[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
______
U.S. GOVERNMENT PRINTING OFFICE
98-352 WASHINGTON : 2005
_____________________________________________________________________________
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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
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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.]