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



 
                IMPROVING FINANCIAL MANAGEMENT AT USAID

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

                                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

                               __________

                           SEPTEMBER 24, 2003

                               __________

                           Serial No. 108-104

                               __________

       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

                                _______


                   U.S. GOVERNMENT PRINTING OFFICE
91-839                       WASHINGTON : 2004
_______________________________________________________________________
For sale by the Superintendent of Documents, U.S. Government Printing 
Office Internet: bookstore.gpo.gov Phone: toll free (866) 512-1800, 
DC area (202) 512-1800 Fax: (202) 512-2250 Mail: stop SSOP, Washington, 
DC 20402-0001
















                     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 September 24, 2003...............................     1
Statement of:
    Marshall, John, Assistant Administrator for Management and 
      Chief Information Officer, USAID; Everett Mosley, Inspector 
      General, USAID; and Gregory Kutz, Director, Financial 
      Management and Assurance, GAO..............................     4
Letters, statements, etc., submitted for the record by:
    Kutz, Gregory, Director, Financial Management and Assurance, 
      GAO, prepared statement of.................................    27
    Maloney, Hon. Carolyn B., a Representative in Congress from 
      the State of New York, prepared statement of...............    60
    Marshall, John, Assistant Administrator for Management and 
      Chief Information Officer, USAID, prepared statement of....     7
    Mosley, Everett, Inspector General, USAID, prepared statement 
      of.........................................................    17
    Platts, Hon. Todd Russell, a Representative in Congress from 
      the State of Pennsylvania, prepared statement of...........     3
    Towns, Hon. Edolphus, a Representative in Congress from the 
      State of New York, prepared statement of...................    41
















                IMPROVING FINANCIAL MANAGEMENT AT USAID

                              ----------                              


                     WEDNESDAY, SEPTEMBER 24, 2003

                  House of Representatives,
Subcommittee on Government Efficiency and Financial 
                                        Management,
                            Committee on Government Reform,
                                                    Washington, DC.
    The subcommittee met, pursuant to notice, at 2:10 p.m., in 
room 2247, Rayburn House Office Building, Hon. Todd R. Platts 
(chairman of the subcommittee) presiding.
    Present: Representatives Platts, Towns, Blackburn, Maloney, 
Turner and Owens.
    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; Earley Green, 
minority chief clerk; and Jean Gosa, minority assistant clerk.
    Mr. Platts. With a quorum about to be present--Mr. Towns is 
on his way--we are going to go ahead and get started and bring 
this hearing to order for the Subcommittee on Government 
Efficiency and Financial Management.
    Today's hearing is one in a series focusing on financial 
management at Federal agencies. For fiscal year 2002, 21 of the 
24 agencies mandated by the CFO Act to audit their statements 
earned an unqualified or ``clean'' opinion. Agencies that did 
not earn clean opinions have been invited to testify before the 
subcommittee as part of our oversight on financial management. 
The U.S. Agency for International Development will be the focus 
of today's hearing.
    Our intent today is to focus not only on the financial 
challenges facing USAID, but also on successful improvements in 
USAID's financial management practices. After receiving 
disclaimers for 5 consecutive years, the Agency improved enough 
to earn a qualified opinion on its consolidated statements. In 
fact, four of the five statements in 2002 that make up the 
consolidated financial statements actually received clean 
opinions.
    That being said, USAID still faces financial management 
challenges including the material weaknesses cited in the audit 
and the use of so-called ``heroic efforts,'' the costly and 
time-consuming manual accounting transactions used to reconcile 
the books at year-end. Today's hearing will look at these 
aspects of financial management and focus on the goal of 
achieving sound business practices, not just earning an end of 
the year clean opinion.
    President Bush's administration has made financial 
performance a top priority and a key part of the President's 
Management Agenda. 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 taxpayers.
    [The prepared statement of Hon. Todd Russell Platts 
follows:]



[GRAPHICS NOT AVAILABLE IN TIFF FORMAT]


    Mr. Platts. Our witnesses today will discuss the results of 
the financial audit for fiscal year 2002 at USAID. We are 
honored to have the Honorable John Marshall, Assistant 
Administrator for Management at USAID, the Honorable Everett 
Mosley, Inspector General for USAID, and Mr. Greg Kutz, 
Director of Financial Management and Assurance with the U.S. 
General Accounting Office. Thank you for your presence here 
today and for the extensive written statements you have 
provided the committee in advance of this hearing. I look 
forward to hearing your oral testimonies as well.
    I would normally yield to the gentleman from New York. When 
Mr. Towns arrives, after your statements, I will allow him to 
make an opening statement then, if he chooses, or to enter it 
into the record.
    We will proceed directly to each of your statements. We 
have been advised we may have votes in 15 minutes or so. My 
hope is we can get your opening statements as part of the 
record and if need be, recess briefly to run over, vote and 
come right back.
    I would ask each of our witnesses and any of your staff 
that will be advising you today, to stand and raise your right 
hands to take the oath.
    [Witnesses sworn.]
    Mr. Platts. The clerk will note that all witnesses and 
support staff have affirmed the oath. We will now proceed 
directly to your testimonies. We will begin, Mr. Marshall, with 
you, followed by Mr. Mosley and finally, Mr. Kutz. Again, the 
subcommittee appreciates your testimonies and would ask if you 
would limit your testimony, today, to 5 minutes for your 
opening statements and we will get into questions following 
your testimony.
    Mr. Marshall, if you would like to begin.

    STATEMENT OF JOHN MARSHALL, ASSISTANT ADMINISTRATOR FOR 
   MANAGEMENT AND CHIEF INFORMATION OFFICER, USAID; EVERETT 
 MOSLEY, INSPECTOR GENERAL, USAID; AND GREGORY KUTZ, DIRECTOR, 
            FINANCIAL MANAGEMENT AND ASSURANCE, GAO

