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





      FINANCIAL REPORT OF THE U.S. GOVERNMENT FOR FISCAL YEAR 2003

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

                                HEARING

                               before the

                 SUBCOMMITTEE ON GOVERNMENT EFFICIENCY
                        AND FINANCIAL MANAGEMENT

                                 of the

                              COMMITTEE ON
                           GOVERNMENT REFORM

                        HOUSE OF REPRESENTATIVES

                      ONE HUNDRED EIGHTH CONGRESS

                             SECOND SESSION

                               __________

                             MARCH 3, 2004

                               __________

                           Serial No. 108-145

                               __________

       Printed for the use of the Committee on Government Reform


  Available via the World Wide Web: http://www.gpo.gov/congress/house
                      http://www.house.gov/reform


                                 ______

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                            WASHINGTON : 2003
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                     COMMITTEE ON GOVERNMENT REFORM

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

                    Melissa Wojciak, Staff Director
       David Marin, Deputy Staff Director/Communications Director
                      Rob Borden, Parliamentarian
                       Teresa Austin, Chief Clerk
          Phil Barnett, Minority Chief of Staff/Chief Counsel

     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
CANDICE S. MILLER, Michigan          MAJOR R. OWENS, New York
MICHAEL R. TURNER, Ohio              CAROLYN B. MALONEY, New York
------ ------

                               Ex Officio

TOM DAVIS, Virginia                  HENRY A. WAXMAN, California
                     Mike Hettinger, Staff Director
                 Larry Brady, Professional Staff Member
                          Sara D'Orsie, Clerk
          Mark Stephenson, Minority Professional Staff Member
                            C O N T E N T S

                              ----------                              
                                                                   Page
Hearing held on March 3, 2004....................................     1
Statement of:
    Hammond, Donald V., Fiscal Assistant Secretary, Department of 
      the Treasury...............................................    51
    Springer, Linda M., Controller, Office of Federal Financial 
      Management, Office of Management and Budget................    39
    Walker, David M., Comptroller General of the United States, 
      U.S. General Accounting Office.............................     4
Letters, statements, etc., submitted for the record by:
    Hammond, Donald V., Fiscal Assistant Secretary, Department of 
      the Treasury, prepared statement of........................    54
    Platts, Hon. Todd Russell, a Representative in Congress from 
      the State of Pennsylvania, prepared statement of...........     2
    Springer, Linda M., Controller, Office of Federal Financial 
      Management, Office of Management and Budget, prepared 
      statement of...............................................    42
    Towns, Hon. Edolphus, a Representative in Congress from the 
      State of New York, prepared statement of...................    48
    Walker, David M., Comptroller General of the United States, 
      U.S. General Accounting Office, prepared statement of......     7

 
      FINANCIAL REPORT OF THE U.S. GOVERNMENT FOR FISCAL YEAR 2003

                              ----------                              


                        WEDNESDAY, MARCH 3, 2004

                  House of Representatives,
Subcommittee on Government Efficiency and Financial 
                                        Management,
                            Committee on Government Reform,
                                                    Washington, DC.
    The subcommittee met, pursuant to notice, at 2:32 p.m., in 
room 2247, Rayburn House Office Building, Hon. Todd Russell 
Platts (chairman of the subcommittee) presiding.
    Present: Representatives Platts, Blackburn, Maloney and 
Towns.
    Staff present: Mike Hettinger, staff director; Dan Daly, 
counsel; Larry Brady and Tabetha Mueller, professional staff 
members; Amy Laudeman, legislative assistant; Sarah D'Orsie, 
clerk; Mark Stephenson and Adam Bordes, minority professional 
staff members; and Cecelia Morton, minority office manager.
    Mr. Platts. This hearing of the Subcommittee on Government 
Efficiency and Financial Management will come to order. I 
appreciate everyone's attendance and participation here today. 
Because of your fine patience in waiting for us to get started 
here belatedly because of votes.
    I am going to dispense with an opening statement and submit 
mine and, with the ranking member, Mr. Towns and others, I will 
ask them to do the same when they arrive. We will go actually 
right to our witnesses and get into your opening statements and 
then into questions.
    [The prepared statement of Hon. Todd Russell Platts 
follows:]

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    Mr. Platts. I again appreciate your preparation in sharing 
your written statements ahead of time, and also being here with 
us today, and do thank you for your patience in waiting for us 
to get back over here.
    We will start if we could ask each of you to stand and be 
sworn in, and any who will be advising you as part of your 
testimony also should stand and take the oath.
    [Witnesses sworn.]
    Mr. Platts. The clerk will note that all witnesses affirmed 
the oath, and again we appreciate your written testimonies. If 
it is OK with you, I was going to give a little bit of 
background on each of you, but for time sensitivities, everyone 
probably knows who you are and what you do and it will not be 
keeping much from them. So I think what we will do is go right 
into the statements.
    Mr. Walker, if you would like to begin?

STATEMENT OF DAVID M. WALKER, COMPTROLLER GENERAL OF THE UNITED 
             STATES, U.S. GENERAL ACCOUNTING OFFICE

    Mr. Walker. Thank you, Mr. Chairman. It is a pleasure to be 
back to this annual hearing on the consolidated financial 
statements and our audit opinion relating thereto. I would like 
for my entire statement to be entered into the record, with 
your permission. Now I will move to summarize it. Let me note 
that I have a number of executives and other members of our 
financial management assurance team with me today. They are the 
ones on the front line doing the work that results in the 
issuance of our opinion. I want to thank all of them for their 
continued efforts and excellent work.
    I would also like to note for the record that we have 
several colleagues from our sister organization, the National 
Audit Office in the United Kingdom who are visiting with us 
because for the first time in the United Kingdom's history, 
they will be required to express an opinion on the consolidated 
financial statements for the government of the United Kingdom 
for fiscal year ended 2004. So we are exchanging knowledge.
    With that, I would like to note at the outset that this is 
an annual process which I appreciate the subcommittee making 
time for. It is a very important topic. Frankly, I think more 
people need to look at the results of these audits and the 
related financial statements.
    As you know, as in the previous 6 fiscal years in which we 
have been required to report on the consolidated financial 
statements, certain material weaknesses in internal control and 
selected accounting and reporting practices resulted in 
conditions that did not enable us to provide an opinion to the 
Congress and the American citizens as to whether the 
consolidated financial statements of the U.S. Government are 
fairly stated in accordance with U.S. Generally Accepted 
Accounting Principles [GAAP].
    I think it is important to note that this year, the 
principals of the Joint Financial Management Improvement 
Program, which includes the Director of the Office of 
Management and Budget, the Secretary of the Treasury, the 
Director of OPM and myself agreed to accelerate the agency 
financial statement reporting due date to November 15 for the 
individual agencies for 2004 fiscal year, and to December 15 
for the consolidated financial statements.
    For fiscal year 2003, OMB required the CFO Act agencies to 
deliver their performance and accountability reports, including 
their audited financial statements to OMB by January 30, 2004. 
I am pleased to say, and I am sure Linda and Don will be even 
more pleased to say that all 23 of the CFO Act agencies met 
that January 30 deadline. Of these 23 CFO Act agencies, 8 
actually issued theirs by mid-November, which is an encouraging 
sign.
    A 24th major agency, the Department of Homeland Security, 
which is not presently subject to the CFO Act, issued its 
financial statements on February 13, 2004. As you know, Mr. 
Chairman, this is the first year they have had to issue and it 
is an amalgamation of a number of different departments and 
agencies.
    With regard to the results, we see that 20 of 23 CFO Act 
agencies were able to obtain an unqualified audit opinion on 
their financial statements. That is up from six in 1996. At the 
same point in time, however, only 3 of the 23 CFO Act agencies 
had neither a material weakness in internal control or an issue 
involving compliance with applicable laws and regulations or an 
instance that lacked substantial compliance with FFMIA.
    So of the 23 CFO Act agencies, 20 with clean opinions, but 
only 3 truly met the green requirement presumably for the 
President's management agenda, which I assume that Linda will 
be speaking more to that. In fact, there is another requirement 
in order to get a ``green'' designation, namely, having systems 
that provide for timely, accurate and useful information to 
make informed management decisions on a day-to-day basis. These 
three may or may not meet that requirement. Linda may know 
that.
    The three major impediments to an opinion on the 
consolidated financial statements are, No. 1, serious financial 
management problems at the Department of Defense; No. 2, the 
Federal Government's inability to fully account for and 
reconcile transactions between Federal Government entities, so-
called intragovernmental transactions; and No. 3 the Federal 
Government's ineffective process for preparing the consolidated 
financial statements.
    If I can, Mr. Chairman, it is important to note what is not 
in the balance sheet of the U.S. Government. If you look at the 
balance sheet of the U.S. Government, you will see that since 
the beginning of our republic, we have an accumulated negative 
results of operations of approximately $7 trillion. That $7 
trillion equals approximately the same amount as total Federal 
debt, both public debt as well as intragovernmental debt.
    It is important to note what is not in the financial 
statements. The chart includes a few of the commitments, 
contingencies and obligations that are not in the financial 
statements. If you look at things like the debt held in the 
trust funds, which are not presently deemed to be a liability 
of the U.S. Government; if you look at the difference between 
promised benefits and funded benefits for Social Security and 
Medicare, and the discounted present value of the difference 
between related revenues and expenses of these funds, the 
number is not $7 trillion, it is more like $30 trillion or 
approximately $100,000 for every man, woman and child in the 
United States.
    In addition, if you consider the preliminary estimates for 
the new prescription drug benefit, that new benefit is going to 
add probably another $7 trillion on a preliminary basis to that 
number. So we have a serious financial and fiscal problem that 
is going to require sustained attention by the Congress and 
others in order to close that gap because candidly the gap is 
simply too great to grow our way out of the problem.
    This is one scenario, potentially, Mr. Chairman. If 
discretionary spending grows by the rate of the economy, and as 
you know discretionary spending includes defense, homeland 
security, the judicial system, education, the infrastructure of 
our Nation, and if all of the expiring tax provisions do not 
sunset, this is illustrative, it is not saying they should or 
they should not, expire, then this is the future. The gap is 
simply too great to grow our way out of the problem. Tough 
choices will be required with regard to entitlement programs, 
discretionary and other spending, and tax policy.
    We have noted this in our transmittal letter that 
accompanies our audit report in the Financial Report of the 
U.S. Government because it is important not just to focus on 
what the financial statements say. It is also important to note 
what they do not say.
    Thank you, Mr. Chairman.
    [The prepared statement of Mr. Walker follows:]

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    Mr. Platts. Thank you, Mr. Walker. That was certainly a 
very important final point there. It is looking at the big 
picture, as opposed to a more blinders-on approach.
    Before we go to Ms. Springer, I would like to recognize our 
Vice Chair, Mrs. Blackburn from Tennessee. I appreciate your 
zipping over here as well.
    Ms. Springer, if you would like to proceed?

