[House Hearing, 109 Congress]
[From the U.S. Government Publishing Office]



 
THE EVOLUTION OF FEDERAL FINANCIAL MANAGEMENT: A REVIEW OF THE NEED TO 
                 CONSOLIDATE, SIMPLIFY, AND STREAMLINE

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




                                HEARING

                               before the

                 SUBCOMMITTEE ON GOVERNMENT MANAGEMENT,
                      FINANCE, AND ACCOUNTABILITY

                                 of the

                              COMMITTEE ON
                           GOVERNMENT REFORM

                        HOUSE OF REPRESENTATIVES

                       ONE HUNDRED NINTH CONGRESS

                             FIRST SESSION

                               __________

                             JUNE 22, 2005

                               __________

                           Serial No. 109-53

                               __________

       Printed for the use of the Committee on Government Reform


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                               index.html
                      http://www.house.gov/reform







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                     COMMITTEE ON GOVERNMENT REFORM

                     TOM DAVIS, Virginia, Chairman
CHRISTOPHER SHAYS, Connecticut       HENRY A. WAXMAN, California
DAN BURTON, Indiana                  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
GIL GUTKNECHT, Minnesota             CAROLYN B. MALONEY, New York
MARK E. SOUDER, Indiana              ELIJAH E. CUMMINGS, Maryland
STEVEN C. LaTOURETTE, Ohio           DENNIS J. KUCINICH, Ohio
TODD RUSSELL PLATTS, Pennsylvania    DANNY K. DAVIS, Illinois
CHRIS CANNON, Utah                   WM. LACY CLAY, Missouri
JOHN J. DUNCAN, Jr., Tennessee       DIANE E. WATSON, California
CANDICE S. MILLER, Michigan          STEPHEN F. LYNCH, Massachusetts
MICHAEL R. TURNER, Ohio              CHRIS VAN HOLLEN, Maryland
DARRELL E. ISSA, California          LINDA T. SANCHEZ, California
GINNY BROWN-WAITE, Florida           C.A. DUTCH RUPPERSBERGER, Maryland
JON C. PORTER, Nevada                BRIAN HIGGINS, New York
KENNY MARCHANT, Texas                ELEANOR HOLMES NORTON, District of 
LYNN A. WESTMORELAND, Georgia            Columbia
PATRICK T. McHENRY, North Carolina               ------
CHARLES W. DENT, Pennsylvania        BERNARD SANDERS, Vermont 
VIRGINIA FOXX, North Carolina            (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 Management, Finance, and Accountability

              TODD RUSSELL PLATTS, Pennsylvania, Chairman
VIRGINIA FOXX, North Carolina        EDOLPHUS TOWNS, New York
TOM DAVIS, Virginia                  MAJOR R. OWENS, New York
GIL GUTKNECHT, Minnesota             PAUL E. KANJORSKI, Pennsylvania
MARK E. SOUDER, Indiana              CAROLYN B. MALONEY, New York
JOHN J. DUNCAN, Jr., Tennessee

                               Ex Officio
                      HENRY A. WAXMAN, California

                     Mike Hettinger, Staff Director
               Tabetha Mueller, Professional Staff Member
                         Nathaniel Berry, Clerk
            Adam Bordes, Minority Professional Staff Member
















                            C O N T E N T S

                              ----------                              
                                                                   Page
Hearing held on June 22, 2005....................................     1
Statement of:
    DeSeve, G. Edward, vice chairman, Board of Directors, 
      National Academy of Public Administration..................    16
    Kearney, Edward F., managing partner, accompanied by 
      Cornelius E. Tierney, Kearney & Co.........................    25
    Kinghorn, Morgan, president, National Academy of Public 
      Administration.............................................     5
Letters, statements, etc., submitted for the record by:
    DeSeve, G. Edward, vice chairman, Board of Directors, 
      National Academy of Public Administration, prepared 
      statement of...............................................    19
    Kearney, Edward F., managing partner, accompanied by 
      Cornelius E. Tierney, Kearney & Co., prepared statement of.    28
    Kinghorn, Morgan, president, National Academy of Public 
      Administration, prepared statement of......................     8
    Platts, Hon. Todd Russell, a Representative in Congress from 
      the State of Pennsylvania, prepared statement of...........     3
    Towns, Hon. Edolphus, a Representative in Congress from the 
      State of New York, prepared statement of...................    52

























