back when I asked earlier about where we are today and 
the focus with both departments and the structural changes and 
the employees being invigorated to achieve the clean audits, I 
would be curious in asking Mr. McPherson and Mr. Martin's their 
opinions that 3, 4 years from now, we will still see clean 
opinions based on changes we made for each of you and from 
GAO's perspective.
    Your comment, Mr. Williams, is time will tell. As we sit 
here today, do you think the changes we have in place truly are 
going to have long-term lasting results, or are we going to 
continue to see the need for the heroic efforts?
    Mr. Williams. Well, let me start with a concept that I like 
to talk about, and that is in developing internal control 
standards. We talk about setting the tone at the top and I 
think that is what Mr. McPherson has done. He set the tone at 
the top, that we will address these weaknesses, we will correct 
these problems. And I believe that if you look at some of the 
things that he has done and some of the things that he has 
underway--I will give you an example when the effort first 
started, USDA established having strike teams to address some 
of the these reconciliation issues, etc.
    And if you look at that particular process, one of the 
things that we at GAO observed is that when the teams identify 
a problem in a particular area, rather than just correcting 
those specifically identified problems, the teams drilled down 
and tried to identify what are the root causes for this 
particular problem. And once you identify what the root causes 
of the problems are, then you put corrective actions and you 
correct those root causes, then you have set the stage for that 
problem not to occur again in the future. So I think things 
like that, if they continue with these types of projects and 
exercises, then things will be set in place so that regardless 
of who's at the top that the effort to achieve financial 
accountability should continue.
    Mr. Platts. Ms. Calbom.
    Ms. Calbom. And I would agree with all those things. You 
know, one of the real key things is the systems, and frankly, 
the Federal Government, most agencies have been handicapped 
over the years because they have outdated systems that don't 
really do what they are expected to do, and that is to produce 
financial statements.
    So it was kind of like putting together a patchwork of 
systems to try to prepare financial statements, and as I said 
it was just a handicap to begin with. Now with new systems 
being put in place that are designed to produce financial 
statements and the type of financial information that really is 
needed to manage, that is a tremendous hurdle that agencies 
like Education now have gotten over. But it's not just systems, 
though. You have to have processes and people too. You have to 
have the reconciliation processes in place. You have to have 
qualified people to do the work, and as Mr. Williams was 
saying, you've got to have the people at the top. You've got to 
have very, very senior management that is willing to put the 
resources into doing these kinds of processes and procedures on 
a consistent, systematic basis. Otherwise it can all fall apart 
again very easily.
    Mr. Platts. Thank you.
    Mr. McPherson, in getting to a specific example of using 
technology to have more accurate information and in this case 
deal with improper payments in 2002, the Department met the 
goal regarding the Food Stamps Program of now having 89 percent 
of the electronic transfer occur. My understanding, that has a 
huge benefit in the sense of eliminating wrongful payments.
    My question actually was being at 89 percent, is there an 
ultimate goal to get to 98, 99? If not, what is the greatest 
hurdle to getting as close to 100 percent as possible so that 
there is less chance of inappropriate payments being made?
    Mr. McPherson. We expect the percentage to go up. The 
reason it should go up is that there are four entities that 
have not converted to electronic benefits, California being the 
largest. California is in the process of rolling out that 
system, implementing it. And then we also have Delaware and 
Iowa and Guam to go. So the percentage ought to go up, and 
you're absolutely correct, it is a major effective tool in 
reducing erroneous payments.
    Mr. Platts. Taking that history with the food stamps and 
looking at the School Meals Program, my understanding is that 
there have been pilot programs to use similar type approaches 
with school meals. Could you give us some background in where 
we stand on those pilots and what have we learned from them and 
how we can maybe use that same knowledge from the Food Stamp 
Program with the School Meals Program?
    Mr. McPherson. There are some pilots going on in the school 
meals electronic commodity ordering system, which is a Web-
based ordering--order control system, that I think over 50 
agencies around the United States have--are piloting. So it is 
going well. I think it's too early to say the full results of 
all of that. But just a general statement. The more electronic 
controls, the checks and balances are better on all these sorts 
of delivery of cash. So it really has to do with the 
productivity of cash in any of these programs. So we expect 
that area to be fruitful as well. And as you may know, Under 
Secretary Eric Bost has had some good experience in this regard 
at the State level and has done a good job in regard to this 
work through the Department of Agriculture.