    Mr. Marshall. Thank you, Mr. Chairman.
    When Administrator Andrew Natsios arrived at USAID in 2001, 
he found all of the agency's management systems in a state of 
disrepair. He directed me to overhaul and modernize the basic 
systems of the Management Bureau, Human Resources, Financial 
Management, Procurement, Information Technology and 
Administrative Services. Reforms in each of these areas are 
well underway. Most have been integrated with the President's 
Management Agenda and many are being coordinated with similar 
efforts in the State Department.
    As a result of past failures, our challenges in financial 
management have been more visible and our reform efforts more 
urgent than in other areas. Regrettably, USAID in the 1990's 
was a poster child for government waste as a result of a failed 
modernization effort. We have also been noted as one of a few 
agencies unable to produce a clean audit opinion because our 
systems could not produce complete, reliable and timely 
financial information.
    Our central problem has been our lack of an agencywide 
financial management system that meets Federal requirements. We 
began to address this fundamental weakness with the 
implementation in fiscal year 2001 of a new government approved 
commercial off the shelf accounting system we call Phoenix. 
Since its implementation in Washington, DC, Phoenix has 
produced significant results. After 5 consecutive years of 
disclaimers on all five of our financial statements, in 2001 
our Inspector General was able to issue three out of five 
qualified opinions and in 2002, four out of five statements 
received unqualified opinions. This marked the first time since 
enactment of the Government Management Reform Act that USAID 
received an opinion on all of its financial statements.
    In the 2002 GMRA audit, the Inspector General recognized 
seven internal control material weaknesses. Six of the seven 
have been addressed and we expect the last one to be fixed in 
the near future. We are working closely with the Inspector 
General on resolving all remaining obstacles so that he may 
issue a clean opinion for fiscal year 2003 and meet the 
administration's accelerated reporting deadline of November 15.
    The next phase of our modernization effort will be the 
deployment of Phoenix overseas. We plan to complete worldwide 
implementation by the end of fiscal year 2005. This will bring 
the agency into full compliance with Federal requirements. At 
the same time, we are working closely with the State Department 
to implement a joint financial management system as recommended 
by a study commissioned by the Department of State and USAID at 
the urging of the two agencies Inspectors General and OMB. The 
joint system will combine the two agencies' version of the same 
accounting software package into a single, common platform, one 
system, one set of code. We have also agreed to jointly 
implement a procurement system in 2006. USAID has fully 
embraced the President's Management Agenda and has made 
significant progress.
    Like many Federal agencies, USAID is experiencing serious 
human capital challenges. As a result of new program demands 
around the world, deep staffing cuts and decisions to 
effectively shut down recruiting and training in the 1990's, 
our workforce is stretched thin, rapidly graying and lacking in 
critical skills.
    Yesterday, I testified to Congressman Shays' subcommittee 
about our efforts to develop a comprehensive work force 
planning capability. These efforts will help us address 
critical competency gaps including those in our financial 
management capabilities through systematic recruiting, training 
and career development planning.
    In the area of budget and performance integration, we have 
developed a strategic budgeting model that has enabled us to 
link performance and resource allocation more efficiently. For 
the first time ever, the State Department and USAID have 
developed a joint strategic plan that will improve 
collaboration and coordination of diplomatic and foreign 
assistance services around the world. We are developing a 
comprehensive USAID competitive sourcing strategic plan and 
action plans to achieve more efficient and effective 
competition between public and private sources to generate 
savings and performance improvements.
    We are partners on several of the President's 25 e-
Government initiatives, collaborating on projects for 
standardization and integration of similar business processes 
when it makes sense. We are developing a joint enterprise 
architecture with the Department of State. This tool will 
identify redundancies and inefficiencies and help us set 
priorities for joint management improvement and IT investments. 
We have established procedures for capital planning and 
investment control to ensure that we spend our IT resources 
more efficiently and we have greatly enhanced our IT security 
efforts.
    Mr. Chairman and members of the subcommittee, Administrator 
Natsios has no higher priority than continuing to improve 
USAID's management systems. We inherited a base of capabilities 
that had deteriorated seriously relative to 21st century 
standards and we are making determined efforts to improve as 
rapidly as our resource levels allow.
    Thanks for the opportunity to report on our progress. I 
look forward to your questions.
    [The prepared statement of Mr. Marshall follows:]



[GRAPHICS NOT AVAILABLE IN TIFF FORMAT]
    
    Mr. Platts. Thank you, Mr. Marshall.
    Mr. Mosley.
    Mr. Mosley. Mr. Chairman, members and staff of the 
subcommittee, I thank you for the opportunity to appear before 
you this afternoon and provide my testimony on the financial 
management challenges facing USAID and progress being made to 
meet those challenges.
    In recognition of the time constraints that you pointed 
out, I have provided my full statement for the record and I 
will make my verbal statement very brief.
    Prior to passage of the Government Management Reform Act of 
1994, USAID, like many other Federal departments and agencies, 
did not have an integrated financial management system in place 
that could provide accurate and timely financial information 
that managers needed to effectively manage or that could 
produce auditable financial statements. This situation resulted 
in disclaimers of opinion--unauditable financial statements--
for the first 5 years of the Government Management Reform Act 
that were audited between 1996 and 2000.
    However, USAID management's efforts over the last several 
years, with the assistance of the Office of Inspector General, 
have resulted in significant improvements in the financial 
management operation. USAID implemented a new financial 
management system called Phoenix, for the Washington 
operations, in December 2000. This system and efforts by 
management and the Office of Inspector General to concentrate 
on correcting outstanding material weaknesses resulting from 
the audit reports have resulted in the fact that we are able to 
issue opinions for the first time in fiscal year 2001.
    OIG issued a qualified opinion on three of the five 
financial statements and a disclaimer of opinion on the other 
two statements. With continued improvements in fiscal year 
2002, the OIG issued unqualified opinions on four of the five 
USAID financial statements and a qualified opinion on the final 
statements. We are following up on all weaknesses from the 
fiscal year 2002 audit as a part of our audit now in process of 
the fiscal year 2003 financial statements. It would be 
premature to draw final conclusions at this point but thus far, 
nothing has come to our attention that would prevent us from 
issuing audit opinions on each of the financial statements for 
fiscal year 2003.
    While improvements have been made and the opinions for the 
statements have been more positive in recent years. 
Considerably more still needs to be done. Currently the USAID 
financial statements are put together through a tremendous 
amount of effort by USAID management staff and similar 
extensive efforts by the Office of Inspector General to perform 
the audit. This is because the financial systems do not totally 
produce the statement and much manual work is needed to pull 
them together. OIG then has to perform significant testing and 
individual transaction reviews to compensate for the lack of 
controls in the system and to be in a position to render an 
opinion. This should not be, so it is extremely important that 
USAID get its Phoenix system for financial management deployed 
to field operations which will result in an integrated 
financial management system that meets the Federal 
requirements. This will also provide USAID managers with timely 
and accurate information needed to effectively manage the 
business of the agency on an ongoing basis.
    Ultimately the preparation and audit of the financial 
statements on a quarterly and annual basis would then be a 
byproduct of a system that provides for normal business 
operations.
    Mr. Chairman, I thank you for your time and I am willing to 
answer any questions.
    [The prepared statement of Mr. Mosley follows:]



[GRAPHICS NOT AVAILABLE IN TIFF FORMAT]
    
    Mr. Platts. Thank you, Mr. Mosley.
    Mr. Kutz.
    Mr. Kutz. Thank you, Mr. Chairman.
    Thank you for giving us an opportunity to testify on 
financial management challenges facing USAID. We have reported 
financial management as a significant challenge facing USAID 
for years. The bottom line of my testimony this afternoon is 
that although the opinions on USAID's financial statements have 
improved, significant challenges remain to achieve the goal of 
effective financial management.
    My testimony has two parts: first, an overview of the 
longstanding financial management challenges and second, our 
perspectives on efforts at reform and some key elements of 
success.
    First, Federal financial management has come under 
increasing scrutiny in recent years. The establishment of the 
Federal Financial Management Framework has shed light on this 
important issue. As this subcommittee is well aware, the 
challenges at USAID are not isolated and reflect a 
governmentwide problem. In light of the serious fiscal 
challenges facing our Nation, the importance of effective 
financial management at Federal agencies is magnified.
    Progress at USAID since fiscal year 2000 relates primarily 
to improvements on opinions in its financial statements. As the 
Inspector General and Mr. Marshall noted, the opinions began 
improving in fiscal year 2001 and for fiscal year 2002, the IG 
issued unqualified opinions on all but one of the financial 
statements. The IG noted additional progress made in improving 
processes and procedures in fiscal year 2002.
    However, over the last 3 years while USAID's opinions on 
its financial statements have improved, reported material 
weaknesses and noncompliance have increased. This increase does 
not necessarily reflect that the situation has gotten worse, 
but rather shows the results of a full scope audit and a better 
definition of the challenges.
    The reported weaknesses indicate that USAID does not have 
timely, reliable financial information. The chronic nature of 
reported weaknesses reflect challenges with people, processes 
and systems. Progress in addressing weaknesses has been slow. 
For example, we reported in 1993 that USAID had problems with 
timely deobligation of unneeded funds. This issue remained for 
fiscal year 2002 with the IG reporting $153 million of stale 
obligations at year end.
    Moving on to my second point and as Mr. Marshall noted, 
USAID has several reform efforts underway to address the 
challenges. For example, they are attempting to implement an 
integrated financial management system. A previous attempt to 
develop a home grown system in the 1990's failed which set them 
back in their reform efforts. This current effort involves a 
commercial software procurement. Successful implementation of 
this system will require reengineering of processes and 
controls and significant, substantive management oversight.
    With respect to oversight, USAID has a Governance Committee 
that is leading transformation of business systems and 
organizational performance. Some of the key issues this 
committee can address include cultural resistance to change, 
improvements in human capital and IT investment oversight. 
Active, substantive oversight of the implementation of the new 
system is a key to reform.
    Last but not least I come back to human capital. The root 
cause of the financial problems at USAID appears to be human 
capital in nature. It is people that implement and operate 
systems. It is people that establish, follow and monitor the 
effectiveness of internal controls. Since the early 1990's, we 
have reported that USAID has made limited progress in 
addressing its human capital management challenges. Developing 
a comprehensive work force plan is critical for USAID given the 
reductions in personnel in the 1990's and the high number of 
employees eligible to retire. In addition, USAID has not had 
consistent financial management leadership. Sustained 
leadership by a CFO and a high quality financial work force are 
critical to successful reform.
    In summary, USAID appears to be making a serious attempt to 
reform its financial management. Initiatives are under way to 
address the many challenges. However, progress to date relates 
primarily to improvements in opinions on financial statements. 
These opinions reflect a heroic effort to develop numbers at 
year end rather than the ability to generate timely, reliable 
information for management and the Congress. To achieve 
fundamental reform, USAID will need to successfully address its 
challenges with human capital, internal controls and business 
systems.
    Mr. Chairman, that ends my statement and I would be happy 
to answer questions.
    [The prepared statement of Mr. Kutz follows:]


