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





                  THE EVOLVING ROLE OF THE FEDERAL CFO

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

                                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

                               __________

                           SEPTEMBER 15, 2004

                               __________

                           Serial No. 108-267

                               __________

       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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                     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
TODD RUSSELL PLATTS, Pennsylvania    JOHN F. TIERNEY, Massachusetts
CHRIS CANNON, Utah                   WM. LACY CLAY, Missouri
ADAM H. PUTNAM, Florida              DIANE E. WATSON, California
EDWARD L. SCHROCK, Virginia          STEPHEN F. LYNCH, Massachusetts
JOHN J. DUNCAN, Jr., Tennessee       CHRIS VAN HOLLEN, Maryland
NATHAN DEAL, Georgia                 LINDA T. SANCHEZ, California
CANDICE S. MILLER, Michigan          C.A. ``DUTCH'' RUPPERSBERGER, 
TIM MURPHY, Pennsylvania                 Maryland
MICHAEL R. TURNER, Ohio              ELEANOR HOLMES NORTON, District of 
JOHN R. CARTER, Texas                    Columbia
MARSHA BLACKBURN, Tennessee          JIM COOPER, Tennessee
PATRICK J. TIBERI, Ohio              BETTY McCOLLUM, Minnesota
KATHERINE HARRIS, Florida                        ------
------ ------                        BERNARD SANDERS, Vermont 
                                         (Independent)

                    Melissa Wojciak, Staff Director
                   David Marin, Deputy Staff 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
KATHERINE HARRIS, Florida

                               Ex Officio

TOM DAVIS, Virginia                  HENRY A. WAXMAN, California
                     Mike Hettinger, Staff Director
                 Larry Brady, Professional Staff Member
                         Nathaniel Berry, Clerk
            adam Bordes, Minority Professional Staff Member


                            C O N T E N T S

                              ----------                              
                                                                   Page
Hearing held on September 15, 2004...............................     1
Statement of:
    Springer, Linda, Controller, Office of Management and Budget; 
      Edward Deseve, senior vice president and managing director, 
      ACS State and Local Solutions, Inc.; Morgan Kinghorn, 
      president, National Academy of Public Administration; and 
      Virginia McMurtry, Ph.D., Congressional Research Service...     4
Letters, statements, etc., submitted for the record by:
    Deseve, Edward, senior vice president and managing director, 
      ACS State and Local Solutions, Inc., prepared statement of.    23
    Kinghorn, Morgan, president, National Academy of Public 
      Administration, prepared statement of......................    14
    McMurtry, Virginia, Ph.D., Congressional Research Service, 
      prepared statement of......................................    30
    Springer, Linda, Controller, Office of Management and Budget, 
      prepared statement of......................................     6

 
                  THE EVOLVING ROLE OF THE FEDERAL CFO

                              ----------                              


                     WEDNESDAY, SEPTEMBER 15, 2004

                  House of Representatives,
Subcommittee on Government Efficiency and Financial 
                                        Management,
                            Committee on Government Reform,
                                                    Washington, DC.
    The subcommittee met, pursuant to notice, at 1 p.m., in 
room 2247, Rayburn House Office Building, Hon. Todd Russell 
Platts (chairman of the subcommittee) presiding.
    Present: Representatives Platts and Towns.
    Staff present: Mike Hettinger, staff director; Larry Brady 
and Tabetha Mueller, professional staff members; Amy Landeman, 
legislative assistant; Nathaniel Berry, clerk; Adam Bordes, 
minority professional staff member; and Jean Gosa, minority 
assistant clerk.
    Mr. Platts. A quorum being present, this hearing of the 
Subcommittee on Government Efficiency and Financial Management 
will come to order.
    As stewards of the taxpayers' money, we in Congress are 
charged with ensuring that each and every public dollar is 
spent wisely. Regardless of party affiliation or ideological 
bent, all of us that are entrusted with the handling of public 
resources must be held accountable for using them effectively 
and safeguarding them from fraud and misuse.
    The Founding Fathers recognized the importance of the role 
of stewardship. Section 9 of Article I of the U.S. Constitution 
requires that, ``a regular statement and account of the 
receipts and expenditures of all public money shall be 
published from time to time.''
    The role of financial managers has changed a great deal 
since 1789. While responsible stewardship is paramount, it no 
longer is the only goal.
    After 5 years of debate, Congress passed the Chief 
Financial Officers Act of 1990. The CFO Act became the 
cornerstone for a host of management reforms. For the first 
time, Federal agencies were required to submit to audit.
    Congress imparted the importance and prominence of sound 
financial management by establishing a management structure 
that places the chief financial officer in a position of power 
reporting directly to the agency head appointed by the 
President with the advice and consent of the Senate. The 
underlying goal was clear. CFOs would become more than 
stewards. They would become strategists who were part of an 
agency's top leadership team.
    Strategic financial management does not end with a clean 
opinion. In fact, clean audits are merely a starting point. 
Timely, accurate and useful financial data is needed to manage 
and make effective decisions. Without this information, the 
Federal Government cannot analyze costs and benefits or gather 
an accurate assessment of program performance.
    We have seen remarkable progress. In the past, the main 
focus was on paying the bills. Accounting was a back-office 
function, and reporting was not timely or useful to management. 
Accounting standards for the Federal Government did not exist. 
Automated systems, when they existed, were focused on recording 
transactions. Most were developed in-house and were not 
integrated.
    Now we are moving from data entry to data analysis. We are 
beginning to see the development of cost information and 
performance data. A complete set of financial statements is 
produced at every agency. We have a full set of accounting 
standards. More departments are developing single financial 
management systems, eliminating redundancies, creating 
efficiencies, reducing the possibility of error and 
facilitating analysis.
    As these changes continue, we will be closer to the 
original goal of the CFO Act: strategic financial management; 
and we will continue to realize more value for the taxpayer.
    This level of transformation could not have occurred 
without the commitment of top leadership. The standing of the 
CFO in the agency management structure was a key consideration 
during debate as the CFO Act was crafted. In order to continue 
the transformation as we must, the agency CFO must remain in a 
position of importance and influence.
    With the focus on improving agency management, Congress has 
created several positions--the chief information officer, the 
chief human capital officer and the chief acquisition officer--
whose responsibilities complement and sometimes duplicate those 
of agency CFOs.
    Today, we will discuss the changing dynamics of financial 
management in the Federal Government and how these statutory 
officers can work together most effectively while maintaining 
the unique fiduciary responsibilities of the CFO.
    I certainly would like to thank each of our witnesses for 
being here today. We appreciate your preparation for today's 
hearing. You bring a wealth of experience and expertise, and I 
certainly look forward to each of your testimonies.
    I now yield to our ranking member, the gentleman from New 
York, for the purposes of an opening statement.
    Mr. Towns. Thank you very much, Mr. Chairman, for holding 
this hearing today on the evolving roles and responsibilities 
of today's chief financial officer. As we continue in our 
pursuit of methods to make our government more effective in 
times of financial duress, I'm hopeful that today's witnesses 
can share with us practical and unique approaches on how to 
achieve such goals.
    As we have discussed during previous hearings, the 
financial management of agencies subject to the CFO Act of 1990 
has improved steadily over time. For fiscal year 2003, GAO was 
able to give 20 out of 23 agencies a clean audit opinion, which 
is the same as last year's outcome when factoring in FEMA's 
move to DHS. Furthermore, efforts to streamline effective 
financial management systems and controls among the legacy 
system of the newly created Department of Homeland Security 
continues through progress.
    However, there remains many issues that continue to 
challenge today's CFO, including the implementation of new 
technologies and agency financial management practices, human 
capital development deficiencies, budget constraints and the 
streamlining of administrative procedures.
    As demonstrated by agencies such as NASA and DOD, the 
implementation of effective and compliant financial management 
systems has improved. For fiscal year 2003, 17 agencies' 
financial management systems were not in compliance with the 
requirements of the Financial Management Improvement Act, the 
same number as reported in fiscal year 2002. One specific 
agency, NASA, has been deemed a high-risk agency by GAO for its 
failure to implement adequate financial management practices, 
even though past attempts at system integration has already 
cost taxpayers $180 million. While this is only one example, it 
serves as a reminder of the costs involved with flawed 
financial management policies.
    Let me conclude by saying I look forward to hearing from 
today's witnesses on these topics and hope they can share some 
insights on how to establish effective policies that empower 
the modern CFO.
    On that note, Mr. Chairman, I will yield back.
    Mr. Platts. As I mentioned, we have a great panel of 
witnesses here today who bring a wealth of knowledge and 
experience to our hearing.
    First, we have the Honorable Linda Springer. Ms. Springer 
is the Controller with the Office of Management and Budget, and 
we appreciate you being back with us again.
    Next, we have Mr. Morgan Kinghorn, President of the 
National Academy of Public Administration, and, as a graduate 
of Shippensburg University in Public Administration, I 
appreciate your work with the Academy.
    The Honorable Edward DeSeve, Senior Vice President and 
Managing Director of ACS State and Local Solutions, Inc., and 
former Deputy Director of Management within the Office of 
Management and Budget. I appreciate you being with us and your 
service as well with OMB in the past.
    And, finally, Dr. Virginia McMurtry, Congressional Research 
Service.
    We appreciate all four of you. We have had a chance to 
review your written testimony, and if you would like to either 
summarize that or complement your written testimony with an 
opening statement and try to stay roughly within that opening 
statement period of 5 minutes if possible.
    So, Ms. Springer, if you would like to begin.
    The practice of the full committee and the subcommittees is 
to have everyone rise and be sworn in.
    [Witnesses sworn.]
    Mr. Platts. The clerk will note that all witnesses have 
affirmed the oath, and we will begin with Ms. Springer.