 STATEMENT OF LINDA M. SPRINGER, CONTROLLER, OFFICE OF FEDERAL 
     FINANCIAL MANAGEMENT, OFFICE OF MANAGEMENT AND BUDGET

    Ms. Springer. Thank you, Mr. Chairman. As well, I would 
like to have my entire written testimony entered into the 
record. I will just highlight some accomplishments and progress 
and an outlook that we have with respect to that progress.
    We are pleased to report to you that much has been 
accomplished in the area of financial management and financial 
reporting during this fiscal year. The very fact that we are 
here on this day in March, a full month earlier than last year, 
indicates that financial reporting deadlines are being 
accelerated. More specifically for fiscal year 2003, a record 
18 of 24 major agencies and departments completed not only 
their audited financial statements, but their combined 
performance and accountability report by the end of December. 
That compares to only two agencies in fiscal year 2002. So we 
went from 2 up to 18. Of those agencies, eight accelerated the 
submission of their performance and accountability reports to 
mid-November 2003, a year ahead of the 2004 requirement. All of 
those eight received unqualified audit opinions.
    Of the 23 CFO Act agencies, as was reported just 
previously, 20 received an unqualified opinion on their 
financial statements. Agencies for the first time completed 
quarterly financial statements. Up until 2003, there was 1 year 
where there was a mid-year requirement for financial reporting. 
Prior to that, it was strictly annual. So last year was the 
first time that there was ever quarterly financial reporting.
    The Department of Homeland Security created 5 months into 
the fiscal year, elected to forego its first year waiver for 
preparing audited financial statements, but instead not only 
prepared those statements, but also went through the rigor in 
the process of the audit to get the insights and to provide the 
opportunity to get a good, strong audited balance sheet to 
start off fiscal year 2004. They did in fact get a qualified 
opinion on the balance sheet, which again sets them up well for 
going into fiscal year 2004.
    USAID received an unqualified opinion on its audited 
financial statements for the first time ever in its history, 
and also met the mid-November reporting date, 1 year ahead of 
schedule.
    The Department of Defense's Medicare-eligible retiree 
health care fund financial statements received a qualified 
opinion in their first year, and the National Reconnaissance 
Office received an unqualified opinion on its statements. It is 
important to be aware of the fact that the Department of 
Defense has more than one financial statement. While it is 
consolidated, into one, but it is made up of 22 component 
financial statements.
    The Small Business Administration developed their 
significantly revised credit models for five of its programs 
during the course of the year. Again, that is a positioning 
remediation-type effort that positions them for going into 
fiscal year 2004.
    The total number of material weaknesses reported by 
auditors was reduced by 13 percent for fiscal year 2003, and 
the total number of FFMIA material weaknesses was reduced by 
over 40 percent.
    New financial management systems, which are often critical 
to the production of quality financial information, went into 
effect in many agencies. Four agencies put systems on line 
after the close of the year, but before the end of the calendar 
year. So there is a lot of activity on that front as well.
    So what is the outlook? My outlook for improving not only 
timeliness, but quality of financial statements and financial 
reporting to the American citizen is very positive at this 
stage. Many challenges remain, but others that appeared 
similarly insurmountable just a few short years ago, like 
accelerating reporting from 5 months after the end of the 
fiscal year to 45 days after the end of the fiscal year, are 
now being achieved. So it is our view that we should be very 
positive and we believe that these other challenges can be 
addressed and can be met, and in fact are.
    It is often said that such achievements can only be 
accomplished by heroic efforts. Hard work is always a factor, 
but these results are a tribute to detailed planning, effective 
management and excellent execution. I want to repeat, those 
achievements are the result of good planning, management and 
execution. That is not heroism. That is just doing our jobs. In 
my mind, heroism is what is going on overseas in Iraq and 
Afghanistan. Good financial management, good financial 
reporting is our job.
    Now, acceleration targets are critical and they will be 
achieved by all agencies. This year, in fiscal year 2004, the 
agencies will all hit that November 15, 2004 date. That is our 
goal. We are meeting with each agency to make sure that 
happens, that they have plans, that they have specificity, that 
there is a name to each step of that plan. Throughout the 
course of this hearing I hope to share some other observations 
about keys to success that we have learned from the CFO Council 
from the eight agencies that made the goal in 2003.
    Beyond acceleration, what we are really after as a main 
goal is the incorporation of timely and accurate financial 
information into management decisionmaking and operational 
assessment. That is a first-class financial management 
organization. Progress toward this goal was made during fiscal 
year 2003, as shown by the addition of two agencies to the 
green status level of the President's management agenda. Those 
two agencies are the Social Security Administration and the 
Environmental Protection Agency. They join the NSF, National 
Science Foundation, in that group of green. Subsequent to the 
end of the fiscal year, the Department of Education also 
fulfilled the criteria for achieving green status. So at this 
point, we now have four agencies.
    In my office, the Office of Federal Financial Management 
within the Office of Management and Budget, we look forward to 
continuing our execution of our duties and leading the agencies 
to achieve higher and higher standards of financial management. 
That is our job, and we do not consider that heroism either. 
That is our job and we are working very diligently with the 
agencies and we look forward to reporting back to this 
committee through the year on the full spectrum of financial 
issues.
    Thank you, Mr. Chairman.
    [The prepared statement of Ms. Springer follows:]

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    Mr. Platts. Thank you, Ms. Springer. I appreciate your 
testimony.
    I would like to recognize our ranking member, Mr. Towns 
from New York who has joined us, as well as Mrs. Maloney from 
New York. Thank you for joining us. Did you have a statement 
you want to submit for the record?
    Mr. Towns. I ask that my opening statement be submitted for 
the record.
    Mr. Platts. OK.
    [The prepared statement of Hon. Edolphus Towns follows:]

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    Mr. Platts. Mr. Hammond.

  STATEMENT OF DONALD V. HAMMOND, FISCAL ASSISTANT SECRETARY, 
                   DEPARTMENT OF THE TREASURY

    Mr. Hammond. Thank you, Mr. Chairman. Mr. Chairman, members 
of the subcommittee, I am glad to be here today to present and 
discuss the financial report of the U.S. Government for fiscal 
year 2003.
    The Treasury Department gratefully appreciates your 
continued focus on improving the Federal Government's financial 
management and reporting, further highlighting the importance 
of this important area.
    My written statement presents the government's financial 
reports for the year, relates some of the significant 
highlights in the report, and discusses financial reporting 
issues and the progress we have made in addressing them. I 
would ask that my written statement be included in the record.
    Mr. Platts. Without objection.
    Mr. Hammond. In my time available today, I will highlight 
some key items in our quest to make the report fully effective 
in meeting its objectives. The Treasury Department has a 
longstanding commitment to report accurate and useful financial 
information. Starting with the first Treasury Secretary, 
Alexander Hamilton, Treasury has fulfilled its core 
responsibility to report on the Nation's finances. Through the 
financial report, our intent is to provide the Congress and the 
public with a reliable, understandable and useful report on the 
cost of the government's operations, the sources used to fund 
its operations, and the implications of its financial 
commitments.
    I am pleased that we were able to submit this year's 
financial report a month earlier than last year. Showing the 
commitment to accelerated reporting this year, three-quarters 
of the major agencies completed their audited financial 
statements by the end of December, and eight agencies issued 
their statements by mid-November, a year ahead of schedule. 
When this accelerated reporting timeframe is accomplished by 
all agencies, it will set the stage for even more timely 
preparation of this consolidated report so that its information 
is available to support the budget deliberation process.
    Because of the GAAP accounting standards under which the 
report is prepared, this accrual-based information helps to 
assess the long-term impact of policy decisions and enhances 
the traditional receipts and outlays information in the budget. 
The 2003 financial results show an accrual-based net operating 
cost of $665 billion, compared to the budget deficit of $375 
billion. The main reasons for this difference are the 
recognition of the actuarial liabilities for civilian and 
military employee benefits and veterans compensation, as well 
as the accounting treatment for capitalized assets.
    The report goes beyond simple reporting of accounting 
results, though, and displays the full effects of all 
significant liabilities, stewardship responsibilities, and 
other commitments. Examples of stewardship responsibilities are 
social insurance programs such as Social Security and Medicare. 
While these are not liabilities on the balance sheet, they are 
nonetheless commitments that the government will be obligated 
to pay in the future.
    Since the first audited governmentwide report was issued 
for fiscal year 1997, we have worked continuously to improve 
the accuracy, reliability and timeliness of this important 
report. We have made considerable progress, but still need to 
resolve some important reporting issues. As noted, the General 
Accounting Office again issued a disclaimer of opinion on the 
2003 report. Making the needed improvements will require a 
concerted effort by all government agencies and auditors, along 
with continued strong leadership from Treasury and OMB.
    There are three major areas of governmentwide focus. 
Treasury needs to directly link agencies' audited financial 
statements with the agency data we collect. Agencies are not 
consistently or properly reconciling their financial activities 
with the other agencies. And unreconciled or unexplained 
transactions that affect the change in the position must be 
resolved.
    The Financial Management Service, the operational arm of 
Treasury responsible for these important accounting 
responsibilities, is making real progress in addressing them. 
First, to address the need to directly link agencies' audited 
financial statements with the data agencies provide to 
Treasury, FMS is implementing a new automated process. The 
governmentwide financial reporting system will go active in 
2004 and will be a system used for the first time to compile 
the report directly from agency audited financial information.
    Second, we have been focusing on the problem of 
intragovernmental activity and a solution, frankly, is in 
sight. FMS's intragovernmental reporting and analysis system 
has been instrumental in classifying the interagency activity 
and balances by reciprocal category. Treasury and OMB recently 
required agencies to report and reconcile this activity 
quarterly. These more frequent reconciliations and adjustments 
should help to eliminate the interagency differences.
    Related to the intragovernmental problem are the 
unreconciled or unexplained transactions. We believe this 
problem has its roots in the unreconciled intragovernmental 
balances. When that problem is understood, it may also suggest 
a solution for this problem.
    I would like to just mention a couple of other improvements 
underway because I think they are in fact significant. First, 
we have accelerated the reporting of budget information so that 
now the monthly Treasury statement is issued on the ninth 
workday of each month. Later this year, we will accelerate to 
the seventh workday. The significance of this acceleration I 
think reflects the commitment of all agencies, because they 
feed the information which supports the release of that report. 
So what that means is agencies today are now submitting their 
information within 3 days of the end of each month on all their 
budget execution.
    We also have the governmentwide accounting modernization 
project. I have mentioned it in years past. We are starting to 
see some real results from that program. When it is fully 
available, we think that it will totally revolutionize the way 
budgetary accounting is done at the Federal level.
    While I am pleased with the progress we have been making at 
both the agency level and the consolidated level, I know that 
much work remains. Some real challenges ahead are to resolve 
the problems with intragovernmental transactions, issue our 
2004 reports much earlier and to provide information that is 
useful and supports decisionmaking.
    Even as we achieve more timely reporting, it is important 
to obtain the full value of financial reporting by having 
reports that are useful. That is our goal. We will not be done 
until we have accomplished that objective, which is useful 
financial reporting for the public and the citizens.
    I want to thank you for your patience. I would be happy to 
answer any questions that you may have.
    [The prepared statement of Mr. Hammond follows:]