    Mr. Platts. Thank you, Mr. McPherson. I'm going to ask one 
more question and then allow other committee members also. I 
think we're going to have a vote in the next 5 to 10 minutes. 
We'll try to get as many questions in before we need to break 
to go over so that we don't keep you here after that if that 
happens.
    Mr. Martin, it's kind of a followup with the use of 
technology. As we use technology to have more accurate payments 
and keep better records and thus have a better understanding of 
our financial position, one of the issues that was addressed in 
previous audits for the Department of Education as well as by 
the GAO was the security of the information in your systems, 
and I wonder if you could update us on where you are and what 
you've done to try to improve the confidentiality of 
information in the Department's data systems.
    Mr. Martin. We have a major IT security initiative taking 
place now. Our office, the Office of the Chief Financial 
Officer, working with the Chief Information Officer and Federal 
Student Aid, we have a plan in place, and we are directing that 
plan in addressing the IT security material weakness. We 
believe that we will have most of the issues related to that IT 
security material weakness resolved by the end of this year, a 
good share of those resolved by the end of the fiscal year and 
most all resolved by the end of the calendar year.
    Mr. Platts. Is that something that you're sharing with or 
coordinating with GAO as far as their past concerns they've 
raised? Or I don't know if GAO has had a chance to look at that 
yet, what's being done.
    Ms. Calbom. We haven't been in to take a look at that 
recently. We will be going in to followup on some of our 
previous recommendations probably sometime this summer, which 
will be just a quick look to see what kinds of things have been 
done. You know, of course the IG has continued to report some 
additional weaknesses in this area, but I do know that the 
Department has some solid plans in place to address these 
issues.
    Mr. Martin. And we are working with the IG in resolving 
these issues, Mr. Chairman.
    Mr. Platts. Thank you.
    Mr. Towns.
    Mr. Towns. Thank you. Mr. McPherson, Federal credit 
agencies have been required to estimate the cost of their loan 
programs in accordance with the requirements of the Federal 
Credit Reform Act of 1990. Since fiscal year 1992, USDA was 
recently able to estimate their loan subsidy cost for its 
credit programs, which totaled about $74 billion. Why did it 
take so long to address this issue, and can we be assured that 
USDA will continue to be able to make reliable estimates?
    Mr. McPherson. I can't answer why it took so long because I 
wasn't there. I know that we made a big effort in 2001 to 
complete that work, and we were able to do it for the Rural 
Development Agency, which has about in nominal terms $70 
billion. We have about $100 billion in total, and as you 
suggest, $74 billion on a present value basis.
    So we made progress in Rural Development and got that 
behind us in 2001. Last year we were able to complete the work 
in the Farm Service Agency and the Commodity Credit Corp., so 
that was key to completing the clean opinion in that agency.
    And it is sustainable. I've looked at those models myself 
in detail. I've looked at the people that operate them, and 
while it was a complex task, once achieved it should well 
sustain itself. In fact, we've been able to cut the time it 
takes to prepare those calculations from what used to take 
weeks to really a matter of days through automation. So I think 
that one--that breakthrough is behind us.
    Mr. Towns. Thank you.
    Mr. Williams and Ms. Calbom, do you feel that a lot of the 
problems is the fact that they have had improper technology or 
not adequate technology to be able to answer the questions that 
need to be answered in order to get information that was 
required? Could you sort of just comment on that? I know you've 
seen a lot of these and you've been there for quite some time, 
and I'm just curious as to this fact.
    Ms. Calbom. Are you speaking of the credit reform area or 
just in general?
    Mr. Towns. In general.
    Ms. Calbom. In general?
    Mr. Towns. Yes.