[GRAPHICS NOT AVAILABLE IN TIFF FORMAT]
    
    Mr. Platts. Mr. Kutz, thanks for your testimony.
    I would like to recognize our ranking member, Mr. Towns 
from New York, as well as our vice chairwoman, the gentlelady 
from Tennessee, Ms. Blackburn. Would either of you like to make 
an opening statement before we get into questions?
    Mr. Towns. No, Mr. Chairman, I will place it in the record.
    [The prepared statement of Hon. Edolphus Towns follows:]


[GRAPHICS NOT AVAILABLE IN TIFF FORMAT]

    Mr. Platts. OK. We will certainly accept your written 
statements for the record.
    I think we have about 10 minutes before the first vote, so 
I am going to try to get started here. My understanding is we 
have two votes. We will try to get those close together and 
come back with you. We certainly appreciate our witnesses' 
patience with us as we run over there.
    Mr. Marshall, if I could start with kind of a broad 
question. We have heard testimony here, today, and in your 
written statements about the past efforts of trying to get the 
agency's arms around financial accountability and the 
expenditure of roughly $100 million, or so, through the 1990's; 
and now of a new effort because the previous effort was not 
successful. We understand you are currently developing an 
enterprise architecture while moving forward with the domestic 
implementation of the Phoenix system, looking forward to 
implementation in foreign locations, and also efforts with the 
Department of State on a joint financial system--a lot of 
coordination.
    What can you tell us that will help to assure us the 
mistakes of the 1990's, where $100 million was spent and, at 
the end of the day, did not have a system that actually worked; 
and that as you move forward from your operations here in the 
United States to your operations overseas, working to 
coordinate these various efforts that are all important but 
need to work together at the end of the day--whether a year 
from now or 2 years from now--we truly are going to have a 
financial system in place that allows informed, day-to-day 
decisionmaking to be made?
    Mr. Marshall. We are doing things differently is the short 
answer and we have spent a lot of time over the last couple of 
years in building a foundation of best practices upon which to 
buildup the capabilities to manage the system implementation 
more effectively. As noted in the testimony of my colleague 
from GAO, the last system in the 1990's was a home grown effort 
they attempted without all the requisite capabilities to 
develop their own system. We are taking a proven, effective, 
commercial off-the-shelf product, that has been designed for 
the Government and successfully implemented by a large number 
of government agencies. So a lot of that learning curve, you 
might say, we are benefiting from that.
    We are investing in sound project management capabilities, 
we have put our plans through a more rigorous business case 
analysis frankly to secure funding from the Office of 
Management and Budget as a result of the administration's much 
tougher requirements in developing business cases, the scrutiny 
they are providing on IT investments and the emphasis on 
project management. So we are going to make sure we have the 
right skills in place to manage effectively. Training and 
certification in the skills of project management will be amply 
funded. We are presuming that the administration and Congress 
provide the resources it takes and putting all these best 
practices in place, together with fully skilled, capable 
resources, will get the job done.
    Mr. Platts. This may relate to some of your testimony 
yesterday. I wasn't able to be at the National Security 
Subcommittee regarding the workforce, but it kind of goes hand-
in-hand with what you are doing different in the sense of your 
infrastructure. As I think we all agree, having personnel there 
to take that infrastructure, really make it work and to act 
upon it has been one of the challenges to the agency of having 
and retaining your work force. Especially since over the next 
several years, 40 percent or so of your work force will be 
retirement eligible, which will compound that challenge.
    How are you moving forward to match on the human resource 
side and ensure people who are there will stay or are going to 
be recruited to put the systems you are currently developing 
into use.
    Mr. Marshall. That is a very good question and it is an 
acute problem at USAID and many other agencies. The agency 
effectively shut down recruiting in the 1990's and as a result, 
we have what you might call a ``lost generation'' of people who 
would be in their mid-career years who could be replacing the 
senior level professionals who are becoming eligible and 
retiring rapidly. Over the past couple of years, we have been 
ramping up a mid-career recruitment vehicle. We call it our New 
Entry Professional Program. A couple of hundred new entry 
professionals have come in with a variety of skills, primarily 
on the Foreign Service side of our organization. Our 
organization includes both Civil Service employees primarily 
based in Washington, and Foreign Service who are based overseas 
and in Washington. On the Civil Service side, we continue to 
recruit.
    For jobs relative to the financial management, we are 
making sure we advertise and screen for the kinds of skills we 
need. Our work force planning effort is just beginning. It has 
been neglected for too long. I had a long discussion with 
Chairman Shays in the other subcommittee hearing yesterday 
about this. We are very concerned but we are moving as 
aggressively as we can to put the right mechanisms in place so 
that we conduct work force planning on a systematic basis, 
institutionalize that capacity so we don't get stuck in this 
kind of situation again in the future.
    Mr. Platts. I have some followup questions to both those 
issues but before we break, I want to recognize Mr. Towns.
    Mr. Towns. We don't have enough time. I walk slow, Mr. 
Chairman.
    Mr. Platts. So you want to wait until we come back? Maybe 
what we will do is go ahead and break here so we can go vote 
and we will proceed as soon as we return.
    Thank you.
    [Recess.]
    Mr. Platts. Mr. Towns.
    Mr. Towns. Thank you very much, Mr. Chairman.
    Mr. Marshall, let me start with you. Your funding over the 
last year almost doubled, right?
    Mr. Marshall. Are you talking about programmatic funding 
for the agency overall?
    Mr. Towns. Yes.
    Mr. Marshall. I don't have those numbers handy but that 
sounds in the ballpark.
    Mr. Towns. I guess my real question is does USAID have the 
personnel and financial management system in place to handle 
the surge of funding?
    Mr. Marshall. That's a very good question, sir. We are 
stretched now. Our present capabilities, as you heard in 
testimony from all three of us this morning, are in need of 
modernization. We think we can get the job done to accommodate 
the surge of activity that we anticipate over the next several 
years. Right now, we are getting the books balanced and we 
believe we can at least produce an unqualified opinion. We are 
hoping we will this year but I can't deny that it is not 
without heroic efforts as testified by Mr. Mosley. It takes a 
lot of leg work because we don't have an integrated, worldwide 
system in place. We still have legacy systems which have 
difficulty integrating with our core system in Washington, a 
lot of paper-based processes and the system is not nearly as 
efficient as we would like it to be, but we are moving as 
aggressively as we can to correct those deficiencies.
    Mr. Towns. Mr. Kutz, you testified that you used USAID 
financial management conditions of 2 years ago as a baseline 
for this current review. You go on to testify about various 
improvements and also some apparent deteriorations. What is the 
bottom line in your opinion? Is it better now, worse or the 
same? I am not sure.
    Mr. Kutz. I would say the additional problems that were 
identified were the result of full scope audits. In 2000, there 
were disclaimers on all the financial statements which means 
you can't give any opinion on the financial statements. 
Typically when agencies have a full scope audit where all areas 
of the audit are investigated, in this case, by Mr. Mosley's 
team, more issues would come to light. I would say they are 
probably in better shape from either knowing what the problems 
are or having had time to make progress against the challenges 
identified.
    I have done lots of financial audits also and I have seen 
that consistently that as you audit more and more items, more 
issues come to light. Now that they have had a full scope audit 
done for several years, I would think most of the issues are on 
the table for them to attack. I would say it probably better 
reflects today the issues than 2 years ago when they had 
audited everything.
    Mr. Towns. So you are saying the issues are out there now 