STATEMENTS OF LINDA SPRINGER, CONTROLLER, OFFICE OF MANAGEMENT 
 AND BUDGET; EDWARD DESEVE, SENIOR VICE PRESIDENT AND MANAGING 
DIRECTOR, ACS STATE AND LOCAL SOLUTIONS, INC.; MORGAN KINGHORN, 
   PRESIDENT, NATIONAL ACADEMY OF PUBLIC ADMINISTRATION; AND 
    VIRGINIA MCMURTRY, PH.D., CONGRESSIONAL RESEARCH SERVICE

    Ms. Springer. Thank you, Mr. Chairman; and I want to thank 
you and Ranking Member Towns for your steadfast support for the 
CFO community and for financial management in the Federal 
Government. More than any other committee, both from the House 
or the Senate, you have been most attentive to our positions 
and our mission and it's greatly appreciated.
    Just over 2 years ago, I joined the Office of Management 
and Budget to become the Controller and head of the Office of 
Federal Financial Management. At the time, approximately a 
decade had passed since the enactment of the CFO Act of 1990, 
which created the position of CFO at the major departments and 
agencies in the Federal Government. As the statutory head of 
financial management of the Federal Government, I direct and 
oversee these CFOs in carrying out their responsibilities. This 
vantage point, combined with 25 years of private sector 
financial management experience, will underlie the perspective 
I'll share with you today about the role and effectiveness of 
our CFOs.
    Under the CFO Act, the CFO is designated as the executive 
tasked with financial management and related responsibilities 
at the agency. While his or her statutory activities are often 
downstream from policy setting that leads to program enactment, 
the CFO is an important member of an agency's leadership team. 
From budgeting and funding at the front end, through course 
management during program execution, to the final accounting 
and reporting of disposition of expenditures, the CFO is 
involved throughout the entire lifecycle of nearly every 
agency's initiative. This requires CFOs to maintain a knowledge 
of the agency's operations that is distinguished by its high 
level of both breadth and depth.
    This broad knowledge has made CFOs attractive candidates 
for expanded duties at their agencies. A recent study conducted 
by the CFO Council examined the variation in roles and duties 
of CFOs at the 24 major agencies. Using nine functional areas, 
the study results support the assertion that CFOs have varied 
duties. Consistent with the CFO Act, 22 of 24 CFOs are 
responsible for financial systems, operations and analysis, 
budget execution and performance management functions. There is 
one CFO that doesn't have budget execution and one CFO that 
doesn't have performance management. Otherwise, all of the CFO 
Act responsibilities are being held and are vested in the CFOs 
of the 24 agencies.
    What is noteworthy is that the prevalence of the CFOs 
having additional duties is very great. We have six that have 
personnel responsibilities, 10 procurement and 11 having grants 
management functions. Additionally, all but four have budget 
formulation, which is not actually covered by the CFO Act.
    Clearly, the CFO is increasingly recognized as being 
positioned to provide agency-wide leadership that other 
officials with more limited portfolios cannot offer.
    The CFO Council itself was established by the act to 
provide a venue for CFOs to meet periodically and advise and 
coordinate on their financial management activities. The CFO 
Council has accomplished its goals through a committee 
structure. These committees were recently realigned to better 
respond to emerging issues and support the needs of the Federal 
financial community.
    There exists a good balance on the committees between CFOs 
and Deputy CFOs. Deputy CFOs are typically career members of 
the government; and CFOs, for the most part, not all, are 
political appointees. But that provides continuity of 
institutional knowledge and continuous progress of initiatives 
regardless of changes in political leadership. The Office of 
Federal Financial Management partners with the CFOs in all of 
their committee work.
    Currently, we have six committees: the Best Practices 
Committee, Financial Management Policies and Practices, 
Financial Reporting Acceleration, Financial Systems and E-
Government, Improper Payments, and the Performance Measurement 
Committee. For additional information on those committees, I 
would refer you to the 2004 Federal Financial Management 
Report. I have extra copies. It was distributed to each member 
of the subcommittee. It is also available on the White House 
Web site.
    Today's Federal Government CFO is not the CFO of the past, 
and that's important to note. Successful CFOs in government as 
well as in the private sector possess capabilities beyond just 
financial acumen and subject expertise. While Federal 
Government CFOs have narrower portfolios than their private 
sector counterparts, they must still have the full range of 
leadership skills that are found in CFOs of well-run private 
sector financial management organizations. To be effective in 
the expanded areas for which they're responsible, these 
executives and their officers have to have a comprehensive 
understanding of both operational and strategic missions at 
their agencies. All of these characteristics support the 
objective that agencies and the American citizens deserve 
decisions that are informed by accurate and timely financial 
information and that programs are executed in an environment of 
robust control and cost consciousness.
    Again, I thank you for allowing me to testify at this 
hearing and I will be happy to entertain your questions.
    Mr. Platts. Thank you, Ms. Springer.
    [The prepared statement of Ms. Springer follows:]

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    Mr. Platts. Mr. Kinghorn.
    Mr. Kinghorn. Thank you, Mr. Chairman and Mr. Towns.
    As President of the National Academy of Public 
Administration, an independent, nonpartisan organization 
chartered by Congress to give trusted advice to public leaders, 
I'm pleased to appear before you today and give you my 
perspectives as to the impact of the CFO Act. The views 
presented today are my own and are not necessarily those of the 
Academy as an institution.
    Shortly before the enactment of the CFO Act, I was 
recruited to become the first Controller and CFO of the 
Internal Revenue Service. IRS, like other Federal agencies, was 
not required to prepare financial statements. Yet the CFO Act 
named the IRS as one of the first pilots to undergo the 
financial statement preparation and auditing process. It's not 
often remembered that the first agencies that went through this 
were pilots because it wasn't clear this could be done in the 
Federal Government.
    The IRS, like the other organizations, was quite unprepared 
for this when I arrived, demonstrated by the fact there were 
fewer than five accountants in the newly created CFO office, 
six nonintegrated regionally controlled accounting systems for 
the appropriated accounts as well as other significant 
shortcomings.
    Fast forward 14 years to the present day. And, as we have 
heard, there have been many significant both strategic and 
operational successes, but I would like to share you my 
perspective having been a CFO and been at OMB prior to the 
creation of the controller organization.
    First, the quality of CFOs at the departmental level is 
high, very high in my mind, and CFOs have the ear of the 
political leadership. At the most fundamental level, quality 
and effectiveness of these processes do begin with people. In 
1990, there was considerable debate whether the CFOs at the 
departmental level should be political and whether deputies 
should be careerists. That approach proved to be the outcome 
and I believe it has served us exceedingly well. I believe the 
qualification listing contained in the CFO Act, coupled with 
the significant responsibilities listed in that act as well as 
others, have really created an environment in which only 
individuals with strong financial management qualifications are 
now likely to ever become a departmental CFO.
    The integrity and usefulness of financial data has greatly 
improved. That most departments and many bureaus have received 
unqualified opinions on their financial audits does mean there 
is improved integrity in those data. Such success lays a strong 
foundation for enabling increased use of financial data for 
complex decisionmaking.
    Third, the CFO has moved from the back room to the board 
room. CFOs now have a place at the management table. There 
clearly is value in having a statutory basis for such broad 
spans of authority. The act's requirement that the departmental 
CFO report directly to the agency head has also helped to 
enable the CFO to move from the back room to the government's 
version of the board room. The impact has been healthy and 
often has occurred at the operating bureau level.
    And, fourth, CFOs are positioned to be key players in 
departmental decisionmaking, probably the fundamental important 
issue. The authorities contained in the CFO Act and related 
acts have given increasingly powerful authorities to the CFO to 
integrate financial and programmatic information to improve 
agency operations. Not all CFOs have the internal 
organizational authorities to accomplish all this, but I 
believe they are placed well to do so.
    What are the remaining issues facing us in the next decade?
    First, we need to recognize that management functions must 
be reintegrated. There has been an increasing statutory 
balkanization of the Federal Government's management functions. 
Although the Chief Information Officer and the Chief Human 
Capital Officers have more recent statutory authorities and 
framework, neither is as powerful or as prescriptive as the CFO 
Act. In my mind, they should not be. I believe financial 
management is the most central and potentially integrating 
function in management. But all management operations need to 
be more unified. Even within the CFO world itself, there is a 
wide array of CFO responsibilities even at the departmental 
level, and I think that inconsistency needs to be examined. The 
management issues today are so much more complex, systems so 
much broader in their impact that there needs to be an 
integrating management focus short of the Secretary or agency 
head. In my mind, the CFO or perhaps an Under Secretary of 
Management/CFO might be the solution.
    Second, we need to leverage our financial management 
investments to focus on what is really more important in my 
mind and that is internal performance. We need to focus as much 
in improving decisionmaking at the program operational level as 
we have for accounting. We have invested hundreds of millions 
of dollars in improving financial operations, and it has now 
moved beyond improving those accounting operations, and ensure 
that financial and administrative systems are utilized to help 
investment decisionmaking in our core programs. I believe one 
tool to accomplish this objective is managerial cost 
accounting, which I believe is the key mechanism that can link 
dollars spent and outputs and outcomes achieved. The 
governmentwide standards need to be fully implemented.
    Third, CFOs need to take advantage of being at the table. 
We must ensure that CFOs are not only there but they know what 
to do once they are there. More CFOs need to see themselves and 
act as business partners with program operations. Many bureau 
CFOs come out of a particular discipline, usually accounting or 
budgeting like I did. Often their focus has been relatively 
narrow. And the CFOs need to see themselves and act as active 
players in improving broad organizational improvement, rather 
than a simple narrow discipline.
    Finally, continuing attention by this committee and the 
administration is crucial. Departments and agencies still must 
undertake Herculean efforts to achieve unqualified opinions. 
Many have found it difficult to keep those clean opinions. 
Improvements in process systems and people must continue with 
the kind of oversight you have been given. Much of the focus of 
the CFO Act has been at the departmental level and on 
accounting process. I believe the next decade needs to be 
focused on the needs of the Program Manager at the operating 
bureaus and the operating level and the bureau CFOs, where 
increasing attention must be given to the utilization of data 
in making decisions, not just simply reporting accounting 
transactions.
    Thank you for allowing me to share with you my observations 
on the implementation of the CFO Act.
    Mr. Platts. Thank you, Mr. Kinghorn.
    [The prepared statement of Mr. Kinghorn follows:]