    Ms. Calbom. I think it's a combination of things. You know, 
like I said before, the systems that most of these agencies 
were using were not meant to develop this type of financial 
information. You know, in some cases we didn't have people in 
the right positions that were trained to do the work that they 
were being asked to do, and when you haven't asked anyone to be 
accountable for years and years and years and then all of a 
sudden we pass the CFO Act and then we're asking agencies to 
issue audited financial statements. Then we're asking them to 
be accountable, and you've got cultural issues there, systems 
issues, people issues, all kinds of things going on. And I 
think as everybody has mentioned, you know, when you're in a 
real deep hole, it's hard to get out, and many of these 
agencies were in a real deep hole. And many of them are 
starting to get out of that hole and to have accountability.
    I think I can speak particularly to Education. I believe 
they've turned the corner on this. They're on the right track. 
It's just a matter of a little more time, particularly to 
demonstrate that this is sustainable and to clean up some of 
these remaining weaknesses that were left over from the last 
fiscal year.
    Mr. Williams. For USDA I would agree with all of those 
points. I think you have a scenario there in which financial 
management was not a top priority in the past and you're 
talking about an organization that is decentralized and you 
would have people in the Northeast maybe accounting for 
transactions one way, people in the Northwest accounting for 
transactions another way, that decentralization not being a top 
priority.
    A lot of times that information was incorrect, and when you 
bring all that information in together, you're basically not 
going to be able to produce reliable financial statements.
    And I would like to add as far as USDA is concerned, I 
think it is also a top factor that a lot of their systems were, 
and in some cases these feeder systems that we're talking about 
are old and they need to be upgraded and in some cases just 
totally replaced. And I think the agency is on track to address 
this particular issue.
    Mr. Towns. Right. Thank you very much. Let me ask, you 
stressed it a lot, Mr. McPherson, and, Mr. Martin, you also 
mentioned in your testimony, you praised the career civil 
servants who worked hard to enable the Department achieve a 
clean financial last year, and you point to these career 
employees as the main reason for continuing optimism for 
financial management improvements in the future.
    Just how important are the career civil servants in 
achieving progress, and what lesson can other agencies learn 
from your experience?
    Mr. McPherson. I would say they are very important, and the 
lesson I learned is how underinvested we were, and are probably 
other Federal agencies, in training for those career civil 
servants. We just last week had 234 people come to Washington 
for 2\1/2\ days in a series of modules of very specific 
techniques, to include reconciliations, property, intercompany 
eliminations, a whole suite of knowledge that they need to do 
their jobs and to understand how all of that is integrated with 
the systems and so forth, and we had two career civil servants 
address those people as part of that curriculum. One was Don 
Hammond from Treasury. One was Joe Kull from OMB, very 
successful career civil servants. Joe Kull gave a very 
effective presentation that I asked him to do as to what he 
would look for if he were to hire anyone in that audience 
today, and he reflected on what one needs to be equipped with 
in terms of attributes and professional skills and so forth.
    So that's a very valuable thing, just to invest in solid 
training for the people.
    Mr. Towns. Right.
    Mr. Martin, could you comment on? That is my final 
question.
    Mr. Martin. Yes. When Secretary Paige took office, he 
formed a management improvement team that was comprised 
exclusively of senior level career employees. These employees 
developed the Secretary's Blueprint for Management Excellence, 
which laid the foundation for most of the improvements that 
were--that occurred at the Department of Education. So the 
career people were extremely important, and they continue to 
play a major role.
    Mr. Towns. Thank you very much. Thank all of you. I yield 
back, Mr. Chairman.
    Mr. Platts. Thank you, Mr. Towns.
    Ms. Blackburn.
    Ms. Blackburn. Thank you, Mr. Chairman. Ms. Calbom, 
following up on what you said about stopping digging when 
you're in a hole, coming out of Tennessee and the country music 
industry being near and dear to us there, I'll just let you 
know there is a great song by Randy Travis talking about stop 
digging when you're in a hole. So if you need something as an 
example, you can look that one up.
    Let's see. And I'm sure if y'all gave me a chance, to our 
ranking member down there and others, I could think of a lot of 
other of our country songs out of Nashville or our blues songs 
out of Memphis that we could tie back into a lot of what we're 
talking about.
    Mr. McPherson and Mr. Martin, Mr. Williams was speaking a 
moment ago about centralizing some of your operations, and I've 
heard you all talk about computer security and other different 
things. As you've gone through this process of becoming more 
technologically aware and having your systems be more of an 
integrated system, obviously it sounds like what you're doing 
from security to application, you are doing both a good bit of 
front-end and back-end work.