and it is up to them to begin to correct them?
    Mr. Kutz. I would say it is up to them to correct. I think 
they should know all the challenges that face them at this 
point and it is a matter of going after it with the people 
processes and systems.
    Mr. Towns. Why do you think they have not achieved the 
success that maybe you had expected? Why do you think they have 
not been able to move more aggressively?
    Mr. Kutz. I don't know if they haven't moved aggressively, 
I think the root cause of the problem as we see it, and we 
don't do the financial audit, Mr. Mosley does the audit, but 
looking across government, the human capital would be, in our 
view, the issue that is most important here. GAO has looked at 
human capital in a broader sense at USAID and had a lot of 
problems with the progress they have made along those lines, 
but right now, you don't have a chief financial officer in 
place. I understand one is coming on board and that is going to 
be critical to reform, having a CFO that is in place for 
several years to maintain the efforts toward reform over a long 
period of time, that is going to be necessary, and making sure 
they recruit and retain a competent, high quality financial 
management work force is going to be a critical element here.
    A lot of times people say the problem is the system but I 
don't think the problem is that simple; it is the people that 
are implementing and operating the system that are the more 
important issues.
    Mr. Towns. Mr. Marshall, 2 years ago your predecessor 
testified that most of the financial management problems faced 
by AID at the time would be addressed by now. That is 
apparently not the case. Both your IG and GAO point to serious 
continuing weaknesses. What has gone wrong? When can we expect 
to see real improvement? This was 2 years ago.
    Mr. Marshall. Things changed unfortunately in those 
intervening 2 years. We had a new administration come in and 
raise the bar on its acceptance of funding requests, business 
cases for IT investments like our financial system, so we 
didn't receive the funding until we did more homework to 
establish better capabilities, to start work on an enterprise 
architecture which was a prerequisite to getting funding from 
OMB so it was clear this investment met the needs of the agency 
in a broader enterprise context and so that we produced a 
business case which fully justified the investment. Those 
criteria had not been previously met and this new 
administration has raised the bar on those requirements so we 
have done some more studying. Within the last 6 months at the 
suggestion of Mr. Mosley and his counterpart at the State 
Department, we have done another study to study not just 
deployment of our system and the State Department system, two 
systems independently, but how the two systems could be 
integrated into a single system to serve both agencies. That 
has also resulted in at least another 6 months delay in our 
receiving funding to move forward with deployment of our 
financial system, Phoenix, overseas.
    Mr. Towns. Mr. Chairman, there will be another round?
    Mr. Platts. Yes, sir.
    Mr. Towns. I see my time has expired.
    Mr. Platts. Ms. Blackburn, did you have questions?
    Ms. Blackburn. Yes, I did. Thank you so very much. It looks 
like I got back just in time.
    I want to go back to the Phoenix system. Mr. Kutz, I think 
I want to come to you with this. We were hearing about the 
implementation of the Phoenix systems on a worldwide basis and 
Mr. Marshall made the comment going back and looking at what 
has been tried previously and the amount of money invested, I 
think as we sit through these hearings and talk to different 
departments, we hear stories of failures when it comes to our 
interactive technologies and our technological applications. We 
hear lessons learned stated but it is very seldom that we see 
those applied.
    As we look at the Phoenix system, if I am understanding 
correctly, Mr. Marshall, you are saying it is an off the shelf 
product with government applications. We have already spent 
$100 million here, DOD has spent hundreds of millions, we have 
Homeland Security spending hundreds of millions. I have a 
couple of questions. One, the applications that are available 
through the architecture in the Phoenix systems, if they are 
able to be implemented for our recordkeeping, money tracking 
with these programs, then would the same system be able to be 
used in other agencies?
    If the answer to that is yes, what would the timeline be 
for implementing it through USAID and then also with some of 
the other agencies. If you have a timeline worked up and a cost 
estimate, if you were to take that template and that 
architecture and apply it, tweak it for other agencies, have 
you given any thought to what a cost savings would be rather 
than doing it much like what we heard from the Chief Financial 
Officer with Homeland Security, that there was no timeline and 
the cost estimate was somewhere between $100-$200 million which 
the constituents in my district Monday morning at a Chamber of 
Commerce breakfast just broke into laughter when they heard 
that. Response?
    Mr. Kutz. Let me break the bad news to you, first. With DOD 
you are not talking about hundreds of millions, you are talking 
about tens and hundreds of billions with systems. So they are 
operating in a different sphere of money.
    With respect to this system that they are implementing, 
again I am not that familiar with exactly what they are doing, 
this is a Momentum system, an AMS product, an off the shelf 
product. The prior effort they had to implement, the system was 
a home-grown effort. I think studies have shown that the off 
the shelf packages are easier to implement, although they are 
not necessarily simple to implement because some of the 
failures we have seen in the Federal Government have also 
included off the shelf packages that have not worked.
    The key to the off the shelf implementations would be 
reengineering of business practices and internal controls and 
strong, consistent oversight and project management. Off the 
shelf packages aren't simply something you apply, you push a 
button and everything works. It just doesn't work that way. The 
success level I believe with off the shelf packages would be 
more heightened.
    Other agencies in the Federal Government and the 
legislative branch, for example the Architect of the Capitol, 
are implementing this same system, so it is being used other 
places.
    If I understand your question, with respect to could the 
Government apply this across the board, presumably yes, the 
Government could if you looked at the Government as something 
like Exxon-Mobil where you have a bunch of subsidiaries. Could 
you have one system across the Government? There has been a lot 
of talk about doing such a thing. Could there be savings? Yes, 
there could be billions of dollars of savings if you did 
something like that.
    The types of technology and functionality built into this 
momentum system are tested by the JFMIP, the Joint Financial 
Management Improvement Program, and presumably if implemented 
correctly and processes reengineered, this is a tested system 
that should work. I think I touched on all your points.
    Ms. Blackburn. Yes, you did a great job and I thank you for 
being succinct in that and I will come back.
    Mr. Platts. Mr. Marshall, I want to ask your opinion about 
the statement that you hope to have an unqualified opinion for 
your 2003 statements but admit that it is going to require 
heroic efforts again to make that happen.
    It is understandable in the short term why every agency 
wants to have an unqualified opinion and not be one of the 
ones--the 1, 2 or 3 of the 24 CFO Act agencies that does not 
get a clean opinion. In the long term that is not really 
achieving the intent of the CFO Act and the President's 
Management Agenda, which is clearly having a management system 
in place that lets us benefit from that system day in and day 
out.
    What is the decisionmaking process? How has the agency gone 
about saying you don't have unlimited resources, financial or 
human capital, so by focusing in heroic fashion to get an 
``unqualified opinion,'' this year, you are going to have to 
take resources, money or personnel from the long-term goal of 
that systematic change and your internal controls. It seems for 
the short-term gain, we are going to have a loss long-term. In 
other words--a longer period of time before we have those long 
term processes in place. Your response to the opinion I have of 
the approach you are taking?
    Mr. Marshall. That is a good question. We have wrestled 
with that one ourselves. Indeed, what is the business value of 
a heroic effort in that investment toward producing what might 
be an apparent victory of a clean audit opinion when that money 
might have been reinvested in other initiatives with more 
lasting impact. That is a tough one.