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    Mr. Platts. Thank you, Mr. Hammond. I appreciate your 
testimony, and also all three of you and your staffs in working 
with the subcommittee staff in not just preparing for this 
hearing, but week-in and week-out as we try to work as partners 
with each of you and your agencies, and the expertise that you 
bring in both guiding the agencies week-in and week-out through 
OMB in preparation of the reports, and then the auditing of the 
reports by GAO.
    There are a lot of areas that you touched on in your 
written testimony and your opening. I have debated where to 
start. I think I am going to start, Mr. Walker, with when you 
talked about the three largest impediments. The first one up is 
DOD. Given the size of that impediment, I think we will start 
there.
    Can you expand on your opening comments? What are the good 
signs? What should we be pleased about regarding where DOD is 
today versus a year ago, as they were trying to get their arms 
around all their systems and bring it together? And then also, 
what is the biggest concern that we should keep in mind?
    Mr. Walker. Mr. Chairman, I believe that current leadership 
at the Department of Defense fully recognizes that they have a 
serious problem here. They are taking it seriously. There is a 
commitment from Secretary of Defense Rumsfeld and also the 
Deputy Secretary, the Controller and others are committed to 
try to address this. The Congress has provided additional 
funding to help modernize financial management systems.
    At the same point in time, while our Department of Defense 
is No. 1 in the world in fighting and winning armed conflicts, 
so it is the gold standard on that basis, they are a D, and 
that is graded on a curve, in economy, efficiency, transparency 
and accountability. Candidly, for decades financial management 
has never been a priority. They have never been held 
accountable by the Congress or anybody else for not making it a 
priority. That is changing, but the fact of the matter is it 
has taken them decades to get where they are. It is going to 
take them a number of years to get to where they need to be.
    My personal opinion is that, among other things, in 
addition to the continued top management commitment and 
congressional oversight and support, the Department of Defense 
faces a fundamental business transformation challenge that is 
going to require at some point in time the considered attention 
of a top-level professional who is focused solely on the 
business transformation process at the Department of Defense 
from a strategic and integrated perspective.
    We have recommended before that consideration be given to 
creating a chief management officer, a level two-type person, 
who would have a term appointment, 5 to 7 years, and a 
performance contract, and whose job it would be to focus not 
just on financial management, but information technology, human 
capital transformation and various other areas on a sustained, 
and integrated basis. I have my doubts as to whether or not the 
DOD will ultimately be successful without taking this step.
    Furthermore, I believe that the Department of Defense also 
needs to take control of the tremendous amount of money that 
Congress appropriates to it each year, they need to have more 
centralized control over the allocation of those resources with 
regard to existing systems and new systems development, and 
also to further accelerate the progress that they have made, in 
connection with developing an enterprise architecture. But I 
think that they need to recognize that if they are going to 
pass the money down to the different services and the different 
operating units, once you pass the money down you lose a lot of 
control.
    So they need to think about differentiating between war-
fighting systems and management information systems, including 
financial management systems, and maintain more centralized 
control over them, more control over what type of systems are 
allowed to go forward, and which ones should be terminated in 
order to ultimately get them to where they need to be.
    Mr. Platts. Mr. Walker, to followup, you mentioned actually 
one of the issues I was going to raise, which is the 
architecture enterprise, and trying to put that in place. To do 
so, they need to first know what they have and what systems are 
out there and how to bring them in line, and then to make sure 
as they go forward that everything is matching up. My 
understanding is they still do not have an accurate assessment 
of what financial management systems, how many and exactly what 
they are yet kind of tabulated.
    And then in the 2003 defense authorization bill, we said 
that they were not to approve any new ones that were more than 
$1 million without ensuring through the CFO that it would line 
up with the direction they are going for their business 
transformation. I understand that is not occurring either. Both 
of those raise further concerns that we are talking about the 
right things, but we are not really seeing the action. Does 
that tell me that we are still wasting good money on bad ideas? 
I think last year the one program we had spent $100 million on 
to realize it was not going to work. Are we still doing that at 
DOD?
    Mr. Walker. My understanding, Mr. Chairman, is that at last 
count there were roughly 2,400 systems at the Department of 
Defense, but they were still counting. My understanding Mr. 
Chairman, is that a number of the $1 million-plus systems have 
been approved by the Controller, but not all of the systems. As 
you know, enterprise architecture is a framework. We are not 
going to have one system for the Department of Defense, but it 
does provide specifications that we need to assure that all the 
systems comply with in order to have interoperability and in 
order to be able to achieve the broader objectives.
    Again, top management is committed, but it comes back to a 
point that I made before. They need to have more control over 
the resources. If they do not have more control over the 
resources, by the time you find out you have a problem, it may 
be too late.
    Mr. Platts. The contract is already let and the money is 
spent.
    Mr. Walker. The money is already spent.
    Mr. Platts. I want to yield to our ranking member, but a 
quick followup is, we talked about this being so critical to 
getting a clean consolidated report in the fiscal year 2007. Is 
that realistic regarding DOD in any sense, that we could get 
them in line by then?
    Mr. Walker. I think they are committed to make best efforts 
to hit that date. I think it is unrealistic to expect that they 
will do it before that date. Obviously, we are going to try to 
do everything that we can, but at the same point in time, 
ultimately it is management's responsibility to do what they 
have to do.
    Mr. Platts. OK. Thank you.
    Mr. Towns.
    Mr. Towns. Thank you very much, Mr. Chairman.
    Let me begin with you, Mr. Hammond. What level of success 
have you had in recovering improper payments referred to you 
for collection?
    Mr. Hammond. From a Treasury perspective, improper payments 
to us look very similar to any other form of delinquent debt. 
So what that means is that it will have been referred to us for 
collection after certain agency actions. So I would not have 
any specific information that would be able to differentiate, 
for example, an improper payment from another type of debt 
collection activity.
    We have had very good success collecting delinquent debts 
relative to the age that they have been submitted to us.
    Mr. Towns. Looking at it across the board, then, is there 
anything more that we need to do here in the Congress to make 
it possible for you to be able to carry out your function?
    Mr. Hammond. I think with regard to the debt collection 
component of that, which would certainly be after an agency had 
exhausted its efforts to recover a payment, and then had 
forwarded it to us for ultimate collection, I believe we are in 
pretty good shape with regard to the tools that we have. 
Obviously, what makes that work effectively is prompt agency 
referral of debts. The older a debt gets, the more difficult it 
is to collect, obviously.
    Mr. Towns. Right.
    Mr. Walker. May I respond to Mr. Towns' comment on that? 
First, I think one of the things that should possibly be 
considered and the administration may want to take a look at 
this is, whether and to what extent they might need additional 
authorization from the Congress in order to engage in 
additional data matching activities. For example, to match 
people or entities who are getting Federal contracts and are 
delinquent taxpayers or other types of activities. There might 
be some barriers there that they might want to consider 
pursuing. That is one area off the top of my head that might 
make sense to pursue possibly further.
    Ms. Springer. There are several things that we have 
proposed from a legislative standpoint that would be of 
assistance. For example, access to new-hires data bases would 
be one example, and access to other data bases that help an 
agency that does not have access to that today to be able to 
validate individuals or the accuracy of payments to the 
universe of people that are subject to a program.
    So yes, there are, I think, three different things and we 
could get those for you that from a legislative standpoint 
would be helpful tools for us to get.
    Mr. Towns. Right.
    Mr. Walker. Mr. Towns, one more thing, if I might real 
quick. The other issue that we have testified on before in the 
past is there is a prompt payment act, where if the Federal 
Government does not pay in a timely manner, they have to pay 
penalties and interest. On the other hand, if the Federal 
Government overpays a contractor, a contractor is not required 
to notify the Federal Government of that and in fact they do 
not have to pay any interest or penalty. So that is an area I 
think that there could be some opportunities.
    Obviously, to the extent that we are looking at this data-
matching issue as well, one of the issues that has to be 
considered is the privacy issues, too. There has to be a 
balancing of interest there, but it is something where 
additional progress could, and should be made.
    Ms. Springer. Yes, part of that often will come into play 
with the use of contractors. For example, what access would you 
give to a contractor to certain data bases. So it is incumbent 
on us to craft that access in a way that protects privacy, but 
it can be done and I think that there are several areas where 
we could do that.
    Mr. Towns. Mr. Hammond, can you think of anything that we 
need to do on this end to be helpful?
    Mr. Hammond. In particular with regard to debt collection?
    Mr. Towns. Yes.
    Mr. Hammond. Taking in its broader focus.
    Mr. Towns. You want to go to broader focus. I will even 
entertain that. [Laughter.]
    Mr. Hammond. Yes, because I think a debt from our 
standpoint, and I know it sounds oversimplified, but a debt 
from our standpoint is a debt. What caused the resulting debt 
is really an agency issue, whether it had to do with loan 
administration or contract administration. As Linda mentioned, 
there are some legislative proposals in the President's budget 
which would on the margin increase the effectiveness of debt 
collection. But the program is frankly reaching a point of 
maturity, which is very encouraging. We have been very, very 
happy with the results that we have been getting to date.
    The data-matching will continue to be one of the balancing 
acts that is important with regard to debt collection, in 
particular as we look at tax-related debts, because the 
tradeoffs between 6103, which is the IRS tax code provision 
having to do with privacy of tax information, and the access to 
taxpayer information with regard to debt collection is a very, 
very difficult balancing act. I know it is one that my 
colleagues at the IRS struggle with every day.
    Mr. Towns. Alright. Ms. Springer, can you tell us what is 
being done by both OMB and the agencies to ensure the 
sustainability of unqualified audit opinions?
    Ms. Springer. There are several things that we do. First 
off, every year we start off the fiscal year by meeting with 
the CFO and the IG of every agency, every major agency, CFO Act 
agency and Department of Homeland Security. We review the 
status of material weaknesses. We review the challenges that 
are impediments to getting a clean audit in the case of the few 
agencies that did not get that. We review the areas that were 
challenges for the agencies that did get unqualified opinions. 
We set a plan for the entire fiscal year that will make sure 
that those areas are a part of a very specified detailed 
working plan with names next to the tasks, so that by the end 
of that fiscal year those issues are being addressed. We make 
sure that there is engagement between the Office of the IG and 
the Office of the CFO throughout the year, so that there are no 
surprises at the end of the year, so that every agency is 
working very much hand-in-glove between those two offices.
    It is our job to make sure that if there are impediments, 
for example systems issues, that they are being addressed as 
well. One of the other things we do is work through the CFO 
Council, which is a group of all the major CFO Act agency CFOs. 
We just recently, for example, performed a survey of the CFOs, 
those who were able to get unqualified opinions and accelerate 
the reporting and those who were not, to ask them to list what 
the challenges were, what the barriers were, what the keys to 
success were. At some point during this hearing, I would like 
to share those with you.
    And then we provide those best practices across the board 
to all of the CFOs and we will do the same presentation to the 
PCIE so that the IGs have that same benefit. But we find that a 
lot of the things that are challenges can be dealt with if they 
are identified and they are assigned to responsible individuals 
and there is accountability throughout the year, as opposed to 
waiting until the very end when the contract auditor comes in 
to perform their review. It is OMB's job to make sure that 
activity is occurring through the year.
    Mr. Towns. Thank you very much. My time has expired.
    Mr. Platts. Thank you, Mr. Towns.
    Before I go to Mrs. Blackburn, a quick followup, Mr. 