    Now, my question to each of you is are you doing--how are 
you breaking this apart? Are you handling it in-house? Are you 
contracting it out? If you're contracting it out, what is the 
length of those contracts, and how much are you spending on an 
annual basis for those contracts?
    Mr. McPherson. Well, in our case, here's how we approach 
it. The first job was to implement a standard accounting system 
for discretionary spending, and we did 17 conversions to do 
that. That's kind of a middle level.
    We have also in our architecture implemented a data 
warehouse and data marts that enable self service by our 
program agencies where people can write their own queries and 
manage their own information.
    The remaining building block are these feeder systems that 
are old legacy systems that include integrated----
    Ms. Blackburn. Just a moment there. On those feeder 
systems, are you--just for my understanding, when you build 
those, your port of entry, is it a--would it be a front-end 
Web-based system, or is it something they're logging--going 
straight into the back end on that data management?
    Mr. McPherson. Most of our interfaces are direct. We do not 
have a lot of Web-based accounting systems. My choice when 
coming was to finish what had been started. Our next migration 
will be to more of a Web-based system.
    So we have warehouse architecture, and the emphasis is on 
feeder systems. And in our case feeder systems are large 
integrated acquisition systems, procurement systems. They could 
be property management for things like 22,000 buildings, 1,200 
space assignments in 766 GSA buildings in over 400 cities and 
towns. So these are massive accounting operations.
    In performing the work, we own it internally. We own the 
responsibility. I would not likely delegate that ownership 
externally. What we do is have business partners that have 
helped implement some of these systems, and we have project 
teams for a suite of the feeder systems.
    Ms. Blackburn. And when you bring those business partners 
in line, is it a project until the completion of the project, 
or how are you writing those contracts?
    Mr. McPherson. Those contracts typically will be--could 
range from development and implementation to maintenance, and 
what we want to do is cut the time it takes to execute an 
implementation, some sort of system change, and then migrate 
aggressively to just an operating cost for maintaining it.
    And my goal is to drive down the costs of this work, 
because my sense is instinctively it's too high across 
government, and it's too high in our case because of the labor-
intensive manual processes that were allowed to accumulate over 
the years. So the replacement through technology has a cost 
saving as well.
    Ms. Blackburn. How many outsourced contractors or outside 
contractors do you have--have you had working on those 
projects?
    Mr. McPherson. I would say for the core systems operated 
for headquarters in the lines of business, I'm going to say no 
more than a dozen, let's say, at the most as a guess. Now, 
remember through the National Finance Center we service 120 
other Federal agencies, so I'm excluding that as it relates to 
payroll projects or the management of the recordkeeping for the 
Thrift Investment Plan with $100 billion and 3 million 
customers there. But just for the accounting operations, it's 
not a lot, but it's very focused.
    Ms. Blackburn. Mr. Martin.
    Mr. Martin. We have an integrated platform called EDCAPS, 
or Education Central Automated Processing System, and this 
platform integrates all of our business processes, procurement, 
travel, our Oracle financial management system, all of the 
systems that we use on the--my side of the house. FSA, the 
Federal Student Aid, they also have a separate Oracle system 
and I think at least three contractors, Accenture I think being 
the largest contractor. Accenture has several subcontractors 
that they employ. We have one major contractor, IBM, now and I 
think they subcontract a good share of their work.
    The precise dollar amount I would have to get back to the 
committee on.
    Ms. Blackburn. If you could submit that for the record, I 
think that would be great, the amount of the IBM contract, the 
Accenture contract and then any of the others that have worked 
on building your system, the separate systems that are in 
there. I think that will be helpful to know.
    May I ask one other question? Then I'll be through. OK. Mr. 
Martin, when your auditor is giving your internal control 
reports, would it be helpful to you all if they also issued to 
you opinions on your internal controls?
    Mr. Martin. I believe those internal controls as presented 
satisfy all of the professional standards. So I don't see any 
additional utility with any more information in those reports.
    Ms. Blackburn. Mr. McPherson.