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    Mr. Platts. Mr. DeSeve.
    Mr. DeSeve. Thank you very much, Mr. Chairman.
    Before I start, I came in 1993 to the Federal Government as 
the Chief Financial Officer of the Department of Housing and 
Urban Development and was honored to have Linda's job as 
Controller at OMB and then as Deputy Director. During that 
time, my official residence was in Monroe County, PA. I was 
born and spent 23 years in Albany, NY.
    Let me not read my testimony, because you have copies of 
it, but make two or three points.
    First, the CFO function has evolved over time, and I think 
the stewardship of this committee can begin continuing its next 
evolution. When the CFO function was put in place, it focused 
very narrowly on audited financial statements, and then it 
focused on financial systems, because you couldn't have 
financial statements without good information and couldn't have 
good information without good systems. Those went hand in hand.
    At the same time, additional laws began to come into play, 
the Debt Collection Improvement Act, the Federal Financial 
Managers Information Act, those in the context of the CFO Act 
as well as Clinger-Cohen and FASA and FARA. We began having a 
burgeoning set of--I hate to use this word because it is a 
Federal word--stovepipe legislation, which were integrated 
often at the level of the CFO.
    What was really important and exciting to me as I worked as 
a CFO and with CFOs is the interaction about real things.
    Today, Secretary Rod Paige talked about the great decline 
in delinquency rates and default rates of the student loan 
program. He said the default rate was down around 5 percent. 
That may still sound too high, but we have all seen rates in 
the teens in that program. That was not exclusively but largely 
as a result of attention paid by OMB, which continues to be 
paid by OMB--Linda, I try to be seamless here--as between 
generations of OMB.
    I think of people like Kathy Stack, for example, in a 
program site at OMB working assiduously with the financial 
people, the CFOs at the agency levels and the subagency level 
in the Department of Education to create an important program, 
the Direct Lending Program, and bring financial integrity to 
it.
    That is the evolving role of the CFO. It is beyond 
financial statements, and it is even beginning to be beyond, to 
some extent, just implementing GPRA to getting results. What 
are the results? What do they matter for the American people 
and how can we understand the proper communication of those 
results within a financial context? Are we doing the right 
things, doing them well and efficiently?
    So I think it is a good time for this committee to step 
back and look broadly at things like internal control. I 
understand the committee is moving in that direction.
    One of the questions that people have asked me, including 
our former Deputy Counsel to the White House is, well, isn't 
Sarbanes-Oxley, if imposed on the Federal Government, going to 
create serious problems? The answer is no. It is quite the 
reverse.
    If you look at the structure of reporting and analysis that 
goes on within the Federal Government, it is beyond the 
standards, I believe, imposed by Sarbanes-Oxley. The number of 
times when I had to talk to the Cabinet Secretary about his 
need to sign off on a particular internal control report were 
great when I was the CFO. This is a time when HUD was plagued 
by scandals, and those scandals related to improper management 
of assets. So it wasn't about audited financial statements but 
about apartment buildings in Chicago that were vacant because 
there were improperly administered loans by the Department of 
Housing and Urban Development that led to the rundown nature of 
those properties.
    So the CFO Act needs to be more real. It needs to have more 
of an emphasis on reality.
    In terms of its organizational structure--I'm sorry--an 
evolving emphasis on reality.
    In terms of its organizational structure, I strongly 
support the chief operating officer model where there is a 
chief operating officer at the deputy secretary level. One size 
doesn't fit all.
    I'm on the Business Advisory Board of the National Science 
Foundation. The National Science Foundation, while an important 
grants-making agency, doesn't have a significant base of 
financial or real property assets. The O&M responsibility, 
although significant, is not a big factor there. It's more 
being able to set GPRA kind of performance measurements for the 
grants and make sure that the grantees, both in terms of 
financial integrity and performance, meet those standards.
    One set of rules for NSF and another set of rules for the 
Department of Education in terms of the role and the 
organizational structure is OK with me. The statute itself was 
ambiguous. It was ambiguous on budget development and on 
reporting relationships. We spent a lot of time trying to 
organize the relationships in various agencies and departments. 
So I think the committee allowing some flexibility within a 
single point of accountability at the secretary's office, if 
there is an Under Secretary of Management tradition as there is 
in the State Department, so be it, I can live with that. We 
want to see the functions of the CFO broad and evolving to meet 
real program needs and real things the American people care 
about.
    Thank you very much.
    Mr. Platts. Thank you, Mr. DeSeve.
    [The prepared statement of Mr. DeSeve follows:]