Hammond, on the question from Mr. Towns regarding your debt 
collection of improper payments. Would there be a benefit, as 
we are trying to get our arms around the improper payments 
issue, what type they are, how much, what is the size of the 
improper payment dollar amount, to complete the loop by 
delineating those that are identified as improper payments, and 
your success. It seems like there might be some benefit to 
understanding the payments and how easily or not easily we can 
go after them after they have been identified.
    Mr. Hammond. I think understanding improper payments and 
their nature, because they are a very diverse group of payment 
types, is very useful. Whether that would need to be drilled 
down to the level of those referred for ultimate Treasury debt 
collection or not, I think is still an open question. The 
agencies are now really doing comprehensive reporting and 
identification of those payments at their end. Oftentimes, that 
is really the best source of collecting or correcting the 
improper payment.
    Mr. Platts. The example would be if you get five different 
types of improper payments referred to you for collection 
because they were wrongful payments. If we track your success 
and that you have great success in the first type in the sense 
of the cost/benefit that you know you will go after those in 
the sense that the taxpayer is awaiting a quick return on the 
effort, whether there is any thought to that.
    Mr. Hammond. I think there is some merit in looking at 
that. I think the thing to understand about those types of 
erroneous or improper payments are that when the government has 
a continuing relationship with the entity or the individual who 
received the payment, there is a much easier or a much higher 
prospect of ultimate correction or collection of the problem.
    When you get into the world, for example, of vendor 
payments where the relationships may not be ongoing or may be 
more sporadic, then you get into a very different type of 
collection when you are trying to collect it.
    Mr. Platts. I agree that it is not in place of the agency-
by-agency identification and understanding of what type of 
improper payments are being made, but it may complement that 
information.
    Ms. Springer, did you want to add something?
    Ms. Springer. Yes, I was just going to comment that the 
Improper Payment Information Act requirements are right now 
being put into place at each of the individual agencies, so it 
dovetails with the debt collection activity at the Department 
of Treasury. So all agencies have submitted their plans. We 
gave them until the end of November of last year. They have 
done that, and all five steps under the act are being 
addressed. Again, it is our directive to the agency that those 
plans have dates for each of those five steps and we have those 
right now.
    So many agencies have started. They have done their 
inventorying of their programs. We are making sure that those 
inventories total all the expected outlays of the 2004 budget. 
And then from that point, their initial risk assessment, going 
on to statistical sampling where that is required, and then the 
remediation plan, and then developing the baseline and the 
opportunity year by year for actual savings.
    So agencies are at different points. They all have plans, 
but they are in various stages along the way of that 
assessment. Obviously, the agencies that have already done 
their Section 57 from the previous OMB guidance have a head 
start on that. But every dollar of Federal outlays will be 
inventoried at the very beginning and then we will move through 
the process.
    Mr. Platts. And given the conservative sum being that $35 
billion or so----
    Ms. Springer. For the first trillion.
    Mr. Platts [continuing]. Right, it is certainly a worthy 
effort in what we need to do to protect the taxpayer's hard-
earned dollars. If it is possible to have those plans as they 
are being finalized and completed shared with the subcommittee 
so we can see how the departments are approaching this 
challenge pursuant to the law, that would be very helpful.
    Ms. Springer. We would be glad to share that with you.
    Mr. Platts. Thank you.
    Mrs. Blackburn, I apologize. It was not a quick followup.
    Mrs. Blackburn. That is quite all right.
    Mr. Platts. I recognize the Vice Chair.
    Mrs. Blackburn. Thank you, sir. I think that we are all 
interested in hearing what you all have to say. We always 
appreciate your coming over here and giving us information. We 
just hope that we honor your time by coming up with good 
legislation and follow-through and oversight. So as always, we 
thank you.
    Mr. Walker, I can tell you, the comments that you had made 
some months ago about the over 2,300 accounting systems in DOD 
and trying to find a way to pull those into one enterprise 
architecture, that is something that I have thought about time 
and time again. Recently, I talked to a company that does the 
data conversion. We were doing a GSA program. I said, my 
goodness, I think we might have some folks that would be 
interested in talking about what you all do and the talent you 
have that knows how to convert this data and bring it all in-
house.
    We continue to look forward to DOD being able to have a way 
to manage both their management systems and their war systems, 
and pull that into one architecture, and then have the 
security, the information security that is necessary to support 
that. I think the security is one of the things that does 
concern me and I would like for you to speak to the impact, 
what impact do the weaknesses have on the Federal operations 
and safeguarding the Federal assets, and on the progress that 
we are making toward being able to pull that architecture 
together.
    Mr. Walker. First as we have noted before, we do have 
concerns about material control weaknesses dealing with 
information security in various agencies of government. With 
regard to the Department of Defense, there is no question that 
they are taking this matter very seriously. It is getting top-
level and sustained attention. At the same point in time, it is 
going to take years of concerted effort in order to effectively 
address a challenge that has arisen over a number of decades.
    I come back, though, to a comment that I made before. That 
is, if you do not get control of the people and if you do not 
get control over the money, the degree of difficulty in getting 
the job done is increased exponentially. I still continue to 
believe that the Department of Defense needs to differentiate 
between war-fighting systems, which ought to be delegated and 
have more flexibility on a decentralized basis; and management 
information systems, which are more than just financial 
management. They have to understand what they have versus what 
they need, and they have to have very tight control over any 
new dollars involved in developing new systems on the 
management information system side, and much more centralized 
control over that area.
    The concern that I have is that they are still finding out 
what they have and the other thing is is that when the money is 
passed down, you lose visibility and control. Let's keep in 
mind, our Department of Defense is arguably the largest single 
entity on Earth, including the private sector. It is a huge, 
complex, and important enterprise.
    So I am continuing to try to work with Secretary of Defense 
Rumsfeld and Comptroller Zackheim and others to try to help 
make progress here. They are making some progress, but it is a 
massive undertaking.
    Mrs. Blackburn. Last year when you spoke, there really was 
not a timeline. DOD did not have a timeline for completion of 
this. Are they far enough along that they can formulate a 
timeline at this point?
    Mr. Walker. They have a timeline for a date that they hope 
to have some type of opinion on their financial statements, and 
that is for fiscal year 2007. With regard to the enterprise 
architecture which is an important contributor to that, they 
have their initial enterprise architecture design, but they 
expect to end up having at least a couple of additional 
refinements to that design this fiscal year. I am not aware 
that they have an estimated completion date. In fact, I do not 
believe they have one at this point in time.
    Mrs. Blackburn. OK.
    Ms. Springer. They do have a plan that is supposed to come 
out in April of this year that will look ahead and establish 
some of those dates.
    Mrs. Blackburn. Great. That is great.
    Ms. Springer, looking at the internal audits and people 
completing things, moving ahead, being ahead with their 
financial statements a year in advance, what is being done to 
prevent agencies from just simply coming along and putting a 
lot of human capital and energy behind getting on a schedule? 
Are they setting up a schedule and a structure in their offices 
that would sustain this reporting year-in-year-out and keeping 
it on schedule?
    Ms. Springer. The better agencies are putting in place 
cultural changes that will sustain their ability to get these 
accelerated audits in the future. I can share with you some of 
the things that they are telling us that they are doing. I 
think you will get a good flavor for it.
    They are enhancing their reconciliation processes. They 
have earlier and more frequent coordination with the OIG and 
with their contract auditors. They are improving the data 
submission process and data control quality reviews. They have 
earlier coordination with external organizations. For example, 
we have agencies that get information from States or from 
grantees and things like that. They are accelerating dates when 
they get that information.
    They have automated a number of things including automated 
footnotes. The footnotes comprise over one-third of this 
financial report, about 40 pages worth. The footnotes in the 
past were never prepared until year-end. They are now preparing 
those footnotes at earlier quarters. So for example, the third 
quarter footnotes are prepared. They have three-quarters of the 
year done. They can hand that to their auditor and that becomes 
the way of operating in the future, and you get a head start on 
things.
    So a lot of it is just better planning, and common sense in 
a lot of cases. That does not require extra people. It just 
requires operating in a different way. They have improved the 
use of estimates. There are many cases where in the past they 
would chase down the last penny and wait until everything was 
closed down to the last date. For example, you would have an 
agency that would say: we can give you until September 30th, 
the last day of the fiscal year, to get in your request for 
using funds for some purpose. Well, if you close that a few 
days ahead of time, that gives you a head start on being able 
to get things done.
    One thing that we found is that a number of agencies were 
taking weeks and weeks to get sign-off from their agency head 
on the audit report and their assurance statement. All the work 
would have been done, and even last year one agency took over a 
month from when the PAR was done, the performance and 
accountability report was done, until they got the sign-off 
from the agency head. Well, that is how much time they have 
this year coming up to do everything from the end of the year 
until the report is due.
    So a lot of it is just operating more efficiently and 
effectively, using some tools, and just flat-out common sense. 
It is not all resources.
    Mrs. Blackburn. Thank you.
    Thank you, Mr. Chairman.
    Mr. Platts. Thank you, Mrs. Blackburn.
    Mrs. Maloney.
    Mrs. Maloney. Thank you very much.
    I would like to ask the Director of GAO, and I truly 
appreciate the fact that we have a nonpartisan independent body 
that assesses what is happening and give us nonpartisan 
unbiased viewpoints. I think you do a fantastic job. All the 
reports from your office I try to study because I feel they are 
accurate and the way government should be.
    I would like to ask you, how do we get a better control of 
what is actually happening to the budget of the United States 
of America? Very briefly, in 1977 my city, New York City, went 
bankrupt. The mayor had a set of books, the controller had a 
set of books, the city council had a set of books. There were 
three different reports. The press had their set of books. No 
one knew what was happening. We went bankrupt and out of that 
process, in fact it was my bill, a simple bill that you have 
one set of books, one set of books. The mayor can have his guy 
in there; the controller can have his in; they have to agree on 
what the numbers are and they project where we are.
    Since that has gone into place, we do not have confusion 
over where we are. We know what our deficit is and we know what 
our projected liabilities are going to be.
    Right now, it is very confusing. OMB has their projection. 
Treasury has theirs. Somebody else uses dynamic scoring; 
another person does not. We have the Office of Economic 
Advisers coming out 2 weeks, and their report is that the 
deficit will be cut in half in 5 years and we will generate 2.5 
million jobs in 1 year. Then you have other people saying that 
what they are saying is not accurate. All of this is happening.
    What has happened is that Greenspan, the head of the Fed, 
whose job is monetary policy, his job is not to project the 
numbers of the country, really. He has become the de facto 
spokesperson on what the actual numbers are. He came out and 
said this country does have a challenge with Social Security 
and Medicare in years 2013 to 2030.
    My question is, we should not have to rely on a Mr. 
Greenspan in the Federal Reserve position when it is not even 
his job to project the economic health of this country. I do 
not mean this in a partisan way. One of my good friends on the 
other side of the aisle, he came up to me and he told me he was 
going to put in a bill to abolish Mankiw's job and him because 
his numbers were so crazy.
    I would not even go that far. This was one of my Republican 
friends who said they were going to do that. I do not know if 
they are going to do that. It may be just gossip or he did not 
like the report or whatever. I do not know. In any event, I 
think that in a nonpartisan way, both sides of the aisle would 
like a proper projection of where we are going, what the 