    We believe the effort that goes into the audit doesn't just 
produce a clean audit opinion. It also produces, as I think Mr. 
Mosley and Mr. Kutz testified, better understanding of your 
financial vulnerabilities because each time you conduct the 
audit, you dig to deeper levels of information, you undercover 
perhaps additional material weaknesses or deficiencies which 
you hadn't inspected before and that tells you something about 
the condition of your books of your financial system. That 
helps you target your investment initiatives to fix those kinds 
of problems.
    Mr. Platts. That would go to identifying the weaknesses but 
then expending the dollars or personnel time of accounting for 
those weaknesses by that heroic effort to make up for it versus 
just identifying and saying, here are our problems--why we 
can't get an unqualified opinion without heroic effort. We are 
going to acknowledge that, accept a qualified opinion or no 
opinion for this year so that we can take these resources we 
would need to use to account for those shortcomings and put 
them into long term benefits.
    Mr. Marshall. We have had some of those discussions and it 
is really a tradeoff because we do receive value beyond 
symbolic result of a clean audit opinion from what we learned 
conducting the audits and we are required to close the books. 
So some effort has to be made to do that.
    I would agree with the point Mr. Kutz made that the use of 
the information is really the ultimate aim. It is using that 
information to better manage your entire enterprise. We have 
serious human capital challenges in providing the training to 
the right people to teach them to use the information more 
effectively to manage their programs and making the data 
available and giving the people the skills to analyze the data. 
There is a lot to be done here but we do think there is some 
value to closing the books, getting the opinion and hopefully 
getting a clean one that we think justifies that investment.
    Mr. Platts. Mr. Mosley and Mr. Kutz, your sentiments on 
spending the resources, personnel or capital to get an 
unqualified opinion versus accepting a qualified one and using 
that instead for the long term transformation?
    Mr. Mosley. If I could be very frank, that has not been the 
emphasis. The emphasis from everybody has been clean opinions. 
That is being very honest with you.
    Mr. Platts. When you say everyone, who do you mean by 
everyone? OMB?
    Mr. Mosley. OMB, the administration, GAO, everybody is 
pushing for a clean opinion, not only for AID but for all of 
government, to be very honest with you. Several years ago, we 
had discussions within the agency where the OIG's office and 
management sat down and talked about, let us not even go 
through doing this big work, this massive amount of work 
knowing we are going to come up with a disclaimer anyway. Why 
don't we just have the disclaimer now and concentrate on 
working on the things needing to be corrected so we have a 
better system. That really wasn't an acceptable option for us, 
even though we still came out with a disclaimer.
    What we have done for the last several years is we have 
narrowed our work to what are the critical issues that are 
preventing us from getting good data. Those are the issues we 
have worked on with management. That has allowed us to come to 
better opinions on the financial statements. The other just 
hasn't been an option for us.
    By the same token, the ultimate of getting financial data 
on a current basis that managers can use to manage is not going 
to happen until we get the system, Phoenix, deployed to the 
field. The reason for that is, right now we have lots of people 
in the field who don't have systems that are integrated so what 
they do is keep cuff records. They keep those cuff records in 
order to maintain the information they need to do their 
managing. The problem with that is when you come from Congress, 
from management, from OMB and ask for certain information, they 
have to go through a long process of pulling that information 
together. It takes time, it sometimes lacks accuracy and you 
have to reconcile that information. That is why we need the 
system deployed to the field as soon as possible.
    Mr. Platts. Mr. Kutz? I acknowledge there is a push for the 
clean opinions and unqualified opinions but I hope the push for 
that is for unqualified opinions that really mean something day 
to day.
    Mr. Kutz. Right. Our position is that the unqualified 
opinion is not the most important thing and in fact, with DOD 
as you may remember from our hearing earlier this summer, the 
law was passed that effectively prohibited spending of a lot of 
money to try to audit unauditable information. We supported 
that legislation under those circumstances. We don't think the 
end goal here is the unqualified opinion.
    I have seen this issue across government. I saw it at IRS, 
for example. IRS is at the point right now where they have 
their weaknesses and all those weaknesses are dependent upon 
systems being modernized. If the systems never get modernized, 
those weaknesses will never go away. They are at a point where 
they are having to still do somewhat of a heroic effort, 
although they have perfected it to some extent by getting 
numbers once a year. It is a tradeoff between spending time. It 
is not like you have unlimited resources so to the extent you 
are spending that time getting that clean opinion, that is time 
that will not be spent on systems modernization or upgrading 
your human capital or whatever else there is to do.
    Mr. Platts. It seems for USAID and IRS, it is kind of a 
catch-22. No one wants to be highlighted as not having that 
clean opinion, but for what we are really after, it doesn't 
mean anything if, year after year, it is heroic.
    I raise that because I think we are being shortsighted in 
our approach in many instances and in this specific one.
    Mr. Kutz. Governmentwide, you have 19 out of the 24 right 
now that have systems that don't comply with FFMIA's but 21 out 
of the 24 have the clean opinion, so I think you can see what 
has happened here.
    Mr. Platts. We are using that heroic, end of the year 
effort to look good but not really get the benefit day in and 
day out. I want to come back to that.
    Mr. Towns.
    Mr. Towns. Thank you.
    Mr. Marshall, thinking about your current expansion, GAO 
testified that many individuals financial managers must depend 
on to provide the data used for financial reports are not 
answerable to the financial managers and often do not have the 
background or training necessary to report that data 
accurately. How are you addressing this problem?
    Mr. Marshall. That gets to the heart of the human capital 
challenges that Mr. Kutz has described where we need to do a 
much better job of work force planning, of defining the 
competencies we need throughout the work force in financial 
management and any of or other management or programmatic areas 
and making sure we have those competencies in place either by 
hiring, outsourcing, training, recruiting, whatever it takes.
    The first thing we need to do is to define what are the 
requirements and what are the gaps and then develop a strategy 
to meet those gaps in one of those different ways. This is one 
very high on our list.
    We have, as I testified yesterday to Mr. Shays' 
subcommittee, our initial work force planning pilot efforts 
will be soon underway and we are targeting our management 
areas, human resources and procurement as well as the 
programmatic area of our global health programs where we think 
we have particularly acute needs to address those human capital 
gaps. Those will be the first areas we are looking at.
    It is a rigorous analysis that needs to take place. We are 
trying to address it as best we can through ad hoc ways, you 
might say, but we are not doing it in a systematic way as we 
need to be but we are trying to get there as rapidly as we can.
    Mr. Towns. Mr. Kutz, let me ask you this. First of all, who 
are these people and who are they answerable to if not the 
financial managers?
    Mr. Kutz. They would be answerable to the various 
components of USAID outside of Mr. Marshall's area. They would 
be programmatic people more so. Again, this is not an issue of 
just USAID. This is an issue across government where a large 
chunk of the financial information and systems are not under 
the purview of the chief financial officer which does create 
kind of a mixed dotted line reporting issue for getting 
financial information to the systems. One would be the 
procurement people as an example of that. Again, I think it is 
more the programmatic people, the people who are involved in 
distribution of funds and oversight of grants and contracts.
    Mr. Marshall. We do have a worldwide financial management 
controller's community as well as procurement community that 
have you might say a dotted line relationship to those 
centralized organizational components that are part of the 