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    Mr. Platts. Dr. McMurtry.
    Ms. McMurtry. Mr. Chairman, thank you for the invitation to 
testify at this hearing.
    A rewarding aspect of working at CRS over the years is to 
follow a major reform measure such as the Chief Financial 
Officers Act through the legislative process to assess initial 
implementation and then to continue tracking subsequent 
developments. My testimony reflects this institutional memory 
perspective, rather than the expertise as a financial 
management practitioner as reflected among others on the panel. 
The written statement was intended to provide a historical 
background on the CFO role and to highlight important 
developments affecting the evolution of the CFO position and 
agency management. I will note some of the key points from my 
statement.
    The 23 chief financial officers established by the 1990 law 
constituted an important group of new actors in the leadership 
structure for Federal financial management. To promote their 
accountability, the CFOs serving in the Cabinet departments and 
two other major agencies were to be appointed by the President 
and confirmed by the Senate. All the CFOs were to report 
directly to the secretary or agency head.
    The CFOs are responsible for all financial management 
operations, activities and personnel in their agency. Among 
other things, the CFOs are to produce financial information, 
establish integrated financial management systems and monitor 
budget execution.
    While all the CFOs share the same broad statutory 
responsibilities, the roles of the CFOs in the organizational 
structure of the respective agencies differ considerably. The 
broad duties for the agency CFOs conferred by the 1990 law have 
been augmented by subsequent amendments and related 
legislation, as already has been noted.
    The CFO Act provided for an interagency Chief Financial 
Officers Council to advise and coordinate activities on a wide 
variety of financial management issues. In the mid-1990's, the 
Council was revitalized with adoption of a charter that 
expanded membership to include the 23 career deputy CFOs and 
also approved the creation of four new Council officer 
positions, provided for the establishment of the standing 
committees for the first time and stipulated that, henceforth, 
meeting agendas were to be set by the Council officers rather 
by OMB alone.
    From 1995 to 2000, the annual financial management reports 
as required by the 1990 law were issued jointly by OMB and the 
CFO Council. As recounted in the report during this period, 
priorities for Federal financial management were being set with 
considerable CFO Council involvement. From 1995 to 1999, the 
reports included a table reflecting CFO organizations and the 
agencies. In 1999, the agencies reported that all agency CFOs 
exercise managerial responsibility over finance operations and 
analysis and, at that point, 23 were responsible for financial 
systems and 20 had responsibility for budget formulation and 
execution.
    Previously, in 1997 and some other years as well, the data 
presented on CFO organizations was broken down in greater 
detail to indicate other management functions performed by the 
CFOs. This is included in Table 1 on page 5 of my statement. 
And here we saw as early as the mid-1990's some of the CFOs 
were responsible for implementation of GPRA in 14 agencies. 
They performed procurement functions in 10, and at that point 8 
CFOs had grants management responsibility. Less common were 
personnel responsibilities and the information resource 
management role outside the financial systems.
    Data from recent studies have already been cited in 
previous testimony, and things have changed somewhat in terms 
of the CFOs performing more of the major roles. From 2002 to 
2004, the CFO-mandated financial management reports 
increasingly have reflected the priorities of the Bush 
administration's management agenda. One of five governmentwide 
initiatives is improved financial performance. The CFOs play a 
major role as their agencies strive to meet the criteria to get 
to green on the scorecard.
    The CFOs and the Council are involved with the budget and 
performance integration initiative. With OMB focusing on and 
providing leadership for the initiatives and the agenda, the 
roles of the CFOs and the CFO Council continue to develop. The 
CFO Act created the agency CFOs as a distinct group of Federal 
financial management officials with their own accountability, 
not just a group of supportive officials following directives 
from OMB. The evolution of the relationship between the agency 
CFOs and the CFO Council and the leadership of OMB will likely 
continue to be of interest for purposes of congressional 
oversight.
    If I may take a couple of more minutes, I would like to 
offer some brief observations on the CFO in the Department of 
Homeland Security. The Homeland Security Act of 2002 provided 
for a CFO position in the new Department. But, unlike the 
appointment procedure for CFOs in the other Cabinet-level 
departments, the CFO in Homeland is appointed by the President 
but is not subject to Senate confirmation.
    The law also made no reference to the CFO Act itself or to 
Chapter 9 of Title 31 where the CFO duties are codified. 
Likewise, there was no mention of membership on the CFO 
Council. The CFO in Homeland presently reports to the Under 
Secretary for Management.
    One version of the Department of Homeland Security 
Financial Accountability Act, S. 1567, which would bring the 
CFO for DHS directly under the CFO Act passed the Senate under 
unanimous consent last November. A related bill, H.R. 4259, was 
approved by the House under suspension of the rules on July 20, 
2004.
    Supporters of the DHS Financial Accountability Act contend 
that the CFO Act and related laws should apply consistently 
across the executive branch and that the unequal status 
currently accorded the CFO in DHS degenerates the CFO position 
and the importance of financial management in DHS. The CFO 
position with its fiduciary responsibilities carries with it 
special needs for accountability, which Senate confirmation 
reinforces. In short, those in favor of bringing the CFO in DHS 
directly under the CFO Act argue that confirmation is 
important, that reporting directly to the secretary is 
significant and that statutory symmetry, including membership 
in the CFO Council for all Cabinet-level CFOs, is desirable.
    A Senate amendment was filed last week to add the text of 
H.R. 4259 to the Homeland Security Appropriations Act, but the 
amendment was not offered on the floor. It is my understanding 
that the House-passed version of the DHS Financial 
Accountability Act has now been cleared in the Senate, and H.R. 
4259 will likely be brought up under unanimous consent on the 
Senate floor in the near future.
    Thank you.
    Mr. Platts. Thank you, Dr. McMurtry.
    We were hoping to have gotten word by the time you finished 
your testimony to say it has been, but H.R. 4259 is apparently 
scheduled or to be scheduled here in the very near future and 
to be sent to the President.
    [The prepared statement of Ms. McMurtry follows:]