deficit is going to be, the Social Security, the Medicare. And 
then you read that some agencies look at payroll numbers; 
others look at the numbers from the census for unemployment 
projections. Everybody is using a separate set of books on how 
they are projecting what is happening.
    I think there can be honest policy debates, really, between 
how you advance a country economically and monetary policy, but 
there should not be a debate on what the numbers are. The 
numbers should be factual. They should be reliable. They should 
be the best numbers that everybody can come up with. And it 
should be clear, this is with dynamic scoring; this is without 
it; this is the unemployment numbers which the experts in our 
country believe is the best way to predict it. But right now, I 
tell you, I read the financial papers and I literally get a 
headache because everybody says something different.
    My question to the nonpartisan independent GAO body is, how 
can we come up with a system that just gives us accurate 
numbers from which we then can begin the debate?
    Mr. Walker. First, Mrs. Maloney, let me say that I want to 
send you a copy of the speech that I gave the National Press 
Club on September 17 of last year that addresses much of this 
issue and some of the work that we are doing in this regard. 
Let me just give you an example. If you take the financial 
statements of the U.S. Government, they are based largely on an 
accrual basis, based upon generally accepted accounting 
principles. There are different numbers you can get out of the 
financial statements.
    On the budget side, the unified budget deficit, which 
unified budget deficit was about $375 billion. You can get an 
operating budget deficit, which is without the Social Security 
and Medicare surpluses, which is much higher. That is on the 
budget side. On the financial statements and an accrual basis 
side, you get $665 billion. On the budget basis, you have the 
unified which is about $375 billion and the operating deficit 
which is much higher. If you look at the financials, you can 
also find numbers for the difference between promised benefits 
on Social Security and Medicare is the supplemental schedules. 
However, some numbers don't appear such as any liability for 
future veterans health benefits provided by the Department of 
Veterans Affairs.
    The bottom line is this. GAO is the supreme audit 
institution in the United States. GAO is nonpartisan, 
professional, and objective. I consider myself the chief 
accountability officer and we are doing more and more work to 
try to bring truth and transparency to what the real numbers 
are, because everybody is entitled to their opinion, but there 
only should be one set of facts.
    Now, importantly, projections and simulations require 
assumptions. There are no right assumptions. There are 
differences of opinion on, for example, what is GDP growth 
going to be; what is inflation going to be; what is immigration 
going to be; what is the cost of health care increases going to 
be. But I do believe that part of the answer is to provide more 
consistency, more transparency, more disclosure with regard to 
key assumptions. We are absolutely committed to playing an 
increased role in that regard.
    Mrs. Maloney. May I do a followup question?
    Mr. Walker. Sure.
    Mrs. Maloney. Personally, I do not think that GAO should be 
the people that should have to come up with the accurate 
numbers. A lot of times, you do these studies on where we 
should be going and this that and the other. We should figure 
out within the institutions of government what the game rules 
are for unemployment and deficit and this that and the other. 
Certainly, assumptions are a whole different category. Who 
really knows? But we should have factual numbers. We are not 
even getting factual numbers. Sometimes Treasury and OMB, they 
are separate; they are different.
    So the question is, I do not think that GAO should have to 
be the keeper of the actual numbers. How do we make the 
institutions that are sitting there, work? Obviously in New 
York City, we basically told the controller and the mayor, who 
had the main responsibility, that their offices had to get 
together and enter into one computer the one number that was 
the real number of what we are spending and what we are doing. 
Since we did that, it has actually worked. Why can't we do that 
in the Federal Government?
    Mr. Walker. Let me clarify what I mean. Management, meaning 
the executive branch, has the responsibility and accountability 
with regard to financial management and reporting. So they 
should have the primary responsibility to make sure that we 
have consistent and reliable numbers there.
    Mrs. Maloney. So you are talking about OMB? So it should 
come from OMB?
    Mr. Walker. I am talking about the agencies, the CFOs are 
responsible.
    Mrs. Maloney. No, no. There has to be one central place it 
comes from. Where should it come from?
    Mr. Walker. In the final analysis, OMB has to look at this 
on a consolidated basis, along with Treasury, for the 
President. If you take, for example, last year's audited 
financial statements, there was a $24.5 billion plug, the 
difference between what the individual agencies said the 
numbers were and what the consolidated numbers were.
    So I think with regard to financial management, it is the 
responsibility of the executive branch. I would respectfully 
suggest, however, that we need to have more transparency over 
commitments that are not in the financial statements. At GAO, 
we have suggested that OMB should have to prepare an annual 
report to the Congress that we could look at and comment on 
with regard to these commitments and contingencies.
    Furthermore, I would suggest that part of the problem is 
the Congress' budget process. It is a 10-year cash-flow based 
system. As a result, especially given the way that CBO is 
required by law to do its estimates, can provide a misleading 
picture as to what the future really is. So I think reforms are 
necessary in several dimensions and I think responsibility is 
shared by a variety of parties.
    Mr. Hammond. If I could just speak to one part of your 
question. I think that the financial report that we are looking 
at today and talking about today goes a long measure toward 
bringing about looking at what has happened and reporting on 
the past, and bringing that form of uniform, consistent, 
comparable----
    Mrs. Maloney. And which financial report are you talking 
about?
    Mr. Hammond. The financial report of the U.S. Government.
    Mrs. Maloney. The financial report of the U.S. Government 
should be----
    Mr. Hammond. Which is prepared by Treasury in coordination 
with OMB and then audited by GAO.
    Mrs. Maloney. Then the CBO is always different, right?
    Mr. Hammond. Well, the difference is, accounting deals with 
reporting that which has taken place, either as it is to be 
measured into the future because it exists, or what took place 
during the prior period. I think the report once it is 
perfected will go a long way toward solving the first part of 
your quandary, which is giving everyone one source for all the 
information dealing with what has happened in the past.
    As for projections, I think the Comptroller General has an 
excellent point. Assumptions drive projections, and it is 
totally appropriate for different entities to use different 
assumptions at different times in forecasting. I think as you 
look into the future, it is a much more challenging task, but 
the beauty of that is the future is something that you get to 
adapt and deal with.
    Ms. Springer. Let me add one other thing to round out the 
panel's comments at least. If you look in this report, one of 
the values of this report is that there are probably about 20 
pages on one of the largest commitments going forward, which is 
Social Security and Medicare. The information has been made 
available in this report, even though it is not part of GAAP, 
generally accepted accounting principles, today. But because of 
its importance, it is in here in this one source, the same 
information that you would find in the trustee's report of 
Medicare and Social Security. That report comes out every 
March, but we have it included in here because of the value of 
having that in this one place.
    Now, one thing that we have all worked on, all of the 
organizations here participate in the FASAB organization, which 
is the government equivalent of FASB in many respects. This 
past year, Statement of Accounting Standard 25 came out which 
requires that in the future that those assumptions and that 
statement of the social insurance, which gets at this large 
piece, will be subject to audit scrutiny and actually a 
significant part will move up into the front of the report to 
be alongside of the balance sheet and the cost statement and 
other statements that are there today.
    So we recognize the importance of this. I would direct you 
to page 60, for example, where there is a reconciliation of the 
accrual basis, which is the generally accepted accounting basis 
for the cost of operations, the reconciliation of that to the 
deficit that you hear about. Again looking back it is set for 
2003. There is no guesswork, no assumption involved. This is 
looking back to fiscal year 2003.
    So while it is not perfect and it certainly is not looking 
to the future in many respects, as far as the past goes, this 
is a pretty definitive source.
    Mr. Walker. There is no question that there has been 
tremendous progress made in the last several years in improving 
this financial report, including increasing transparency with 
regard to long-range commitments and contingencies. For 
example, when I first became Comptroller General in 1998, there 
were no disclosures about the estimated difference in the costs 
between promised Social Security and Medicare benefits and 
funded benefits. Now, if these numbers are in the annual 
report, not only is it disclosed, but as Linda mentioned, it is 
going to be subject to audit in the near future.
    So we are headed in the right direction, but we have a way 
to go.
    Mrs. Maloney. I congratulate all of you on your commitment. 
I know it is a very tough job. I would love to see a copy of 
your speech on this particular issue that you referenced.
    Thank you.
    Mr. Platts. Thank you, Mrs. Maloney.
    I look at the report as the Clint Eastwood movie 
paraphrasing the title, the good, the bad and the unknown. 
[Laughter.]
    What we find in the report, and some of the unknown is that 
future debt that we are making projections about, but cannot be 
certain.
    Mr. Hammond, in talking about how the information will be 
used as we are getting to this goal of more uniform reporting 
throughout the departments and agencies, and allowing us to 
come together and having a useful consolidated financial report 
for the entire Federal Government. In your testimony, you 
touched on a couple of aspects of that. The first is timely 
reporting. The administration has been great. One of the 
examples, as with including Social Security and Medicare in the 
report, although it is not mandated, that is the administration 
being proactive in that way, in moving up the deadlines to 
November 15, although the deadline is March 31 in law, no later 
than, that the administration has said, well, we want it sooner 
because March 31, the new budget has already been proposed and 
it is not going to be very helpful.
    Your department, Treasury, and seven other agencies have 
been great in meeting that November 15 deadline this year. What 
would be your message to the other departments, one, on the key 
to meeting that deadline, as all of them are going to have to 
this coming November 15, and the benefit that your department 
has gained as you went into the 2005 budget process because of 
meeting that deadline.
    Mr. Hammond. I think those are really important issues, 
because we have found that by accelerating, especially to meet 
these very aggressive timetables, you have to fundamentally 
change the way you manage financial information. By 
fundamentally changing that, what you do is improve the data 
quality. There is not an agency that I have spoken to that has 
not cited the principal benefit of just the first phase of 
accelerating the financial reporting, of getting better data 
sooner inside the agency.
    What that does is it means that there is now information 
available for management to use to understand what is going on 
within their programs and their activities, when they can 
actually do something with it and actually try to make a 
change, make a difference with regard to the management of a 
particular program, administration of a contract. It is a huge 
unknown benefit that only becomes visible when agencies do the 
acceleration, because it is so comfortable today processing the 
data, massaging it on an after the fact relaxed path.
    What happens is reconciliations are something that you do 
when you have time. When you have to accelerate the information 
now, you have to do the reconciliations currently. You find 
problems right up front and you are able to deal with them 
before they become serious. You are able to influence programs. 
And then you have better actual data with which to set your 
meaningful performance measures for the development of your 
budget for the next year.
    I think that is one of the beauties of the accelerated 
timetable, quite frankly, is that we will have the prior year 
out of the way well before the President's budget is released, 
plus allowing everyone to look at what happened last year; make 
sure it is reflected in the performance measurement; and make 
sure everyone understands what the impact is for the future. I 
think that really goes to building better projections of what 
is going to go on as well.
    Mr. Platts. The quarterly reporting requirement I assume it 
is safe to say that is critical or helpful in getting to that 
earlier deadline because it is forcing the agencies and 
departments, yours included, to be more proactive throughout 
the year, rather than waiting until the end and that heroic 
effort being the norm. You really cannot do that anymore 
because of the requirements we are placing on you.
    Mr. Hammond. Very definitely. What we found with agencies 
doing quarterly reporting is that as they started that, the 