    Mr. McPherson. I'd agree with that. I think there are 
perhaps things such as audit committees or things beyond just 
normal government practices that could be considered in 
addition, but I agree with what Jack says about that particular 
item.
    Ms. Blackburn. Thank you, sir.
    Mr. Platts. Thank you, Ms. Blackburn.
    Mr. Martin, as one who about 2 weeks back made my last 
student loan payment from law school--and I'm actually waiting 
to get the statement back saying I'm completely paid off to 
celebrate. But I'm grateful for the Direct Student Loan 
Program, because my undergrad degree and my law school degree 
would not have been achievable without that assistance. So the 
integrity of those programs and all who participate who 
actually fulfill their obligations, that is something that I 
have a longstanding interest in. As I pay mine back, I want to 
be sure everyone else is paying theirs back.
    And my understanding is that in the Office of Federal 
Student Aid, there has been some significant technology 
investments to improve the tracking of--whether it be the Pell 
grants or the Direct Loan Program. I wonder if you could update 
us on where that stands and what you envision for the 
improvements being made regarding the Office of Federal Student 
Aid.
    Mr. Martin. Well, I think in terms of what we need to 
satisfy GAO, we've got material weaknesses that we need to 
improve related to IT security and other FMFIA material 
weaknesses.
    Mr. Platts. And that relates to being on the at-risk list 
with GAO to satisfy their requirements to get off that risk 
list?
    Mr. Martin. Right. Yes.
    Mr. Platts. What's your timeframe you think as far as 
trying to satisfy the----
    Mr. Martin. I think that where we'll be--you'll be 
reviewing probably in 2005, I guess?
    Ms. Calbom. Yes. Probably during fiscal year 2004 we'll be 
looking at what's been done in preparation for our high-risk 
assessment that we will be issuing in January 2005.
    Mr. Platts. That was my followup, is the Department, in 
this case Department of Education, takes action to address 
issues that I guess result in being on that list. It's my 
understanding that the GAO--that your process has always been 
just a 2-year update, that there are not interim updates?
    Ms. Calbom. Yes. Our policy is to do it on a biennial 
basis. You know, part of the reason for doing that is that 
really allows time to demonstrate sustainability of the 
improvements that have been made. For example, with the 
Department of Education, they did get a clean opinion in 1997, 
but then they weren't able to sustain that and they weren't 
able to even repeat it until just recently. We've seen that 
with some other agencies as well. Transportation had that issue 
a few years back as well. So we want to give some time to make 
sure that, as we've been talking here today, that these are 
permanent type improvements.
    The other thing is, GAO spends a lot of time and effort in 
doing those high-risk and performance and accountability series 
updates, and it is something that we think is a valuable thing 
to do for the Congress. But because it is such a big 
investment, we really want to limit that to a biennial-type 
process and not make exceptions on an agency by agency basis, 
because then we'd have everybody wanting to have an out of 
cycle assessment. So our policy is to stick with the biennial 
assessment.
    Mr. Platts. But you will have ongoing interaction with the 
Department that--as they work to address the shortcomings you 
have identified, that they are on the right track as opposed to 
just waiting till you get to that next 2 years and----
    Ms. Calbom. Definitely. In fact, the Department has offered 
to provide us with a series of briefings on the improvements 
that have been made in the student aid programs and we 
definitely are going to take them up on that, because we want 
to be as up to date as we can be and offer advice as we go.
    In addition, we have several ongoing jobs at the Department 
that really we do in order to build toward the high-risk 
update. As a matter of fact we're doing planning agency-wide at 
GAO right now to make sure that we've got a body of work 
planned for each of the areas that are currently on the high-
risk list so that we're in a position to properly assess those, 
again, for the 2005 date.
    Mr. Platts. OK. Thank you. Maybe a final area of specific 
inquiry, Mr. McPherson, with the Department of Agriculture is 
on the issue of debt, but I guess in a broad sense with your 
Department having--my understanding is about a third of all 
nontax debt or credit being issued by Agriculture. In the 2002 
fiscal year you jumped from 14 percent to 96 percent in the 
eligible debt that was referenced--or referred to the Treasury 
cross-servicing program, I guess, that kind of resulted in such 
a significant result--or increase in the referral and what you 
see for the future in that type of action.