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    Mr. Platts. Again, my thanks to each of you for your 
written testimonies and your oral testimonies here today. I 
would like to start off on the questions asking you to expand.
    Each of you touched on the role of the CFO as defined in 
the CFO Act. Are the statutory parameters specific enough or 
too broad? And what each CFO is required to be doing, as 
opposed to possibly being involved with, should we be fine 
tuning it to deal with the fairly diverse approach of CFOs 
across the Federal Government?
    Ms. Springer. I will start with one thing that I think is 
just happening without the legislation, but it would be nice if 
there were a legal basis for it, and that is the budget 
formulation. I think that a CFO that doesn't have explicit 
budget formulation responsibilities is hard-pressed to be 
considered a CFO in the fullest sense, whether it is in the 
private sector or the Federal Government. And I was surprised 
when I went back to read the legislation again to find that it 
was budget execution that was mentioned but not formulation. I 
would recommend that at the next opportunity that be something 
that be remedied.
    Mr. Platts. That is certainly one that jumps out to me when 
we talk about strategic planning. It seems you need to be part 
of that budget formulation. And, as Dr. McMurtry's table shows 
us, the fact that some significant agencies--Department of 
Education, HUD, Agriculture--do not have--they have budget 
execution only--their CFOs--makes the point that there is a 
significant amount of the Federal Treasury within those 
departments where the CFOs don't have that role.
    Mr. Kinghorn. If I may, I would certainly concur on budget 
formulation. If you only have execution, you are a clean-up 
hitter. There is nothing you can fix in the execution phase of 
the budget. You can track, count and report, but unless you 
have an integral role of developing that budget--because, as 
you know, decisions about budgets are made 3 years before the 
budget starts.
    In general, I think the act is pretty broad. One of the 
issues that you might want to consider that might resolve some 
of trying to fix the 18 or 20 different functions is the 
concept of what financial management means. When it was enacted 
and that term was used--and even to this day, having come out 
of the budget world, financial management to many people sort 
of means accounting. I view it much broader than that. I would 
view the act as very broad. I would even view financial 
management to include formulation. If you don't want to get 
into a game of trying to fix every function, I think the act 
itself is very broad.
    I think I would agree with Ed that sometimes you have to 
fit a particular organization. Back when I was Deputy Assistant 
Administrator for Management at EPA in all the 1980's, the 
functions we had were everything in the financial world. We had 
grants management, we had financial management, we had human 
resources, and we had IT and everything. And there is basically 
at that agency level reporting to the administrator a single 
office that could bring together all those tough issues. So we 
really had no question of who was or was not the CFO. That is 
now split into three different political food chains.
    And, again, in this day and age when you bring up a 
financial system, grants are involved, IT is involved, every 
function that you can think of, and it is no longer possible to 
have this increasingly diverse balkanization of management 
functions unless you have a single individual office that can 
be held accountable for the success or failure of those 
functions.
    Mr. Platts. So the example in DHS, the Under Secretary of 
Management where those various entities--positions are being 
funneled through, that approach is an example that's out there 
that you would embrace?
    Mr. Kinghorn. The statutory recommendations that are being 
proposed, I think I would. I would probably even go further and 
indicate that office should also be the Under Secretary of 
Management/CFO. The CFO needs to be slightly at an elevated 
level than the other management functions.
    Mr. Platts. And within DHS, it is Under Secretary versus at 
a Deputy Secretary level?
    Mr. Kinghorn. I would prefer a deputy secretary level, but 
that's just my bias. And there is a lot going on at Homeland 
Security. It is a brand new structure, and sometimes it is 
difficult to put all these functions in one place, but I think 
I would support it for the long run.
    Ms. McMurtry. One other thing I might note here looking 
back at the historical perspective, which is what I have to 
offer, when the CFO Act was enacted, there were provisions for 
each agency--more than provisions, there was a requirement that 
each agency prepare an organization plan to be submitted for 
OMB's approval to show how the various functions required by 
the CFO Act were going to be performed in the agency. And I 
think that because of the various developments that have 
occurred since the initial act, while we don't want to get 
bogged down in paperwork and organizational charts, it might be 
useful to think about agencies focusing on just whether the CFO 
has the structure within the agency or department to perform 
all the broad responsibilities that are given to them and 
expected of them.
    And so while I think that we don't need arrangements to be 
identical in each agency, where you have a situation now that 
some CFOs are performing only three or four functions and 
others--it's not that they are performing the function wholly, 
it's not the CFO would perform the procurement function as a 
sole responsibility, but rather that they be involved and have 
some managerial responsibilities in the area so they can keep 
the breadth that they need and have some authority to go with 
their responsibilities.
    Mr. DeSeve. If I could make two comments.
    One, leaving out budget development was not accidental, 
wasn't just an oversight of the committee. The Appropriations 
Committee has weighed in heavily in many agencies, and the fact 
that the Department of Agriculture still does not have a CFO 
with responsibility for budget development is not an accident. 
You are bucking a trend, and you may want to talk to your 
friends in the Appropriations Committee both about this as well 
as about engaging in GPRA and being part of GPRA.
    I come from a tradition of strong chief financial officers. 
When I was the Chief Financial Officer of the city of 
Philadelphia, there were three individuals reporting to the 
mayor. One was the managing director, who took care of the 
operations of the department and the housekeeping functions, 
whether that was personnel or whatever. Second, the director of 
finance, which was my job. I did taxation. I did accounting. I 
did budgeting. I did information technology, because in those 
days it was bound up with financial management. I did 
everything but post audit. I didn't audit myself.
    And so I believe, for example, in a place liked DHS, it is 
perfectly appropriate to have an Under Secretary for Financial 
Management, that going through a single entity, have the CFO, 
the chief information officer, the chief human capital officer, 
the chief procurement officer all reporting to a single 
individual significantly dilutes financial management and what 
we need to do is elevate financial management and make it a 
prime companion to program management. The two need to be 
interlocked and working together.
    What is the revenue collection responsibility of DHS? It 
has the second largest revenue collection function in the 
Federal Government in the Customs Service. That's a lot of 
money. I forget the current number, but it is tens of billions 
of dollars that is collected through Customs. What are the 
internal controls there? Isn't that important? And I could go 
on and on.
    I firmly believe the CFO at the same level as the chief 
management officer is appropriate. Now would I modify that 
view? GAO, for example, has the chief mission support officer 
as well as a chief operating officer and the CFO is embedded at 
GAO within mission support. Why? Because they don't have a lot 
of financial management functions. I am not in any way 
denigrating the Government Accountability Office, but it's not 
inappropriate that they have that structure. But if there is 
significant financial responsibility, there ought to be a chief 
financial officer reporting directly to the Office of the 
Secretary. And the initial intent of the CFO Act of having, 
one, the Senate confirmation and the direct access or DHS bill 
of trying to kind of take that hybrid approach of maintaining 
that direct access--Senate confirmation--but also with dual 
reporting to the Under Secretary.
    Mr. Platts. I have additional questions, but I would like 
to yield to the ranking member, Mr. Towns.
    Mr. Towns. Thank you very much, Mr. Chairman.
    Mrs. Springer, let me begin with you, in your testimony you 
mention how CFOs are now also assuming additional 
responsibilities, and there's two schools of thought. Some 
people say that's good, and some say it's bad. What are your 
views on that?
    Ms. Springer. What I've seen is that CFOs have too many 
responsibilities beyond the CFO Act, that it dilutes their 
ability to be as effective as they should on the basic CFO 
functions as they are listed in the act.
    So, for example, without naming an agency, one individual 
that had the full breadth of all the new responsibilities--the 
IT officer, not just for financial systems but for all the IT 
resources, was--I believe had personnel responsibilities, had a 
variety of these additional ones that have since been listed in 
separate acts and separate pieces of legislation. But when they 
had all of them, they were not as effective and they were 
slower to achieve some of the management successes that we have 
seen in other agencies.
    I believe that the CFO responsibility with the act and with 
the addition of the budget formulation, which I think is more 
akin to a CFO's job than personnel, that's a full-time job for 
our CFOs. So I think it is better to have a dedicated personnel 
manager. I think it's better to have a designated CAO for 
acquisition and a designated CIO that have certain skill sets 
that are germane to those responsibilities that a CFO may not 
have.
    Now having said that, I believe that the CFO, as has been 
stated by someone earlier, has a higher level of prominence in 
the organization, not because the other responsibilities aren't 
important but because everything that's done has a financial 
aspect to it, in my mind, in the agencies. I don't believe 
every aspect, everything, has the same level of involvement for 
those other positions, but I would recommend that the CFOs 
stick to things that are strictly financial and financial 
management.
    Mr. Towns. Not grants management.
    Ms. Springer. Grants is a little bit more borderline, but 
when you get to personnel and CIO responsibilities, I think it 
should be by someone else who brings a more dedicated skill 
set.
    Mr. Towns. Anyone else want to add on that?
    Ms. McMurtry. I want to say one thing on the personnel 
issue. It is my recollection that in report language, if not in 
the actual statute, the CFO is expected to perform some 
personnel duties with regard to financial management personnel. 
They advise on the appointment of the deputy CFO, and my 
recollection is that they also were expected to be involved in 
recruitment of agency financial personnel below them and also 
to be involved in training, again, of financial personnel. It's 
a limited segment, but it's the special needs that financial 
management has. I think there was some thought as the 
legislation was being drafted to give the CFOs a piece of that 
responsibility.
    Ms. Springer. If I could followup, if I may. I agree with 
that, and that would make sense in the structure I envision. 
Where I would draw the distinction is in the chief human 
capital officer that is pervasive through the whole 
organization.
    Mr. Towns. Mr. Kinghorn, our committee has spent several 
hearings this year focused on the financial management of 
Federal agencies, including the number of clean audits received 
at the agency level. Can you identify for us ways in which the 
CFO community can improve upon current efforts of the 
government to achieve a governmentwide clean audit?
    Mr. Kinghorn. When I went to IRS, again--and it has been 8 
or 9 years or maybe even more now--it took a long time for the 
IRS to get a clean opinion. I was there 5 years. I was the 
first and still the longest-lasting CFO of Internal Revenue, 