management bureau which I head. Our CFO has a dotted line 
reporting relationship to controllers in each of our missions 
overseas and the controllers' staffs. As Mr. Kutz was 
describing they aren't directly under my control or the control 
of the CFO who is a member of my organization, but we do issue 
policy guidance and we coordinate training and define the 
standards these individuals and their systems are intended to 
perform. So we do our best to train up and test up to those 
standards but they aren't directly under my control and those 
resources are stretched pretty thin and are oftentimes 
conflicted between their reporting relationships up through 
their chains of command in the field and through that narrow, 
small dotted line into Washington.
    Mr. Towns. Mr. Mosley, you testified that the problem 
affecting USAID financial management systems were caused by the 
absence of effective controls for managing USAID information 
technology resources. Could you elaborate on that?
    Mr. Mosley. There are a lot of weaknesses in the general 
control systems. In fact, that is why we have to do so much 
substantive testing. The systems don't have the controls in 
them, plus you don't have an integrated system that includes 
the field mission accountability control system. That system 
then feeds information into Phoenix and then once you are 
trying to reconcile that information, it doesn't have the 
controls necessary to make sure the information is accurate. 
That is why there is a lot of effort being made by the managers 
to pull together the statements and us to do the testing of the 
transactions on a statistical basis to try to determine whether 
there are significant weaknesses and whether we can render 
opinions.
    Mr. Towns. Mr. Marshall, do you have any kind of time table 
for when you might be able to pull this together?
    Mr. Marshall. Our current plans call for completing the 
overseas deployment of our financial system within about 2 
years, by the end of fiscal year 2005 and soon thereafter, we 
will be completing the integration which is planned with the 
State Department. We will have a single system serving the two 
agencies.
    Our piloting overseas will start in early 2004, in April 
through August 2004, and then the deployment through the 
remaining missions will be completed, hopefully, by August 
2005. That is the current timetable.
    Mr. Towns. On that note, I yield. There will be another 
round?
    Mr. Platts. Yes. We will have plenty more opportunities.
    Ms. Blackburn.
    Ms. Blackburn. Thank you.
    Mr. Mosley, let us continue right there on these computer 
systems. For data transfer and management, how secure are the 
systems, the computer systems?
    Mr. Mosley. The agency has made a lot of improvements in 
computer security. That has been an emphasis over the past 
couple of years. There are still weaknesses simply because you 
are dealing in underdeveloped countries and you are 
telecommunicating data. There are still weaknesses but they are 
much more secure than they were at that time.
    Ms. Blackburn. Where do you think the greatest 
vulnerabilities are?
    Mr. Mosley. Probably through telecommunications. You are 
using lines and there are mechanisms in foreign countries where 
the systems and processes are not nearly as well developed.
    Ms. Blackburn. Mr. Marshall, can USAID account for every 
dollar they have given in foreign aid?
    Mr. Marshall. I would have to get back to you on that. I 
think we can account in some way. We are challenged in 
attributing every dollar to every strategic objective. This 
gets into the very complex way we have of defining strategic 
objectives, country objectives, programmatic objectives and 
geographical objectives. We do quite a bit of estimating in how 
we split the dollars, which ones roll up to which strategic 
objectives.
    Worldwide, I think our system has hundreds of strategic 
objectives because our plans and all the strategic objectives 
are based on a per country basis. So we are challenged in that 
area but we do the best we can. We hope with our new system, we 
can keep getting better and better.
    Ms. Blackburn. So you can't account for it now but you are 
trying to get better at it. Specifically, other than 
implementing a new system, what are you doing to be sure you 
are accounting for the dollars you are spending or do you 
intend on having the new system remedy all your problems?
    Mr. Marshall. I think the new system is the major piece of 
the puzzle. We are doing a lot of things with our reports, 
refining our strategic objectives and part of this gets into 
our budget process. We are doing joint and strategic planning 
and financial management with the State Department. Clearly I 
think the financial system is the big piece of the puzzle here 
but our definition of strategic objectives, the way they align 
with goals of the agency's, strategic goals and objectives from 
the broadest level down to the country level, and roll up from 
expenditure. Tracking reports is another area where we need to 
continue to do work.
    Ms. Blackburn. Let me ask you something else. You mentioned 
that you are defining the competencies that are needed within 
your agency.
    Mr. Marshall. Yes, in our work force planning context.
    Ms. Blackburn. And then with your human capital. How long 
have you known that you had a human capital problem? How long 
have you been in process on this to get to the point that you 
are just beginning to define the issue and you are going to get 
a pilot project underway? Listening to all of this and being 
someone that comes from the private sector and small business, 
I am always challenged in my thinking to get beyond my bias 
which says if you were in the private sector, you would have 
been out of business a long time ago. How long has it taken you 
to move through this process and how long do we have to go 
before we say we have arrested this problem?
    Mr. Marshall. I appreciate your question and I share your 
frustration. I too came in from the private sector to USAID 2 
years ago. What I found when I moved into my position was I had 
an HR office that had a vacancy in the Director of HR and the 
Deputy Director of HR and those positions weren't filled until 
I was in my position for about 6 months. It is very hard to 
initiate something new and comprehensive like work force 
planning with a leadership void like that.
    Another thing to understand is during the 1990's, the USAID 
was in the downsizing mode. We had significant cuts across all 
of our administrative functions and programmatic functions. The 
Management Bureau took some very deep cuts and those skills and 
those capacities within HR were severely affected. In the 
1990's being in a downsizing and outplacement mode, there 
wasn't a focus on recruitment, it almost ground to a halt; 
training, ground to a halt. There was no work force planning 
when the emphasis was on downsizing.
    Also, as a result of the failed IT initiatives of the 
1990's, those were supposed to have produced new systems which 
would allow us a lower base of personnel to operate more 
efficiently. Those initiatives failed and so in the last couple 
of years we have inherited a lower number of employees who 
continue to operate in these outmoded, inefficient, antiquated 
systems that don't integrate, don't produce data, and don't 
process transactions efficiently. As a result we have a very 
small margin of extra resources to invest in modernization that 
it will take to get on top of the situation. It is very 
challenging but I appreciate where you are coming from. That is 
why it has taken a while to ramp up our work force planning, 
getting back to your point, because my first task upon arriving 
was finding a HR Director, bringing in a Deputy Director, 
getting a leadership team in place, stopping the leaks in the 
dike where the whole HR function had pretty much ground to a 
halt and hadn't been doing any of this stuff because they had 
been in the outplacement mode for the 1990's and starting 
incrementally, step by step, to think about the future and 
connect our work force planning with our agency strategic 
planning and move forward and say what are the programmatic 
drivers, the business drivers, the skills we need, how do we 
get them on board, how do we source them, how do we train them, 
how do we recruit them.
    I share your frustration and it is a very complex and 
Gordian knot to unravel.
    Ms. Blackburn. May I ask one followup?
    Mr. Platts. Yes.
    Ms. Blackburn. In light of your timelines, your timetable, 
you mentioned your computer systems and the Phoenix system, you 
are looking at total integration of that by 2005?
    Mr. Marshall. That is correct. Phoenix will be deployed, 
our present plan shows, by August 2005.
    Ms. Blackburn. As far as your human capital management, is 
your timetable the same?
    Mr. Marshall. No, it is not exactly the same but let me 