requirements are for fairly skeletal quarterly reporting. They 
found that it made much more sense to do more complete 
quarterly reporting. It allowed them to better understand their 
programs. It gave them more information to share with their 
auditors throughout the year. Because that is the other thing 
that comes out of this process, is that audit becomes a year-
round environment and it becomes much more of almost a, I 
shudder to use the word ``partnership,'' but it is very much 
along those lines as people are working through the information 
throughout the year, instead of a hand-off at the end of the 
year.
    Mr. Platts. In that year-round audit approach, then, it is 
not just giving the administration a more big picture 
assessment or Congress, but to the actual department that they 
can make adjustments throughout the year as they have that 
information more readily available to act upon.
    Mr. Hammond. Absolutely. I think people lose sight of the 
fact that financial reporting is really simply one work product 
of good financial management. You cannot have good financial 
management without effective financial reporting, but having 
effective financial reporting is in and of itself not good 
financial management. Good systems, good financial management 
allow for easy, effective financial reporting, but the real 
benefit is what management does with that information.
    Mr. Platts. Right. The usefulness and how it is acted upon 
once it is provided.
    Mr. Hammond. Exactly.
    Mr. Platts. Ms. Springer, Mr. Hammond mentioned when he 
talked, the quarterly reports being more substantive. Is your 
assessment of the various agencies and departments and the 
quarterly reports, is the more substantive approach becoming 
the norm with the agencies and departments?
    Ms. Springer. It is. In addition to just statements 
themselves, as I mentioned earlier, the actual preparation of 
footnotes. The footnotes are really the explanatory element 
that goes along with the statements. There are very few pages 
in this report that have statements. Almost one-third of the 
report is footnotes.
    I am not going to say that they would have 40 pages each 
quarter, but that work effort is what really surface issues. If 
you cannot put your footnotes together, then you can't explain 
the results, and then that is an indicator that you are headed 
for trouble. So doing that at least at the third quarter, and 
many agencies do it every quarter--that is the extra substance 
that you mentioned--really has been an important factor in 
accelerating, and having useful information.
    Under the President's management agenda, getting your 
financial reports done early, getting rid of material 
weaknesses, will not get you to a green score. You cannot get a 
green score unless you can prove that you are integrating 
financial information into your day-to-day management. That is 
why we only have four agencies that are green.
    Mr. Platts. Right. And then again, that gets to how the 
information is going to be used or if it is going to be used at 
all. It does not make much sense to have it if it is not acted 
upon.
    I would be interested from all three of you with the 
timeliness issue being focused on by the administration and 
with all departments and agencies here, the November 15 
deadline coming up this year and the quarterly report playing a 
helpful role in that process. That is something the 
administration has chosen to do, but not required by law.
    Is that something we should be looking at that should be 
changed in statute instead of no later than March 31? Should it 
be November 15 or no later than December 31? Should we 
statutorily be looking to move that deadline up, or should 
discretion still remain with the administration? The second 
part of that is the quarterly report aspect. Should that be a 
part of the statutory requirement regarding the financial 
reports?
    Ms. Springer. That is the standard to which we hold the 
agencies. I do not see why we should expect anything less. I do 
not know if there are any other dependencies of that particular 
part of the statute that might cause that to be modified. But 
barring any of those, I would say that should be the legal 
requirement.
    Mr. Platts. The current administration, you are setting a 
great example and I would hate to see us get on this track and 
then, for whatever reason, we slip back until we are back to 
having reports in February or March and pass the new budget 
process being done, and again trying to look to have the good 
approaches maintained into the future.
    Yes?
    Mr. Walker. Mr. Chairman, I would say that this 
administration is clearly committed to accelerated reporting 
dates, and that is not an issue. But if for some reason there 
was ever a slippage in the future, then I think the Congress 
should consider requiring accelerated reporting dates.
    I think one of the reasons that we are much better off 
today than we were just a few short years ago is because these 
accelerated reporting dates have forced agencies to focus on 
improving their systems and controls in a way that has improved 
financial management overall. What was happening before is that 
people were not really focusing on a lot of issues until after 
the end of the year.
    They were wasting a tremendous amount of human and 
financial resources to try and do a lot of things after the end 
of the year in order to be able to get a clean opinion several 
months later, but yet they did not have timely, accurate and 
useful information to be able to make sound management 
decisions on a day-to-day basis.
    One of the things that our UK colleagues noted is they even 
have a more lax reporting deadline than we do. I think they 
need to seriously consider whether to tighten it up, either 
voluntarily or statutorily, because people may not take sound 
financial management and reporting seriously enough with lenthy 
due dates. With accelerated reporting dates, people are not 
going to be able to play games. They are going to have to solve 
the underlying problems if they have to report much quicker 
than historically they were accustomed to doing.
    Mr. Platts. It is human nature. My 7-year-old son, if I 
give him until the end of the week to clean up his room, I know 
it is going to be Friday versus today. [Laughter.]
    Human nature is, I don't have to meet that deadline until 
Friday so why do it today?
    Mr. Walker. You are lucky. It could have been Sunday. 
[Laughter.]
    Mr. Platts. He is going to go out and play soccer or 
something in the meantime.
    Mr. Towns, do you have further questions?
    Actually, I apologize. I wanted to ask Mr. Hammond on the 
statutory aspect from a department perspective, on whether from 
your perspective as a department would it be advantageous for 
your department to know it is in statute November 15, or 
something of that nature?
    Mr. Hammond. I think the momentum will overtake that 
requirement. It is the kind of thing, once we get to November 
15 of this year, it is hard for anyone to go backward. I do 
think getting a consistent understanding of all the major 
entities of reporting deadlines will be very important. It is 
more than just the CFO Act agencies. The Accountability for Tax 
Dollars Act brought into play a whole other range of executive 
branch agencies.
    I think we need to also get clarity with regard to the 
legislative and judicial branches. We would like to keep them 
included in this report, but there will come a time in the not-
too-distant future when we will need audited financial 
statements for those major components as well. Those do not 
have to be statutory requirement, but they do in fact have to 
meet the preparation timetable.
    Mr. Platts. Thank you.
    Mr. Towns.
    Mr. Towns. On that note, I hear you. Let me just ask, it is 
my understanding that a lot of these agencies, that the 
contractor support for their financial statement, how does this 
affect the agencies' ability to comply with something like 
that?
    Mr. Hammond. It would depend on what they are using 
contractor support for. I think you certainly historically saw 
a lot of contractor support used in the preparation and year-
end closing cycle when they have 5 months to do that. It was a 
very easy situation, in my words, to throw money at the 
problem. Accelerated timeframes make that very, very untenable.
    So now the use of contractors is really designed to improve 
business processes, reengineer the way financial management is 
done, bring about systems change. So while the use of 
contractors is still prevalent, I suspect, at many agencies, 
the types of uses are much more productive and are much more 
designed to improving management at the agency for the future, 
as opposed to simply producing a financial statement this year.
    Mr. Towns. So you are saying, really, in a case like that, 
it would not affect the ability of a person to meet the 
timetable?
    Mr. Hammond. Right. I think what you will find is that 
people who are using contractors today are looking at them for 
the ability to bring in best practices and revise the way they 
do their business throughout the year, not the actual 
production of financial statements at the year-end.
    Mr. Towns. Yes. Does this bring about a savings for the 
agency?
    Mr. Hammond. You would think so. I think agencies have 
found that what it has allowed them to do is reallocate 
resources, to better financial management. I think it has also 
identified something that you see throughout government in the 
financial management arena, which is a huge skill gap. 
Historically, financial management in the Federal Government 
was data processing, whether it was manual or not. It was 
moving information from here to there.
    Financial management for the future is analytical. It is 
taking that information that is timely available and doing 
something with it. That is in many agencies highlighting a huge 
skill gap. As they accelerate their financial information, they 
are finding now they have time available on their staff, but 
now they have to position their staff to be able to do that 
value-added work.
    Mr. Towns. I am just thinking that, help me with this, do 
they have to get contracts? For instance, if I use you this 
year and I want to use somebody else next year, is that a 
problem? I am just thinking in terms of things that might slow 
down the process here, that might make it difficult to have 
this thing done in a timely fashion.
    Mr. Hammond. I have not heard any complaints about the 
contracting process and its ability to meet the accelerated 
timetables, but perhaps others have.
    Mr. Towns. Have you?
    Mr. Walker. Mr. Towns, there are two aspects: To what 
extent are they using contractors for basic financial 
management and to assist in that function; and second, to what 
extent are they using contractors to perform the audit. In many 
cases, the inspector generals will hire external contractors, 
typically one of the big four accounting firms, to actually do 
the audit of the departmental financial statements, but I have 
not heard any difficulties expressed with regard to this issue.
    Ms. Springer. Actually, all but one of the CFO Act agencies 
use a contract auditor, as David just mentioned. Typically, one 
of the big firms for the actual audit opinion that is rendered 
on each individual statement, in the same way that GAO renders 
an opinion on entire governmentwide consolidated report. In 
fact, GAO is in a couple of cases, I guess, the auditor for 
rendering an opinion.
    Mr. Walker. We audit the IRS, the Bureau of Public Debt, 
the FDIC, and soon we will audit the SEC. We also audit the 
consolidated financial statements of the U.S. Government.
    Mr. Towns. You have answered my question. Thank you very 
much.
    Let me just ask Mr. Walker one other thing. I have some 
concerns related to the lending and credit activities within 
many of our Federal agencies. Can you speak to the material 
problems facing the agency community and how to adequately 
determine credit programs' costs? Are these programs viewed as 
governmentwide, as opposed to just SBA?
    Mr. Walker. We have had some challenges with regard to the 
credit estimation modeling. These credit estimation models are 
important not just for financial statement reporting purposes, 
but they are also used sometimes for submitting budgets to the 
Congress. This past year, we had a serious problem with the 
Small Business Administration which ultimately we were able to 
resolve. But it is an example of something that cannot be 
allowed to happen in the future if we are going to be able to 
hit accelerated reporting deadlines for the audit reports.
    We are going to have to be able to audit on a continuous 
basis. While it will not be a partnership because we have to 
maintain our independence, we will have to work constructively 
and on an ongoing, continuous basis with the executive branch 
agencies. We will need timely access to the information that is 
required of the external auditor, or else we will not be able 
to hit the accelerated reporting deadlines.
    Mr. Towns. Do you want to add anything to that, Mr. 
Hammond?
    Mr. Hammond. I think, and I will yield to my colleague, Ms. 
Springer from OMB, with regard to credit reform, but I think 
the challenges of the credit reform model, the complexity as it 
applies, is something that makes a significant hurdle for 
preparation of agency financial statements.
    Ms. Springer. And that is one of the things that, in the 
same ways that agencies on the CFO council identify keys to 
success, they identify challenges. One of the challenges is 
that the agencies that have loans, have some issues with the 
credit reform process as it relates to acceleration and 
timeliness of various information.
    Agencies like SBA are very model-dependent, both for their 
budget work and for their financial statement work. In the case 
of SBA, there were some long overdue upgrades and, frankly, 
replacements of models that were in use. So you saw that for 
all of their five key programs, there were new models that were 
either put in place or upgraded last year. It takes a lot of 
time. It takes more time than they thought it was going to.
    One of the reasons for their disclaimer is that they, 
frankly, were not able to complete all that work, but they had 
in effect decided to use those models to support their 