and I had to put a new financial system in, and we did that 
successfully in the first 18 months. That meant 2 or 3 years of 
not achieving a clean opinion because the system wasn't yet 
working and that would help get me there. And then we realized 
we had a wonderful financial system in place but the business 
processes were a mess.
    That is a relatively contained organization; and most of 
our problems at IRS were, frankly, not in terms of accounting 
on the revenue side but really the appropriation side, the 
appropriated accounts, which were really a basket case, 
frankly. Three years after I left, finally got a clean opinion. 
Two years, they sort of got one, but then lost it. But it took 
8 years for the IRS, which is really mostly appropriated 
accounting--you look over to the defense, which is comprised of 
over 200 financial systems. I had six to get rid of. They have 
200. That is incredibly difficult. And, frankly, the attention 
of this administration and the oversight in the last 4 years to 
specific issues of financial management has really helped to 
enable people to get things done.
    On the organizational issues, when I went to the IRS, I was 
an outsider. I was the first executive into IRS from the 
outside; and if I had not the placement in that organization of 
reporting--four people reporting to the Commissioner, no one 
would have listened to me. And I had concerns then, people 
thinking I had too much authority. And it really goes to DHS. 
In most organizations, particularly I believe in compliance 
organizations, which IRS is, and most programs, there is a 
desire to get the program done. And I think in DHS, having 
consulted with that organization in its previous components, it 
is a very difficult place to improve financial management 
because people believe in the program. So unless you really 
place within DHS in a position of true authority, I think 
reporting to the Secretary, the CFO function, I think it is 
going to be very difficult to pull together multitudes of 
systems that didn't work well before they were consolidated and 
try to get it done.
    I think the issue around placement is very important. That 
won't make it happen, because you need the right people and the 
right functions. I think without placement, you are going to 
have a very difficult time in a diverse environment like DHS.
    Mr. Towns. I yield back.
    Mr. Platts. Thank you, Mr. Towns.
    Continuing on the discussion about these different roles 
and the importance of CFO versus some of the other more recent 
statutory positions, has OMB given any guidance to the 
departments and agencies regarding either the alignment of the 
CFO and these other positions and factors to consider in what--
how broad the CFOs responsibility should or shouldn't be?
    Ms. Springer. OMB hasn't issued a particular circular or 
work product that defines those roles. We believe that the 
legislation for each of those has addressed and has identified 
different positions. The CIO, the chief human capital officer, 
CAO and CFO, each of those has legislation to varying degrees 
that defines the roles and responsibilities of each of those 
positions and we think establishes those as unique positions.
    To the extent that a secretary decides to have the same 
individual occupying more than one of those positions and more 
than one title, it would be similar to the private sector 
saying your chief human resources officer is also going to be 
your chief financial officer, going to wear two hats. But the 
roles themselves are what they are. We don't believe there is a 
need for OMB to come up with an additional description of the 
CFO's role, for example, because we look to the CFO Act for 
that, as we do for the chief human capital officer and the 
others. Each secretary is left to make the decision as to how 
many hats to give a given individual among those four different 
positions.
    Mr. Platts. Within your CFO Council committee structure, 
your Best Practices Committee, is there any discussion of ``in 
department X, I'm wearing two different hats,'' ``here's how it 
is working and not working.'' Is that type of dialog occurring?
    Ms. Springer. Formally and informally there is. The CFOs 
talk among themselves about what makes them successful and what 
challenges they have and where they are placed in the 
organizations.
    We also did a survey, as you know, roughly a year ago. The 
Council asked the Department of Labor, whose CFO volunteered to 
do the survey of the responsibilities and to update previous 
surveys. So that grew out of the Council's interest in 
surveying the landscape. So, from time to time, we will 
formally look into that, and there are varying opinions. There 
are some CFOs that would say they like the breadth of wearing 
several hats, and there are others that are happy to have a 
more focused approach that more aligns with their skill sets.
    Mr. Platts. In response to the Department of Labor study, I 
would be interested in the general reaction of the CFO Council 
members to the disparity when that came out. Were they 
surprised that Education had four of the core function areas, 
versus Commerce, where they had eight. Did they want to look 
into it further to find out why two different departments have 
a significant difference?
    Ms. Springer. The strongest reaction that came out of the 
panel that we had to discuss this was the budget formulation 
issue and the absence of that, and that is why I keep going 
back to that. No one expressed a strong desire, for example, to 
have personnel that didn't already have it.
    But they felt, as CFOs--and I agree with them 
wholeheartedly--that if they didn't have budget formulation--
they didn't have that seat at the table at the front end--as 
was mentioned earlier, that they were more coming in at the 
back end, and that more of the execution, which they felt a CFO 
really should have, was at the front. And so they really did 
feel an issue with that, whatever the history was.
    Mr. Platts. And that leads to, for all four of you, that 
issue of budget formulation and your opinion in a broad sense, 
or if there is any specific example you want to give. You're 
familiar with different agencies, like IRS or HUD--in the level 
of authority or actual impact that CFOs are having from a 
strategic planning standpoint.
    Several large ones do not have that budget formulation, it 
leads me to believe in those departments, those CFOs have less 
input into strategic planning of their departments.
    Even where they have the budget formulation responsibility, 
I would be interested in your thoughts as to why they have the 
responsibility and involvement. Are they truly being engaged 
and actively included in the strategic planning process?
    Ms. Springer. I think that's a fair question to ask, Mr. 
Chairman, and I think it's safe to say that they would feel 
that they were more involved, to whatever extent they were 
involved now. But they would feel that they were more involved 
if they had the budget formulation piece, and I think they 
would welcome that.
    Mr. Kinghorn. Let me give you an example of where it really 
is crucial, and it goes back to my experience. I arrived at IRS 
about 3 months before the end of the fiscal year; and the one 
question I did not ask the Commissioner--foolish me--was, How 
was your budget for next year?
    They had a $500 million shortfall on labor costs. It was 
the third year they had done that. And the main reason that 
resulted was that there were lots of decisions being made in 
the formulation stage on personnel policy with the unions that 
greatly affected the ability to pay.
    So what I did, because I had those functions finally 
consolidated was, we did a major study in the CFO office that 
looked at what were the drivers of labor cost. We developed a 
model. And that became very sensitive because--that's why it is 
a sensitive issue because we had to go into the programs and 
force them to become more careful in how they develop their 
budgets. And 2 years later, they did not have a labor problem 
because we were able to look at it in formulation.
    What was happening in execution was, they were taking money 
away from the IT program to pay for people's labor costs, the 
only place to go.
    So I think that's the clearest example to me of why you'd 
want to do it. And I think also the reason it's so sensitive is 
because it gets the CFO really into the pockets of the program 
operations, which is where I think it should be.
    Mr. DeSeve. I have to go back in history for just a second, 
Mr. Chairman. What we find, that I hadn't really looked at--the 
labor at Department of State--carefully, but it's consistent 
with what I know, historically there were assistant secretaries 
for management and budget and that had administrative functions 
as well. Often departments grafted on the CFO function or 
grafted on the CIO function, onto those existing organizations, 
rather than creating an independent CFO organization.
    Take HUD for a moment. HUD actually split out the CFO 
function. They left their assistant secretary for management 
and budget in place. Budget formulation was at the ASMB level. 
Finance and accounting went with the CFO. Over time, HUD 
evolved and took away from the individual who had the budget 
formulation responsibility, that responsibility, and gave it to 
the CFO.
    What I see here in the various departments is the remnants 
of history. I won't go department by department, but I have 
some knowledge of some of the major ones. Agriculture is still 
a problem. Go talk to the Appropriations Committee about that 
one. I can't help you on that one.
    Justice has a tradition of a strong management operation in 
certain areas. In State, for example, personnel isn't in that, 
but the other functions are because there was a separate 
director general for personnel within State. So I think you 
almost have to go agency by agency and have this committee ask, 
does this make sense? Is there a sensible accommodation of the 
finance function or not of budget formulation?
    The other function I would add to this is asset management. 
The more I work with Federal agencies, the more I realize that 
in addition to the functions across the top, for many of them, 
especially the credit granting agencies--that is, Education, 
HUD, VA, Agriculture--the stewardship over financial assets, 
especially loan programs, SBA, is an enormously important 
function, and if the CFO isn't playing that function in credit 
granting agencies, then you've got a significant disconnect.
    The programs also want to make more loans. They always want 
to serve a greater population. But the risk factor needs to be 
accommodated as well. There has to be a balancing, whether it's 
under credit reform or other standards of those two things.
    So I would add that function, asset management, and 
indicate that not every agency has it. But where it exists, is 
the CFO actively involved in designing those programs. We have 
a $100 million portfolio. That doesn't sound like much in 
Federal parlance, but $100 million portfolio of loans. Thirty-
three percent of the loans made to students are made through 
the direct loan program. We'd better have good consonance, and 
we do in the Department of Education between the CFO's office 
and the portfolio, as it exists.
    Mr. Platts. Thank you.
    Ms. McMurtry. I think another issue here that might be 
combined with looking at what the CFOs have done, and another 
thing really that makes a case for combining the budget 
formulation and budget execution is another one of the 
initiatives in the President's management agenda, that being 
the budget and performance integration. Especially with that, 
aside from all the concerns about financial management, I don't 
see how that's going to ultimately be as effective as possible; 
that is to say, efforts of performance budgeting, unless you 
have, somewhere, someone overseeing all pieces of the budget 
cycle as well as the performance measurement.
    Mr. Platts. OK. Thank you.
    Mr. Towns.
    Mr. Towns. Yes, thank you, Mr. Chairman.
    Dr. McMurtry, is it any way we could--anything that we 
might be able to take a look at to see, you know--let me be 
specific. NASA has gone through three financial management 
systems to the tune of about $180 million. Is there anything, 
any guidelines to be used to sort of see or determine or to 
avoid that kind of waste?
    Ms. McMurtry. In terms of trying to consolidate financial 
system and make improvements in them?
    Mr. Towns. Yes, yes, right.
    Ms. McMurtry. Quite frankly, I don't have too much 