    Mr. McPherson. It was a significant and invaluable 
improvement. About $300 million more in cash collections going 
to the Treasury than otherwise would have been the case. I 
think the issue is for us--the management of this hundred 
billion dollar loan portfolio in achieving the proper missions 
of the programs through the productive use of cash, and to 
manage those loans, I think there are four things that are 
important in addition to things like being good at collecting 
delinquent debts.
    One is the transaction approval process, and so we've 
emphasized taking a close look at how those transactions are 
approved. Two is how those portfolios or cohorts are managed in 
terms of concentration of risk, early warnings and so forth. 
Three has to do with the systems, the use, the application of 
computing to run a loan portfolio, to manage a loan portfolio, 
and a lot of loan systems probably around the government need 
to be renovated. We have some of that work to do.
    And then the fourth area is debt collection, credit reform, 
a whole other miscellaneous group of techniques and processes 
that are brought to managing that portfolio. And I think it's 
good to look at those aggregates where a lot of agencies have 
particular agencies or programs dedicated to lending. Any bank, 
private or public, is going to look at the whole portfolio and 
how it's managed, and I think that's where we have gotten some 
of our gains with more to come.
    Mr. Platts. Is that work--the various stage at this point 
is all internal, or do you use outside----
    Mr. McPherson. It's principally internal, and my role is 
sort of as a policy overseer. I'm not close to the customer. I 
don't own those portfolios. So my role is to influence how 
those are managed by Rural Development and the Farm Service 
Agency who have agency heads and under secretaries that own 
that work. But in tandem, in teaming, we all sort of speak the 
same language and are focused on some of these things that we 
think are most useful.
    Mr. Platts. And actually your final statement there brings 
me to a final question for Mr. Martin and Mr. McPherson. 
Speaking the same language and one of the goals of this hearing 
and of having you testify is to shed some more light on the 
efforts you have made and the tremendous success you both have 
had with your Departments and your fellow colleagues at your 
Departments in having more financial accountability, is there a 
regular interaction between the two of you and your--kind of 
your colleagues in other Departments in the same positions that 
you share notes on a regular basis as what's working in my 
Department, what's not, and so that we aren't having to 
reinvent the wheel, per se, in each of the CFO agencies?
    Mr. Martin. We have the CFO Council where many of these 
issues are discussed, and we have had I think two dinners of 
CFOs where we talk about issues that are affecting our 
respective Departments and where there are common interests. 
And we have working groups on--I think there is a working group 
that deals with issues related to implementation of the Oracle 
system, you know, where they meet periodically. I think it's 
either monthly or quarterly. So there is----
    Mr. Platts. Not just at the CFO level but staff----
    Mr. Martin. And below that, yes.
    Mr. Platts. Great. Well, hopefully when you're meeting and 
your fellow CFOs get together, they're listening well when the 
two of you speak and taking good notes, and we will hope with 
time that we can get DOD to embrace the improvements as well 
given the size of that Department's challenges, but if no other 
questions----
    Mr. Towns. I would like to just thank the witnesses, Mr. 
Chairman. Thank you very much.
    Mr. Platts. Thank you, Mr. Towns, and we do appreciate all 
four of you for your time and effort, not just here today but 
in the preparation and material you shared and your willingness 
to continue to be great resources for the members of this 
subcommittee.
    I'd also like to thank both the majority and minority staff 
members for their efforts regarding this hearing. It's clear 
that the agencies before us have put forth significant efforts 
to fix various serious financial management problems, and I 
commend each of you and your many, many staff persons who have 
put forth that effort in achieving the successes you have in 
both Departments. We look forward to hearing similar success 
stories from your financial management colleagues throughout 
the Federal Government as they learn from your examples and 
seek to meet the challenges before their Departments.
    The record will be kept open for 2 weeks for any additional 
information to be submitted, and this hearing stands adjourned. 
Thank you.
    [Whereupon, at 3:30 p.m., the subcommittee was adjourned.]
    [Additional information submitted for the hearing record 
follows:]

[GRAPHIC] [TIFF OMITTED] T9718.037

[GRAPHIC] [TIFF OMITTED] T9718.038

[GRAPHIC] [TIFF OMITTED] T9718.039