financial statement. So they ran out of time to be able to put 
this together in a timely fashion and in enough time for the 
auditor to be able to review the model and the data that came 
out of it.
    That is why we have better hopes for this year, 2004, 
because those models are in place, they are getting reviewed, 
and should be reliable. But they face challenges, the credit 
reform agencies do face challenges that some of the other 
agencies do not.
    Mr. Towns. Is there anything that the Congress should do?
    Ms. Springer. My sense is that it is not so much a 
congressional issue as it is just an issue of the agencies 
having the right type of systems and processes to be able to 
manage their programs that have those additional requirements.
    Mr. Towns. Thank you very much.
    I yield back, Mr. Chairman.
    Mr. Platts. Thank you, Mr. Towns.
    Mrs. Maloney.
    Mrs. Maloney. I just would like to ask, and maybe it is a 
silly question, why are the numbers between OMB and the CBO 
always different? I know the CBO had a change this year to 
allow dynamic scoring in their numbers. Does OMB allow dynamic 
scoring in their numbers? Just any comments on it? Do you 
support dynamic scoring or are you opposed to it? What is your 
position on it?
    Ms. Springer. The Comptroller General I am sure will have 
some comments because his scope and his reach of activities is 
much broader than mine. But I just want to point out to you 
that from the standpoint of this report, that issue is not 
present because it is not a question of an estimate of CBO 
versus an estimate of OMB. We are talking about historical 
facts that already happened, transactions out of the ledgers of 
these subsidiary entities.
    I think where the issue that you are mentioning comes into 
play is more from the prospective look in the budget and the 
projections of programs and costs. In my world, that is not a 
factor fortunately. I am very happy it is not. There are other 
parts of OMB that deal with that, but I am sure Mr. Walker, who 
has a broader scope, would want to comment.
    Mr. Walker. Just to reinforce. The report that was issued 
last Friday----
    Mrs. Maloney. I understand the report. I am talking 
prospective. They are always different.
    Mr. Walker. Prospectively, as you know, the OMB has the 
responsibility to do the estimates for the President. The CBO 
has the responsibility to do the estimates for the Congress. 
Both of them are looking over the same time period. However, 
both of them can come up with different assumptions on things 
like what do they estimate that economic growth is going to be; 
what do they estimate that inflation is going to be; what do 
they estimate, for example, what are the costs associated with 
the new prescription drug benefit going to be. We saw that 
manifested recently where the administration had one number; 
and CBO had another.
    Part of that difference was because they were talking about 
a different 10-year period. Part of the difference was because 
they had different assumptions as to what the estimated cost 
increases for prescription drugs were going to be during the 
10-year period. Again, since it is based on projections, there 
is no one right answer.
    What is important is that there be disclosure such that we 
understand what the differences are and what are the reasons 
for the differences, so that Congress and others can make an 
informed judgment about which one do you think you have more 
comfort with.
    Mrs. Maloney. That is great that you gave that example. 
That was really helpful. CBO has now incorporated dynamic 
scoring in their projections. Does OMB use dynamic scoring? 
That was a big debate on whether CBO should go to dynamic 
scoring or not and they voted to do it. But does OMB use 
dynamic scoring? I really do not know.
    Ms. Springer. It is not my area, so I really am not 
prepared to comment.
    Mr. Walker. Not to my knowledge, but I am not sure.
    Mrs. Maloney. Not to your knowledge. That is one difference 
between the two. And what is your opinion on dynamic scoring, 
or anybody if they would like to make a comment.
    Mr. Walker. My opinion would be is that if you were going 
to do that, you ought to do it both ways. My personal opinion 
would be is you do it non-dynamic and then dynamic and then 
disclose what are the assumptions underneath the dynamic and 
then Congress can decide what it wants to use.
    Mrs. Maloney. Great answer. Thanks.
    Mr. Platts. Thank you.
    I would like to get into two specific parts of the 
consolidated reports, two specific agencies. You mentioned one, 
the SBA, and some of the challenges they still have, and 
specifically, the issue of the loan sales. My understanding is 
the numbers in dealing with $5 billion worth of loans that were 
sold over 4 years, a loss of about $1 billion to the American 
taxpayers, versus what was initially reported as a savings of 
maybe $600 million or so. Obviously, that is a huge difference, 
that we made money versus we lost even a larger sum.
    What is OMB, Ms. Springer, doing specifically in how you 
are working with SBA to try to address that. Part of it is, are 
you assessing SBA's ability in their staffing to be engaged in 
this activity? Do they have the professional expertise to 
continue to engage in this type of program?
    Ms. Springer. It is an excellent question, and obviously 
the staff of this subcommittee and the committee itself has 
been very visible in expressing the need for SBA to do a better 
job in this area. Obviously, the loan sales have stopped. And 
when it became apparent to us at OMB as well as to the agency 
itself that there were problems in their modeling, that they 
could not go forward with any additional sales. There was one 
that was in the works and it was stopped. So that was obviously 
the first step.
    But the next step, then, was to review the models. The 
models comprehensively have been reviewed and they have been 
modified or replaced and rebuilt. OMB was very involved. We had 
people from OMB, not from my area specifically, but from the 
part of OMB that is dedicated to SBA, both on the budget and 
their management issues, that were integrally involved in 
assessing and in reviewing the model as it was developed. None 
of those models were even presented to the auditor before OMB 
reviewed them very extensively.
    So we are confident that those models now of disaster loans 
and all the other programs are doing the job they should. 
Having said that, sales have not started back up again and they 
would not startup again until two things occur: We are very 
sure that these models and the data coming out of them would be 
very, very accurate and reliable; but also as you mentioned, 
that the staff is in place that is equipped and trained in that 
area. That is an area that my office, as well as the other 
parts of OMB, would want to get involved.
    As you may know, we have had an initiative to look at asset 
management across the Federal Government. We have started with 
real property. We issued an Executive order just the beginning 
of last month. We have issued a new President's management 
agenda program initiative. It is not one of the five 
governmentwide ones, but it joins the other nine program 
initiatives. We are expecting that after the real property 
area, that we will move on to financial assets like loans. SBA 
would obviously be an area that we would spend time with.
    Mr. Platts. Mr. Walker, does GAO have an opinion on SBA 
specifically regarding whether they should even get back into 
at all the loan sale effort, and then in a broader sense 
regarding other agencies?
    Mr. Walker. Well, they are constantly trying to improve 
their modeling capabilities, but I would also respectfully 
suggest and agree with Linda that part of it is do they have 
enough people with the right kind of skills and knowledge to do 
this. They have had to rely on other agencies, and that is 
fine, but the government as a whole has a shortage of people 
with the right type of skills and knowledge in this and other 
areas, and it is something we need to address.
    Mr. Platts. That human capital challenge goes well beyond 
SBA. We will followup with GAO with putting a followup request 
in to have you look at that specifically, but in the broader 
sense, as we are trying to meet these new requirements, 
timeliness, usefulness, substantive nature of the reports, we 
are going to be in need of more and more qualified financial 
experts. What is your assessment of our ability to meet the 
human capital needs? Is there anything we need to be looking at 
from Congress' perspective as giving more discretion or 
incentives in the area of financial management to recruit and 
retain the key people?
    Mr. Walker. As you know, Mr. Chairman, the lack of an 
effective and strategic human capital strategy in the entire 
Federal Government is something that is on our high risk list. 
I think there has been more progress, frankly, made in the last 
2 years than in the last 20. I am cautiously optimistic more 
progress is going to be made in the next 2.
    Mr. Platts. And you are setting an example.
    Mr. Walker. We are leading by example, that is correct. We 
are, and we are committed to continue to do so. But as Mr. 
Hammond mentioned, a part of the challenge is that historically 
financial management from a people standpoint in the government 
was viewed as data entry and processing transactions. Most of 
that is automated now. So the type of people that you need 
along with the type of knowledge and skills are fundamentally 
different. There is going to have to be a restructuring of the 
existing financial management functions and also an extensive 
effort to try to recruit and retain top talent.
    I think one of the things that hopefully the CFO council is 
doing or is contemplating doing is to ascertain whether and to 
what extent additional flexibilities might be necessary for 
this community. Historically what has happened is that people 
have tended to look at these issues on a department-by-
department or agency-by-agency basis, rather than on a cross-
functional basis or a functional basis across government. I 
think that is something that hopefully they might take a look 
at.
    Mr. Platts. In giving GAO additional flexibility to meet 
your needs and restructure, that assessment of whether there is 
enough flexibility existing under the law today for OMB and the 
administration to do that cross-agency, cross-department 
approach, because otherwise you are competing with each other 
for a select few to fill all these spots.
    Is there any type of review ongoing now, Ms. Springer, 
within OMB to look at that, what flexibility you have, and what 
additional flexibility you may need to meet the human capital 
aspect of financial management?
    Ms. Springer. Financial management is one of the parts 
within the human capital initiative of the President's 
management agenda. That would be one of the areas that is 
reviewed in the broader context of the initiative, to ensure 
that the right human capital resources and assets are in place 
at the agencies. But there is no question that is a 
consideration for the executive branch, as well as for GAO.
    If I may, I had one other thing that I take as a good sign 
on SBA's account, they learned that there might be an 
additional request from this subcommittee to have GAO go in and 
look further at some models, they embraced that. I take that 
very positively on their part, that they feel, A, good about 
what they have done; and B, that they see value in that process 
both for themselves and for their contract auditor.
    Mr. Platts. Good to hear.
    Mr. Towns, did you have additional questions?
    Mr. Towns. I have a question, Mr. Chairman.
    Mr. Walker, in your assessment, are the problems at NASA 
and SBA in need of a long-term solution? Or do you think it is 
something that can be repaired in a year?
    Mr. Walker. At NASA and SBA? Well, they are very different 
problems. I think they could be repaired within a reasonable 
period of time. Whether or not it is a year, I have my doubts, 
but I think we are not talking about many years. We are not 
talking about anything like the scale of a Department of 
Defense, which is a number of years.
    By the way, we are working with all of the high-risk 
designated functions to provide them with specific things that 
we think need to be done in order to address their high-risk 
designation. We are working in a very constructive and 
cooperative manner with OMB. If you look at the President's 
management agenda, it bears a very close resemblance to GAO's 
high-risk list, and that is not an accident. I think that is a 
positive development.
    Mr. Towns. Thank you.
    Mr. Platts. Thank you, sir.
    Mr. Towns. I yield back, Mr. Chairman.
    Mr. Platts. OK. Thank you, Mr. Towns.
    You probably will not be surprised to hear me ask about the 
Department of Homeland Security, as one who has spent a lot of 
time, and we have a hearing next week on that department 
specifically. One, I would be interested in doing the 
compilation of the report, Mr. Hammond, and in the audit, DHS 
made a decision and I commend them for the decision, not to 
take the pass and use the waiver of having their financials 
audited this year and waiting a year. They embraced it. They 
testified before us in September that they would meet the 
November 15 deadline.
    In the end, they were about 2 weeks past the January 31 
deadline. But I think given it being their first year and they 
are kind of a hybrid starting 5 months into the fiscal year 
before they actually assumed responsibility, it is better that 
they be a little later and try to get it as right as possible.
    What impact did that delay have with your compilation? How 
did it play into it? And then the audit, and the fact that it 
is 7 months of the fiscal year that DHS had and the 5 months 
that were with all the disparate agencies.
    Mr. Hammond. It had only a very limited effect on the 
actual preparation of the report. We got financial information 
from them throughout the cycle. So even though they had not 
finished their financial statements, we got comprehensive 
detailed information from them.
    It is noteworthy that if this had been next year, it would 
have been problematic. Next year we are going to a system that 
relies on the audited financial statements to compile the 
report. This year, we were collecting data at a much more 