technical expertise in the systems aspect of it. Ordinarily, I 
think the case would be made that if you can combine and 
simplify your systems, down the road there should be some 
savings because things will be more efficient and you will be 
able to get the information you need for your program people 
and so on faster if you have a system that works.
    But in terms of having a--putting a lot of money to develop 
a system and then have it not work, I can't offer you any 
guidance there, except I guess you need to look at the 
designers of the system, whether it be contractors or whatever, 
and try to get the most capable people on it.
    Can anyone else comment on that?
    Mr. Towns. Yeah. Anybody else want to add anything to that 
because, you know, to me----
    Mr. DeSeve. You have two of the world's great experts in 
financial systems in Mr. Kinghorn and myself. I don't know 
Linda's background, so we can't duck the question. He can, 
maybe; I can't. I was involved heavily with NASA's financial 
system when I was at OMB. And my view of the world is as 
follows: NASA needs to fully involve and fully integrate its 
program and mission support areas, including its contractors--
by ``contractors,'' I mean the people who run the NASA 
program----
    Mr. Towns. Right.
    Mr. DeSeve [continuing]. In developing the stewardship and 
financial systems. It can't be something that's imposed by the 
chief financial officer's office upon the field.
    NASA is an agency with a field culture. If you go to the 
jet propulsion lab, or if you go to Huntsville, Alabama, or if 
you go to any of the other parts of NASA, that's where NASA 
really works, really does its work.
    The Kennedy Space Center is where they really do their 
work. Anything that seems to come from central office and limit 
their flexibility or impose upon them additional requirements 
has to be carefully integrated with the way they do their 
operations. And I think NASA's culture has resisted almost as I 
might resist penicillin perhaps. I might be either allergic or 
resistant to penicillin.
    NASA's culture has resisted financial systems over time. 
Now, I haven't looked at it for some time, but I saw the 
failures that occurred, and I believe that it is the engagement 
of the program entities with NASA's central management that can 
provide a successful system. But till now it has not. And I'll 
probably be sorry I just said what I said.
    Mr. Kinghorn actually installed more than I installed, so I 
can ask him to comment.
    Mr. Kinghorn. These are incredibly difficult to pull off. 
Forget the technologies, which I think are pretty substantial. 
They are difficult for cultural reasons, and NASA does have a 
field structure culture just like IRS did. They had six 
regional financial systems, IRS, controlled by the regional 
administrators; whereas when I went, I wanted to find out what 
the big picture was, I had to go to them and ask and beg.
    NASA's centers and their field structure were the power 
bases, so you've got a real cultural change there. And I think 
Ed was exactly right; to make it successful, and I believe, 
albeit with some recent GAO reports on their implementation, 
they're going about it the right way.
    They really have begun to change the culture. The CFO and 
controllers at the centers who run NASA day to day don't report 
directly to headquarters nor should they. But they report to 
their center director, and then when the center directors 
historically said, to heck with this central management stuff, 
that's who they listen to.
    That's changing. When I went to IRS, the Commissioner asked 
me in the interview, if you come here, what's the most 
important thing I can do for you? And I said, do not blink. 
I'll give you 5 years. It'll take that long to do this. If you 
blink, I'm dead.
    And people tend to blink. Three commissioners didn't for 
me. People tend to blink just when it gets tough. And I really 
think NASA has begun to turn the corner in terms of getting the 
system up, getting the way that helps the program operations 
and trying to pull together enormous financial data that no one 
has ever really wanted to look at.
    So I did a study for NASA just before I left consulting 
that really looked at the impacts of the budget process on any 
of the shuttle disasters. And what was striking to me was that 
they never looked at the full cost because, really, the centers 
and NASA as a whole did not want to look at the full cost. So 
you've got a dificult culture there.
    That has changed under the current administrator.
    So these are very complex issues. I think some previous 
NASA failures as other agencies had with technology that 
perhaps wasn't ready, but getting the program operations 
involved early and making sure the reporting mechanisms--if you 
ask people and the agency what doesn't work, it's really the 
latter.
    Accounting processes often do work. They may be more 
cumbersome appearing because people didn't have to do a lot 
more. You have to do a lot more information inputting now than 
you did in the old days. That's why you want a system, so you 
have better financial data.
    But the real issue is reporting, and reporting is 
difficult. You can get reporting for accounting. You may not 
have it for the program operations. Both sides can complain on 
that. But it's an extraordinarily difficult thing to do in a 
place as big and as field oriented as NASA and some of these 
compliance agencies.
    Mr. Towns. Right. That raises another issue, the issue of 
tenure. I mean, how do we handle that problem?
    Mr. Kinghorn. Of tenure?
    Mr. Towns. Tenure, yeah. Because I understand that the 
average CFO stays about 22, 23 months and sort of moves on.
    Mr. DeSeve. Yeah, I'd like to see that data. Because if you 
look at my career within the Federal Government, I started in 
1993 and left in 1999, you would say that I only stayed 2 years 
in the Federal Government because I actually moved, I changed 
jobs. So it is a good thing in some cases when you see CFOs 
move.
    Often a CFO will move from one agency to another or into a 
different program slot. Some day I would like maybe NAPA to go 
down and look at that.
    One of the things that we did, and Linda has continued 
this, is, we made sure that the deputy CFOs, who are often the 
operational day-to-day administrators of the CFO office, were 
very much part of the decisionmaking process in the CFO council 
and in the department itself, so that the tenure, the 
institutional knowledge, was guaranteed more at the career 
level than it was at what we will call the political level 
along the way.
    But I even think, at the political level, that the 
continuity may be greater than we think it is because sometimes 
a CFO actually really does well and becomes a deputy secretary. 
I've seen that happen twice. So we may see that the tenure is 
really longer within the organization, within the institution, 
than we think it is when we have the deputies there to continue 
to bring it forward.
    So I think we're doing the right thing at this point.
    Ms. Springer. In addition to that, which is actually 
correct about the deputy being a critical position--we have 
some CFOs that if you look at the official date from when 
they're sworn in until the date of their departure, it doesn't 
reflect the time that they're with the agency, in some 
restricted capacity appropriately, prior to their official 
swearing in and approval.
    So, for example, if you looked at me, you'd think that I 
was controller since April 2003. But in fact, I was at OMB from 
September 2002, and I wasn't just sitting around on the 
sidelines. I didn't set policy or didn't cross the line, but 
there were ways to contribute as a consultant, in effect. And 
many of our CFOs have earlier dates of arrival on the scene, if 
you will.
    Mr. Towns. All right. Thank you very much.
    Thank you.
    Mr. Platts. Thank you, Mr. Towns. Following up on some of 
the dialog on the NASA example, we have had various discussions 
with NASA, hearing and focusing on their challenges when they 
have about one-eighth of their entire budget unaccounted for at 
the end of the year and they just do an accounting correction 
without any ability to really say where the money went. That 
tells us that there are some significant problems.
    Our memory of the exact number of corrections was something 
like $560 billion in corrections where they recorded it wrong, 
and then moved it over here, and then reported it wrong back 
and forth. Mr. Kinghorn, you kind of touched on their center or 
field mentality. It really seems to be one of the challenges 
there. In our hearing with the CFO, one of our focuses was 
what's her authority over the center CFOs as far as giving 
direction to and, ultimately the ability to hire and fire 
those?
    It seems that those center CFOs look at the agency-wide CFO 
and say, ``I don't answer to you; you don't have authority to 
fire me, so I'm not going to prioritize what you need versus 
what my center director does.''
    Do you think, using NASA as the example--and it won't be 
the only agency out there--should that agency-wide CFO have a 
specific authority ensuring the ability to hire and fire, or at 
least have a synergy with the center director, in the case of 
NASA, to provide more connection?
    Mr. Kinghorn. I had that same issue when I was at EPA and 
IRS, and the way I came out in both places there was that 
they're really more soft dotted lines. Because my life was, and 
still is, that if you've got a strong field operation, which 
both those agencies do, unless the controller and CFO at the 
local level really has the eye, ear and the trust of the center 
director, or EPA regional office, whatever, it's not going to 
ultimately work either.
    In the study that we did--and I'm sure NASA could provide 
it to you, I think we--I'm trying to remember. It's been about 
a year and a half, 2 years. I think we recommended, if not 
direct reporting, a very strong-line direct reporting to the 
centers because there really was divided loyalties. You know, 
if you're a center director, controller, CFO, and you know 
there is not a lot of support or power base at the national 
office, who are you going to work for day to day?
    So I think in NASA's case I would probably make that dotted 
line pretty close to solid with, certainly, coevaluations. Not 
to defend NASA, but they are really trying to do some 
extraordinary things. And it's similar to what I tried to do at 
EPA.
    EPA--when we brought up the new system, we also had to 
implement the Superfund Act which required full cost 
accounting, and everyone went absolutely nuts. We were 
successful in doing it. It was very painful. Unfortunately, I 
left after it was implemented, but they had a lot of blood on 
the table for 2 or 3 more years. But to this day that system 
works reasonably well and probably has the best accounting data 
in the U.S. Government for management purposes, Superfund.
    NASA's trying to do the same thing. They're bringing up a 
very complex system, trying to change the culture; and also 
bringing up full cost accounting, which I can assure you--not 
with any direct knowledge, but I can assure you that people in 
the field do not want that.
    So it's not to explain they don't have problems. I had 
tremendous numbers unreconciled at IRS for years. I tried to 
explain that wasn't real money. You know, it never worked 
either, and it shouldn't have been there. But I would suggest 
what they're trying to do is extraordinarily difficult, and I 
think they're further along than they've ever been before, and 
I think you need to keep on top of them.
    Mr. Platts. Yes. I would agree with your assessment, with 
the NASA administrator and the CFO and their commitment to 
staying on top of it.
    Are there things that this committee should look at trying 
to make happen to give that agency-wide CFO the ability to do 
what they're trying to do? If she can't answer the questions 
because she's not getting the information from the center CFOs, 
this committee will have no choice but to bring the center CFOs 
in here and start putting them on the hot seat, defending their 
actions and not having the cover of the agency-wide CFO whom 
they don't want to respond to.
    Mr. Kinghorn. That would be a good idea, actually. I 
recommend you do that.
    Mr. Platts. Well, it's something that--the thought's out 
there, and I think it's known within NASA. I do agree that they 
have a challenge and there is a committed team of leadership 
there trying to overcome those challenges of the past and get 
accountability. We'll continue to hold their feet to the fire. 