explain. Primarily the work force planning capability is the 
missing piece here. That is not just a particular system, an 
analysis or any particular deliverable. That is a whole set of 
capabilities that have to be put in place. It is a life cycle 
kind of system to be meshed with our strategic planning process 
so you identify what are your programmatic needs, your work 
force needs, where are your gaps in your capabilities, how do 
you source those gaps, do you outsource them, do you recruit 
them, do you train them, and so forth.
    Work force planning is kind of a life cycle of cradle to 
grave activities of how you manage your HR system. Different 
pieces are being put in place over the next couple of years. I 
can get back to you with some more specifics on the dates and 
sequencing of those investments but we are seriously resource 
constrained and we are trying to put them in place based on 
what is the most critical need and the highest payoff from a 
particular investment. We are getting at that but I don't have 
a timetable for you in terms of when the complete set of 
capabilities will be in place and when our organization will 
mature to the point we can say we have an effective work force 
planning capability institutionalized.
    Ms. Blackburn. I think that I would be interested in that. 
I don't want to add to your workload because I appreciate your 
attention to the task of trying to go through a reorganization 
but I definitely would be interested in seeing what that 
timetable is and how you plan to phase that in. I think it is 
relevant to our discussion of having a government that is 
effectively delivering services using 21st century technology, 
that government come into the 21st century and avail itself of 
all this technology looking for some efficiencies and some cost 
savings along the way. I would appreciate knowing that.
    Mr. Marshall. I would be happy to provide that for you.
    Mr. Platts. Thank you, Ms. Blackburn.
    A couple of followups to Ms. Blackburn's questions. One, I 
take it that we do have a Director and Deputy Director in place 
today working on that human capital plan?
    Mr. Marshall. Yes, we do. We brought in from overseas one 
of the agency's top managers to be the HR Director and we 
recruited governmentwide and found a very capable Deputy 
Director who has been in place for about 9 months now. We are 
starting to bounce back a bit. I think we hit bottom a little 
over a year ago and over the last 6 to 12 months we have 
started to rebound.
    Mr. Platts. And that is the direction in which we want you 
to continue--and a positive one.
    The followup regarding the timeframe on the Phoenix 
implementation overseas kind of follows up my broader question 
about short-term investment versus long-term. You are saying 
August 2005 is when it will be fully implemented overseas, 
which means we really are looking at the 2006 financial 
statement when that integration will really benefit us with 
full integration?
    Mr. Marshall. Yes, that is true, although I must say that 
over the next year in 2004, we will be in our pilot missions. 
We picked three countries, Cairo, Egypt, Lima, Aeara Peru and 
Ghana in West Africa for our initial pilots. Those three 
missions produce 60 percent or so of our transactions, I think 
is the number, so we might see some benefits before 2006 
because we hope to be ramping up the higher volume missions 
earlier.
    Mr. Platts. That is April 2004?
    Mr. Marshall. 2004.
    Mr. Platts. So about halfway through the 2004 fiscal year. 
The 2004 audits could show something?
    Mr. Marshall. It is possible. That could start to show some 
benefits.
    Mr. Platts. If we are starting in April 2004 and it is 
another year and a half roughly to get fully implemented, is 
the barrier dollars or being able to allocate enough dollars 
for that implementation?
    Mr. Marshall. You mean for the timeline?
    Mr. Platts. Yes.
    Mr. Marshall. No, dollars aren't the constraint right now, 
it is the capacity of our organization to get it done, the 
implementation. We need to test pilot the applications in a 
couple of missions, do the training, learn from that 
experience, fix any problems that come up and really be 
deliberate and systematic about that. Hopefully in about August 
2004, if all those pilots are successful, then we will begin 
the deployment to the rest of the missions throughout the next 
year. I think that is a prudent timeframe for getting this done 
and all the professional advice we have had has endorsed that.
    Mr. Platts. In a correlation or analogy to the private 
sector and that you would be out of business perhaps by now if 
you were in the private sector, in the private sector agencies 
that provide humanitarian assistance--which my wife and I lead 
our personal support for agencies in our community with her 
serving on several not-for-profit boards--a common judge of an 
efficient operation is of every dollar received, 90 percent, 95 
percent, 85 percent is actually hitting the pavement in 
services.
    Given your current financial situation and your internal 
controls, of the dollars American taxpayers give USAID, what 
percent is gobbled up in administration either internal or 
consulting agencies or contract agencies versus what actually 
is received in services provided?
    Mr. Marshall. I don't have that number with me but we have 
looked at that and I can get back with you on the best numbers 
we have along those lines.
    Mr. Platts. I would welcome that. Can you give me a 
guesstimate today? Is it 80-20, 50-50, 60-40?
    Mr. Marshall. I don't think I can give that.
    Mr. Kutz. I believe the annual report shows that it is 84 
percent.
    Mr. Platts. My followup to the two of you is, are you 
familiar with that percentage as current 2002 numbers or 
historically and what is the IG or GAO's assessment of how 
efficient we are from an agency standpoint in the management of 
those dollars to actually doing what we intend them to do--
provide the service?
    Mr. Mosley. From my perspective, I have to say that while I 
think one of the questions was can the agency account for every 
dollar that is being spent and clearly the answer to that was 
no, we can't account for every dollar. Based on the opinions 
that we are giving, obviously the majority of the dollars can 
be accounted for. The difficulty is when. It takes so long to 
account for them.
    We have not found where there are significant losses. As I 
said, we do a lot of testing when we do the financial statement 
audits. In addition to that, in terms of the actual program 
operations, we do program audits in each of the locations. We 
have field offices as well and our people are out there doing 
program audits to assure that the dollars are going where they 
are supposed to go and they are being spent in the way they 
should.
    Mr. Platts. To make sure I understand, are your program 
audits x-dollars committed to this program and x-dollars were 
spent on that program or do they get into the next level of 
questions that this service was provided by that program, say 
it is $5 million to this program and it went to that program 
but $5 million of services were provided versus $4 million in 
consulting fees and $1 million in services. Do your program 
audits get into that?
    Mr. Mosley. Yes, it does. The financial audits are the ones 
we really make sure the dollars went where they were supposed 
to go. Our performance audits, which are the programs we are 
reviewing, are really looking at whether the program was 
accomplishing what it was intended to accomplish.
    Certainly we don't have the resources to do audits of every 
activity but of those we have done, we are not finding a 
tremendous amount of loss.
    Mr. Platts. Can you give us a ballpark percentage of the 
ones you have done, x dollars were not really getting to the 
intended beneficiaries?
    Mr. Mosley. I cannot give you that today and being a 
conservative auditor type, I don't want to render a guess but I 
could certainly provide you that.
    Mr. Platts. If you could followup as well with us for the 
record.
    Mr. Mosley. Sure.
    Mr. Platts. Mr. Kutz.
    Mr. Kutz. I don't have anything else to say.
    Mr. Platts. Let me go to Mr. Towns.
    Mr. Towns. Thank you.
    Mr. Kutz, you testified that in 2002 and in 1993, GAO 
reported USAID did not promptly and accurately report 
disbursements and that at that time USAID could not ensure that 
disbursements were made only against valid reestablished 
obligations. Additionally, you reported that USAID did not have 
effective controls and accountability over its property.
    Can you expand on these problems? Are you saying they 
continue to exist today? Can you elaborate on that?
    Mr. Kutz. The issue with deobligations that Mr. Mosley's 
2002 audit report indicated were still a problem, $153 million 
of amounts that were not timely deobligated, timely mean there 
were no payments for at least a year or more, would indicate 