detailed level, so we were able to get that information.
    Mr. Platts. Is your assessment in looking ahead to next 
year that DHS is going to be in position to meet November 15 
and in that uniform sense?
    Mr. Hammond. Based on everything that I know today, I would 
say that they are certainly shooting for November 15, just as 
every major agency is. I think the other thing that is worth 
noting is that the hand-off of the transferred assets, because 
it was already 5 months into the fiscal year, the date of the 
transfer from the agencies to Homeland, we found that process 
worked very well for the compilation of our report. The 
coordination between the granting agencies and then the 
receiving agency, Homeland, allowed for a very, very effective 
data transfer. We felt pretty good about that.
    Mr. Platts. Mr. Walker, on the auditing, given the split, 5 
months, 7 months?
    Mr. Walker. It was not a problem this year, but it will be 
a problem next year if they cannot end up accelerating their 
timeframes.
    Mr. Platts. Do you think they have the resources? We were 
talking about DOD making it a priority, and know that they have 
a long way to go, the leadership has embraced it. Does DHS have 
the resources and is it the priority it needs to be?
    Mr. Walker. At DHS, it is a priority and they are ahead of 
DOD. [Laughter.]
    Mr. Platts. Good.
    Mr. Walker. Yes, and they are considerably ahead of DOD. As 
far as whether or not they need any additional resources, I 
would have to talk to my people about what our views are on 
that before saying anything on the record.
    Mr. Platts. And the $64 million question, my piece of 
legislation, your opinion on the benefits of having DHS under 
the CFO Act statutory requirement and the benefits that we 
believe that brings to the other agencies, Cabinet-level 
especially, should DHS be under the CFO Act?
    Mr. Walker. We believe they should be.
    Mr. Platts. I think they are doing the best to comply with 
the requirements now, setting the example and to me, I have 
told Secretary Hale that they are making the case for my 
legislation by their actions. We can make it permanent and that 
would be a good approach.
    Mr. Walker. They are voluntarily complying and I think they 
should be commended for that.
    Mr. Platts. Yes, absolutely. And given the weaknesses they 
inherited, you know, the 18 material deficiencies and they are 
working on chipping away at them, I agree that they are doing 
their best and hopefully will continue in that positive 
direction.
    The Sarbanes-Oxley Act that we passed in trying to have 
more accountability in disclosure for the investor, we have in 
effect the requirement of internal controls. I would be 
interested in really all three of your different perspectives 
on whether we should be mandating audits of internal controls 
across our departments and agencies. Or should we, as in the 
legislation with DHS that I have, about doing kind of a cost-
benefit assessment first? Or do we have the information to make 
an informed decision already?
    Mr. Walker. I think we need to do a cost-benefit 
assessment. As you know, Mr. Chairman, GAO has voluntarily 
expressed an opinion on internal accounting controls for the 
entities that we audit. We believe it is critically important 
and we believe it passes a cost-benefit test for the entities 
that we are responsible for.
    At the same point in time, it is not required by generally 
accepted government auditing standards or so-called ``yellow 
book'' standards which were promulgated by the Comptroller 
General. This is an issue that we are going to be looking at as 
to whether and to what extent standards should be updated. I 
think it would be premature to mandate it at this point in 
time.
    Mr. Platts. Is there a timeframe for your review of the 
issue?
    Mr. Walker. I will get back to you for the record, Mr. 
Chairman, on that. I also think that this, along with the 
relative merits of financial management committees or audit 
committees at selected departments and agencies is something 
that needs to be looked at, as well as the result of Sarbanes-
Oxley. That is something that we are trying to also work in a 
coordinated fashion through the Joint Financial Management 
Improvement Program, the Secretary of the Treasury, the 
Director of OMB, the Director of OPM, and myself. I am hoping 
that we are going to be able to make some progress on that, 
too.
    Mr. Platts. OK.
    Ms. Springer. We would agree with that. Actually, Mr. 
Chairman, we applaud and are happy to see that the language in 
your bill has mandated the study, the cost-benefit analysis by 
the joint effort of the CFO council and the PCIE, the 
inspectors general community. That work is already started and 
we are anticipating passage of your bill.
    Mr. Platts. I appreciate the optimistic approach. 
[Laughter.]
    Ms. Springer. Either way, we were already planning to start 
that, frankly, because we think that it is an emerging issue. 
It is a fact of life, certainly in the private sector. We are 
very attentive to what is going on in the private sector. We 
seek to be more private sector-like as far as the admirable 
features of the private sector.
    It is important to note that just a week or two ago, the 
SEC extended the deadline for the internal control report for 
the private sector. So this obviously has some challenges. It 
will have challenges as well for the Federal Government.
    Having said that, the cost-benefit study is underway by 
those groups. We expect to follow a timetable that is outlined 
in your bill, visiting with GAO on the results of that study, 
and visiting with this committee.
    Mr. Walker. Mr. Chairman, I think the cost-benefit test 
will hopefully be helped by the fact that the firms that are 
doing the audits for many of the departments and agencies are 
the same entities that are going to have to figure out a way to 
render an opinion on internal accounting controls for large 
private sector public companies. So therefore, hopefully we 
will be able to obtain some of the efficiencies of that. We 
have done it for years at GAO, so this is just another example 
of where we have led by example.
    Mr. Platts. OK. Mr. Hammond, what is Department of 
Treasury's approach? Are you auditing your internal controls?
    Mr. Hammond. The governmentwide report does receive an 
opinion review, or is subject to an opinion-level review by 
GAO. The Treasury statements themselves, I believe, is a report 
on internal control.
    Mr. Platts. OK.
    Mr. Hammond. I would echo the sentiments of my colleagues 
with one addition. I think once the cost-benefit analysis is 
done, looking at it from a governmentwide perspective, 
consistency will be important. I do not want to begin to 
understand what the challenges I would face to get an opinion-
level review at a governmentwide level statement if agencies 
were not getting an opinion-level review. So I think a 
consistent approach, when all is said and done, will be very 
important.
    Mr Walker. We are already expressing an opinion on a 
governmentwide basis. What is not happening is there are a 
number of the other departments and agencies that we do not 
audit that are not. So if we can do it, they ought to be able 
to do it.
    Mr. Hammond. It is a difference as to whether it should be 
voluntary versus required by law.
    Mr. Platts. And that goes to the leading by example, and I 
appreciate GAO's efforts in doing that.
    Mr. Walker, you certainly are helpful in your frankness 
regarding the challenges facing our Nation long term, and how 
to look ahead and make the tough decisions year-in and year-out 
with what lies ahead.
    Relate to that would be the pay-as-you-go discipline on the 
past that we have gone away from. I would be interested in your 
opinion, and both Ms. Springer and Mr. Hammond if you want to 
also add if you think we should return to that more fiscal 
disciplined approach of pay-as-you-go?
    Mr. Walker. In the speech that I gave at the National Press 
Club this past September, I included a number of items that I 
thought that Congress should seriously consider, including 
returning to the pay-go requirements, including additional 
transparency with regard to major tax and spending proposals, 
and a variety of other actions. Candidly, we have been digging 
pretty fast lately. We have had a long-range fiscal imbalance 
for a number of years, even when we had current surpluses in 
the 1990's, we had long-range fiscal imbalances. But now the 
surpluses have turned to deficits, the long-range imbalance is 
worse in part because of the passage of prescription drugs, and 
it is more immediate.
    Mr. Platts. One of my constituents at my town meeting made 
sure to remind me to speak accurately when we talk about 
surpluses. They were not really surpluses in the big picture, 
maybe in that limited 1-year isolated approach, but if you took 
Social Security, Medicare trust funds, they really were not 
surpluses even when we thought they were good years. That type 
of frank, transparent outlook is something we need to have, and 
we appreciate your efforts in trying to promote that.
    Mr. Walker. Thank you, Mr. Chairman.
    Ms. Springer. Mr. Chairman, if you look in the President's 
fiscal year 2005 budget, it is actually in the analytical 
perspectives section, you will find that there is a proposal 
there for spending controls and discipline that essentially 
reflects an extension of the Budget Enforcement Act. So that is 
a part of the President's proposal and it can be found in the 
budget.
    Mr. Platts. Great. I meant, having seen your statement from 
last September, but I forgot that was in there. So thank you. I 
appreciate the reminder.
    I have just two other questions I would like to touch on 
quickly. Mr. Towns, did you have anything?
    Mr. Towns. No further questions.
    Mr. Platts. OK. One is on the dynamic versus static, and I 
appreciate the dialog with Mrs. Maloney on that, because it is 
one of the challenges. I hear from my constituents and I use 
the Medicare bill where they say, your numbers are already 
wrong. I explain, well, actually we did not change any numbers. 
Those are somebody else's numbers. CBO stands by their $395 
million; OMB at $537 million or so. It is interesting because 
one of the big assumptions that is different in those numbers 
is OMB is making the assumption that more seniors will embrace 
the new choices they are going to be given, and thus cost the 
program more because of embracing the new opportunities being 
provided, versus traditional fee-for-service approach.
    Your discussion of that, I guess I do not have a question, 
but just appreciate the dialog on that as members and then the 
public try to understand comparing apples and apples.
    My final question is on the debt limit and where we are, 
and if there is a guesstimate of what by mid-year we are 
clearly going to need an increase, what sum we may be looking 
at. I do not know if there are any projections any of the three 
of you would like to make.
    Mr. Hammond. I certainly will not make any projections. I 
will say that I think it is a matter of public record that we 
believe that we will hit the current ceiling toward the last 
part of this fiscal year, so in the August-September timeframe. 
Obviously, those kinds of projections can move a little bit 
this way or that and could require an increase in the debt 
ceiling limit before the Congress recesses.
    Mr. Platts. But no estimate at this time what that ceiling 
increase may be?
    Mr. Hammond. I believe that our position has been and will 
continue to be that the Congress should appropriately give us 
the ceiling that they are most comfortable with, consistent 
with the budgets that are before them.
    Mr. Platts. A diplomatic approach.
    Mr. Walker. It sounds like they have passed the ball, Mr. 
Chairman. [Laughter.]
    Mr. Platts. Ms. Springer or Mr. Walker, do you want to 
hazard a guess? A wise decision probably. [Laughter.]
    Mr. Walker. Let's just say, Mr. Chairman, it will be a big 
number.
    Mr. Platts. We are in difficult times, but actually I do 
town meetings week-in and week-out because of being in my 
district every day. I started in York this morning at 5 minutes 
of 6, and I will end there tonight at some hour. But I do talk 
about the historic times that we are in that is driving a lot 
of these numbers.
    The recession that we were already in, September 11 and the 
huge cost of responding to September 11, and now kind of 
getting out of it and the increased costs associated with now 
guarding against a wholly new threat here in the homeland and 
the homeland security efforts. There are some unique 
circumstances. They do not change the fact that we need to be 
proactive looking ahead,
    Mr. Walker. That is true, Mr. Chairman, but I think if we 
look at the numbers closely, you will find that of the 
estimated deficit for fiscal year 2004, less than 25 percent 
relates to Iraq, Afghanistan and incremental costs on homeland 
security. While economic growth for the last several years has 
until recently not been what we all would hope for, I mean, it 
is getting better. It has gotten better. We have not been in a 
recession since November 2001. So we do have a serious issue 
that we are going to have to come to grips with.
    Mr. Platts. But if you add in the economic impact on those 
numbers on top of that 25 percent, you get a pretty significant 
part of that deficit is then related to those happening at the 
same time; not just having a war on terrorism and responding to 
a terrorist attack, but coming out of recession at the same 
time.
    I again just appreciate each of you and your testimony here 
today, your extensive written testimony you have provided us 
and each of your staff for the great work they are doing. I 
thank you personally and your offices for your work on behalf 
of the American public.
    We will keep the record open for 2 weeks for any additional 
information to be submitted and look forward to continuing to 
work with each of you and your offices as we go into the rest 
of the year.
    This hearing stands adjourned.
    [Whereupon, at 4:25 p.m., the subcommittee was adjourned, 
to reconvene at the call of the Chair.]
    [Additional information submitted for the hearing record 
follows:]

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