I also am a big supporter of the space program and believe the 
better we do on the financial management, the better the space 
program will advance and succeed because it will have the 
resources it needs.
    Mr. DeSeve, did you want to add something on the NASA 
issue? OK.
    I had maybe one or two other areas. Mr. DeSeve, you touched 
on it in your statement. You compared the public sector to 
Sarbanes-Oxley. In Sarbanes-Oxley, we're more specific in 
delineating responsibilities of executive officers. Should we 
be more specific in a similar fashion with public officials? 
You addressed that you think we actually do more of that now 
than we actually appreciate.
    Mr. DeSeve. Yeah. We might ask CRS to do a study for us. I 
think if you took the log of, starting with the Inspector 
Generals Act--where the Secretary has to read and respond and 
affirm to the inspectors general's finding semiannually, the 
head of the agency has to make a response to that--and then 
went down into the internal control aspects of the Federal 
Financial Management Improvement Act and looked at those, and 
looked at responding to the material weaknesses in the audit, 
in the CFO Act, and the accountability under GISRA, as another 
example, where the systems aspects, the plans, have to be 
affirmed by the CIO and then go to the agency head, I think we 
find the agency head performing a series of functions that 
effectively mirror Sarbanes-Oxley.
    I think that's true again in the procurement arena.
    So if we took Sarbanes-Oxley on one axis and the various 
Federal statutes on the other axis and mapped, kind of in a 
three-dimensional way, the responsibilities of the chief 
management offices, I think the consonance would be very high. 
I think there would be a very high level of overlap in those 
areas. Other than external reporting to the SEC and places like 
that, I honestly don't think that there are holes.
    Now, I'm not an expert in Sarbanes-Oxley. So I just took a 
quick look at it, and from my own experience and with corporate 
structure. But I think that's where I come out.
    Mr. Kinghorn, who was in a public accounting firm, may have 
a better view than I do.
    Mr. Kinghorn. Well, I'm not an accountant so--I think the 
only significant change might be on implications that once you 
sign and something goes south. And I was saying with you, when 
I went up to the administrator, the Commissioner on Internal 
Control Sign-off, they took it very seriously.
    But, you know, chances were they were going to be gone in 
18 months, and other than direct fraud or a violation of that 
efficiency act, I don't think there was implications, as there 
are in Sarbanes-Oxley. So I think that would have to be given 
some thought.
    Mr. DeSeve. Well, you know, again, Judge Alvin Adams, who 
sat in Philadelphia and looked at the HUD scandals and put a 
number of people in the Federal prisons, focused the attention 
of the HUD Secretary following that activity. I mean, Secretary 
Cisneros was very careful when he reviewed it. So there are 
consequences out there.
    And I'd love to someday see someone go to jail for a 
violation of the Anti-Deficiency Act. One of my fond wishes is 
that we would some day do that.
    Ms. McMurtry. Just to mention another source of 
information, the chief financial officer at the Library of 
Congress actually just brought this to my attention, and I 
haven't had a chance to read it thoroughly. But it's a study by 
KPMG on Federal agencies--will Sarbanes-Oxley fit--and then the 
discussion of Federal internal controls.
    And they say at the outset that if the requirements from 
Sarbanes-Oxley were adopted by Federal agencies, it would mark 
a major shift in current procedures and policies. It could 
strengthen the confidence of the American taxpayer in the 
government, improve the effective use of Federal resources and 
provide more accountability.
    So, I guess that's a little bit different take than you 
have on it.
    As I say, I haven't read the whole document. But that might 
be something of interest to the committee if it hasn't come to 
your attention already.
    Ms. Springer. Mr. Chairman, if I could complete the cycle 
of the panel on this question, we're well aware of that study 
and just about every study that's come down the pike on 
Sarbanes-Oxley for the Federal Government.
    As you know, at this committee's recommendation, in that 
DHS bill we have convened a working group task force of IGs and 
CFOs from our Committee on Financial Management Policies and 
Practices. Essentially, it's one of those committee 
responsibilities, working with the IGs to do exactly what was 
mentioned earlier--compare the private sector practice to the 
existing guidance and legal requirements in the Federal 
Government with respect to internal control over financial 
management and financial reporting.
    We've done that. We've assessed the risk environments in 
the private sector versus in the Federal Government, which are 
different. We've done that. We are reviewing the existing OMB 
guidance for management of our agencies, the CFOs, the 
Secretary--A-123, which you should be familiar with--on 
assertions with respect to internal control.
    I received a draft of that last night, so as I mentioned 
before the hearing to some of the staff, we are getting very 
close to the point where we would like to come up and visit 
with you about our recommendation for strengthening this.
    So I have decided not to be silent here. I don't want to 
preempt what we are doing, but we are very close, and I would 
say, before the end of this calendar year, we'll have a 
strengthened procedure in place for management that addresses 
Sarbanes-Oxley.
    Mr. Platts. Dr. McMurtry and Mr. Springer, internal 
controls is, the next item I had written here in my notes to 
bring up. With that specific focus, and I'm pleased with how 
OMB is moving forward in a very active way and working with the 
CFO Council and inspector generals to come out with a 
department- or a governmentwide recommendation and process.
    I am going to use you two as bookends here to our two 
middle witnesses. Mr. Deseve and Mr. Kinghorn please provide 
your thoughts from having been in HUD, having been in IRS, EPA, 
on the issue of auditing internal controls and the role they 
play and how, if any, we should be more specific in demanding 
the internal control approach.
    Mr. DeSeve. I think the nature of internal control has to 
start with things at the program official level. It doesn't 
start from the, you know, the IG or the chief financial 
officer. It starts with looking at the processes of asset 
management, transaction processing and so on that go on almost 
at the lowest level of the organization, and then builds from 
that a pyramid. And it needs to deal with what is sensible.
    I haven't read the KPMG report, and I used to work for KPMG 
once upon a time, so I really can't comment on it, although I 
would like to. But I can't.
    Taking the legal framework that exists now and asserting to 
each of the individual managers that there were sensible and 
common-sense things that they needed to do to get control of 
their assets, their contracts, their transaction processing in 
such a way that it just didn't involve checking a box and 
passing a form on is the essence of internal control. And I 
worry that we almost have an enormous framework of Federal 
States beyond OMB Circular A-123, beyond the GAO green book, 
that people--there's an old expression, ``Bad money drives good 
money off the market.'' I think it's Gresham's Law.
    Too much reporting and too much checking boxes and form-
filling-out makes people not spend the time, the appropriate 
time, looking at problems.
    I eliminated a form called the HUD-1 at HUD. The HUD-1 used 
to require agents in the field to add up the summary schedules 
at housing closings and figure out whether the math was right. 
That was a really stupid idea. And so we eliminated the HUD-1 
schedule, but rather we said, no, you need to do other kinds of 
surveys and controls.
    So my only plea would be for reality at the program level, 
where program officers think that the internal control's a 
useful extension of their business, and I fear that accountants 
run amuck.
    I wasn't an accountant, nor was Mr. Kinghorn. But 
accountants running amuck will produce an internal control 
regime that will not be useful and will perpetuate the paper 
work that people are so fed up with.
    There, I've said it.
    Mr. Kinghorn. One thing that was exciting to me about the 
CFO Act and financial statements--and there wasn't much in the 
beginning because it was tough to get them--was the fact that 
it was a process by which all the different competing 
requirements around internal control were going to suddenly be 
consolidated, I thought, into the audit process, where all our 
business process would be examined. And I think that's probably 
where the home should be.
    The best document now, which is quite old and I think 
subsequently has been brought up and used by GAO in its 
guidance, is something that used to be called the COSO report, 
the Committee on Sponsoring Organizations, which really is 
worth reading because it's a very understandable document on 
internal control done by Coopers & Lybrand, I believe back in 
the 1990's. It sets the framework that Ed just mentioned.
    It has to be common sense and oriented toward the program, 
not an accounting by itself process.
    Mr. Platts. I think that the message is, if we're going to 
require additional efforts in reporting, that it truly be 
something that's merit based and going to have an impact. We've 
regularly talked about it the last year and a half. Our goal 
isn't just a clean audit; it's to have a financial management 
system in place that you actually, day to day, can use to make 
decisions. Just saying that we are going to audit you and we 
want you to have a clean audit is not what we're after. It's 
useful information.
    We'll look forward to OMB's work in progress and look 
forward to those discussions of where we go on that issue.
    Mr. Towns, did you have any other----
    Mr. Towns. Just quickly. Is there anything more that we 
should do legislatively?
    Mr. DeSeve. Morgan and I talked about this at the 
beginning. I think it would be worth again asking either CRS or 
someone else to go in and look at all the legislation. And, 
again, I would start back with the IG Act and come forward.
    And if it were possible to pass clarifying legislation that 
eliminates overlaps, that gets rid of certain things and then 
imposes new standards--I'm really, frankly, very surprised at 
just the conclusion that Dr. McMurtry talked about from KPMG, 
that there is in an effective internal control regime. My 
goodness. There are an awful lot of pieces of the legislation 
out there. How can you pass a unifying act or a generic organic 
statute in this regard rather than--leaving out all the pieces 
that are out there?
    I'd love to see a unification across the board of the IG 
Act, the CFO Act, GMRA, even looking at things like FFMIA, 
FMFIA, FACA, FARA, GISRA and GPRA to create a single unified 
statute that people could look to. We called it the unified 
field theory when I was at OMB, a single statute that people 
could look to that has all the information in one place and 
makes it easy to do their job.
    So if you could engage in rationalization, I think there'd 
be a lot of applause out there. Very hard job. Not something 
that congressional term limits would help with. You may need a 
couple of more terms to carry it out.
    Mr. Towns. Thank you very much.
    Mr. Platts. It would also help us eliminate the number of 
acronyms, if we had one, right?
    Mr. DeSeve. I sure hope so. I forgot DCIA.
    Mr. Platts. I've got to go check my book to see if I can 
figure out what a couple of those were.
    I certainly appreciate your testimony and participation, 
and as I said at the beginning, the four of you have a wealth 
of knowledge; and we appreciate your sharing it with this 
subcommittee as we try to stay the course and keep a good focus 
on the Federal Government's financial management practices and 
the important role the CFO plays in those practices. I'm sure, 
in the months or years to come, we'll come back and ask for 
your expertise again and be glad to have it.
    We'll keep the record open for 2 weeks for any additional 
information that you would like to submit based on the give-
and-take here. Otherwise, this hearing stands adjourned.
    [Whereupon, at 2:33 p.m., the subcommittee was adjourned.]

                                 
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