that the money was no longer needed for the original purpose. 
That was something we had reported on back in 1993. That has 
been a chronic problem there.
    We also did report on some accountability issues with 
property in 1993 and Mr. Mosley's report would indicate that 
there are still some challenges with that issue. The answer is 
those are still there and the deobligation one, probably they 
are governmentwide issues, lots of agencies have them.
    The one on deobligations does get back to how reliable is 
the information Congress and management have to manage. The 
$153 million would appear to have been spent for purposes of 
Congress looking at that obligation when in fact the money 
wasn't necessarily needed. It could have resulted in a 
situation of providing money for something that maybe money was 
already there for. That is a very important thing they need to 
deal with, timely deobligation. They have policies and 
procedures in place for managers to scrub their obligations and 
deobligate them. It just appears in 2002 and before, people 
weren't doing it and the question is are they doing it now. 
Maybe Mr. Marshall can comment on some of that.
    Mr. Marshall. It is a concern. It is a governmentwide 
problem and it gets to be a workload matter. We have to go 
through a scrub exercise. It requires agency program managers 
to close out contracts and do a lot of administrative work that 
takes away from the rest of the work. A lot of our people are 
stretched very thin and it is hard for them to find the time.
    Last year, we went through a push, we found a level of 
obligations, went through a scrub, deobligated a lot of money, 
kind of a one-time clean-up effort. It is another one of those 
things that takes sometimes some heroic effort to get done and 
manage down to a more reasonable level. We have been challenged 
to find the resources to put into that, although it is 
something that should be done. It is good common sense 
businesslike housekeeping that unfortunately gets deferred too 
frequently.
    Mr. Mosley. If I might add one comment, this gets back to, 
not to beat a dead horse about the system, but that is really 
what it comes back to. The systems don't provide that 
information on a constant basis for the managers to manage. As 
a result, you have people who have records but those records 
are not in the overall system. Then you have to go back to 
them.
    I have to say that management has implemented a system 
where on a quarterly basis, they are going back and scrubbing 
that information and we are also working with them in taking a 
look at that information but because the system is not there, 
they have to go back and determine have these funds been spent 
or not. In many cases, it is not money that needs to 
deobligate, it has been spent, it is just that is not in the 
overall records for the agency.
    Mr. Towns. That is serious, very serious. Mr. Mosley, you 
also testified that the International Relations Committee, that 
your office uncovered a major bid rigging and fraud scandal in 
USAID funded construction contracts in Egypt that resulted in 
fines and restitution of over $260 million in fiscal years 2000 
and 2002. Can you provide us with some details of your 
investigation?
    Mr. Mosley. Yes. Those were contracts for building sewers 
and other types of activities in Egypt. You had several 
companies who got together and they manipulated the bids. They 
made agreements where certain companies would make certain bids 
and one company would get it this time, a different company 
would get it another time and because of this, they were 
defrauding the government. The bids were set so that AID did 
not have the process of getting competitive bids and getting 
the best price.
    We took this to the Department of Justice after we did the 
investigation. Prosecutions were made and several companies 
paid restitution up to as high as $50 million from an 
individual company and a total of about five companies with 
somewhere in the neighborhood of $250-$260 million.
    That was an investigation we did over a period of about 5 
years to bring it to fruition.
    Mr. Towns. Financial management weaknesses at AID 
contribute to this problem, you have to say that, right?
    Mr. Mosley. I don't know that you could say that. I don't 
see a direct relationship in terms of financial management 
simply because this was in the procurement process and these 
companies were getting together and fixing the bids. There was 
no way for the managers to know they were fixing the bids. To 
be very honest, there would have been no way for us to know had 
it not been for someone coming forward and giving us 
information, basically ratting out those companies.
    Mr. Towns. I assume this has been corrected?
    Mr. Mosley. It has been.
    Mr. Platts. Thank you, Mr. Towns.
    We have a mark-up scheduled to begin in about 5 minutes, so 
we are going to have to wrap up. I did want to touch on one 
other issue and Mr. Marshall, you may need to followup as well 
after the hearing with us directly in writing.
    From a staffing standpoint and the issue of outsourcing, if 
we set aside more clerical, secretarial staff in-house, what 
percentage of USAID, Washington, your operations here, are 
direct hires versus non-direct hires regarding professional 
staff?
    Mr. Marshall. We have about 1,300 direct hires in the 
Washington headquarters. I would have to get back to you with 
the breakdown and that would include secretarial as well as 
administrative. I will be happy to give you a breakdown. We can 
visit with your staff and get a sense as to how you would like 
that.
    Mr. Platts. And how do the direct hires compare to the non-
direct in your operations and managing your programs?
    Mr. Marshall. Sure.
    Mr. Platts. The followup is: are the non-direct staff 
directly involved in the accountability for the programs and 
the oversight of the programs or is that accountability 
retained in-house?
    Mr. Marshall. We are a very contract dependent work force. 
They are an important part of our entire business system, our 
delivery system, both in Washington and overseas since most of 
our business actually is carried out overseas by contractors 
and grantees. If you are referring primarily to Washington, 
sometimes we have situations where contractor employees are in 
accountability positions. We are reviewing those situations, 
trying to be aware of them and reduce that vulnerability as 
best we can. In a work force like ours which is resource 
constrained and contractor dependent, it is one of our 
challenges.
    Mr. Platts. Mr. Mosley, Mr. Kutz, does that worry you in 
the sense of the accountability, oversight being non-direct 
hires for the agency and the integrity of that oversight?
    Mr. Mosley. Certainly that is a concern. Unfortunately, AID 
is in a situation where they certainly don't have enough 
people. Our concern is even if you have non-direct hires who 
are doing the work, we need enough qualified people in place to 
manage those who understand what needs to be done.
    Mr. Platts. Enough in-house people?
    Mr. Mosley. In-house people who can assure us the product 
they are receiving is what was desired. That is one of the 
difficulties in terms of contract offices and some of the 
expert program people. That is one of the things Mr. Marshall 
was talking about. We need more quality people in that area.
    Mr. Platts. I want to thank our witnesses again for your 
written testimonies and your testimony here today. We do 
appreciate your forwarding some followup information to us. Mr. 
Marshall, coming in 2 years ago without people in place and the 
challenges you are facing, you certainly came in with quite a 
task ahead of you and we appreciate your dedicated efforts in 
tackling that task and going forward. As we see in the progress 
scorecards, we know there are some encouraging signs.
    I hope that we will focus governmentwide but specifically 
in this case for USAID on ensuring that we really are about 
institutionalizing good financial management practices so that 
we have that day to day benefit to taxpayers that their money 
is being spent and allocated in the most efficient and 
responsible way possible, especially as we are increasing USAID 
efforts in Iraq and Africa with the AIDS efforts and elsewhere 
in the world. Being wise with those dollars is all the more 
important.
    I hope we will continue to head in that right direction and 
not just have interim good signs but permanent, long term 
benefits. Thank you again.
    The record will be kept open for 2 weeks for submission of 
additional information and this hearing stands adjourned.
    [Whereupon, at 3:44 p.m., the subcommittee was adjourned, 
to reconvene at the call of the Chair.]
    [The prepared statement of Hon. Carolyn B. Maloney and 
additional information submitted for the hearing record 
follow:]


[GRAPHICS NOT AVAILABLE IN TIFF FORMAT]

                                   - 