THE EVOLUTION OF FEDERAL FINANCIAL MANAGEMENT: A REVIEW OF THE NEED TO 
                 CONSOLIDATE, SIMPLIFY, AND STREAMLINE

                              ----------                              


                        WEDNESDAY, JUNE 22, 2005

                  House of Representatives,
Subcommittee on Government Management, Finance, and 
                                    Accountability,
                            Committee on Government Reform,
                                                    Washington, DC.
    The subcommittee met, pursuant to notice, at 2:44 p.m., in 
room 2247, Rayburn House Office Building, Hon. Todd Russell 
Platts (chairman of the subcommittee) presiding.
    Present: Representatives Platts, Gutknecht, and Maloney.
    Staff present: Mike Hettinger, staff director; Dan Daly, 
counsel; Tabetha Mueller, professional staff member; Jessica 
Friedman, legislative assistant; Nathaniel Berry, clerk; Adam 
Bordes and Mark Stephenson, minority professional staff 
members; and Jean Gosa, minority assistant clerk.
    Mr. Platts. The hearing of the Government Reform 
Subcommittee on Government Management, Finance, and 
Accountability will come to order.
    We are going to dispense with full opening statements. But 
we are delighted to have our witnesses with us and apologize 
for keeping both them and our other guests here today waiting 
while the votes were proceeding on the House floor.
    This hearing is the first in what will be a series of 
discussions on how best to consolidate, simplify and streamline 
the laws that govern financial management for the agencies of 
the U.S. Federal Government. Currently, there are more than 800 
statutory pages that govern financial management, some dating 
back to the 1920's, and a pretty complex and challenging 
collection of laws over those many decades for our Federal 
financial managers to interpret and implicate as they go 
forward with their assigned responsibilities.
    We have been delighted in having some discussions, and now 
here today with us are representatives from the National 
Academy of Public Administration. We appreciate this advisory 
panel that has come together and begun to do some research on 
behalf of the subcommittee and in conjunction with the 
subcommittee members and staff, in looking at the Federal 
financial management practices and how we can better 
streamline, eliminate duplications, eliminate things that are 
no longer necessary, that are really make-work, as opposed to 
substantive and useful information. And we certainly are glad 
to have our witnesses here, the information you have already 
shared with us, and to continue this dialog as we go forward.
    I think what we will do is go forward into our opening 
statements. We are also, as part of this hearing, announcing 
the formation of the Congressional Management Caucus. That will 
be a bipartisan, bicameral effort focusing on financial 
management in the Federal Government to try to be a 
clearinghouse for efforts to keep this issue, or these issues, 
in the public limelight and emphasize the importance of these 
efforts to assure that we have a more efficiently run Federal 
Government.
    We are delighted to have several witnesses with us here who 
have extensive experience in financial management. Representing 
the National Academy of Public Administration we are going to 
hear from Morgan Kinghorn, the Academy's president, and Mr. Ed 
DeSeve, vice chairman of the Academy's board of directors.
    Mr. Kinghorn and Mr. DeSeve, we appreciate your being here 
and again appreciate your willingness to help lead the effort 
in this partnership as we go forward.
    We are also going to hear from Ed Kearney, a certified 
public accountant and managing partner of Kearney & Co., and we 
look forward to all of your testimonies.
    We will begin with roughly 5-minute opening statements and 
apologize again because of the time. We will try to stick to 
that and perhaps we can get to a good discussion.
    Mr. Tierney, you are joining Mr. Kearney. I think I didn't 
mention that. We are glad to have you, as well, as part of our 
panel here today.
    So with that, Mr. Gutknecht, did you have anything you 
wanted to say to begin? Otherwise, we are going to go right to 
our opening statements.
    [The prepared statement of Hon. Todd Russell Platts 
follows:]


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    Mr. Platts. And, Mr. Kinghorn, if you would like to begin.

 STATEMENT OF MORGAN KINGHORN, PRESIDENT, NATIONAL ACADEMY OF 
                     PUBLIC ADMINISTRATION

    Mr. Kinghorn. Thank you, Mr. Chairman and members of the 
committee. As President of the National Academy of Public 
Administration, an independent, nonpartisan organization 
chartered by the Congress to give trusted advice, I am pleased 
to appear before you to provide some interim perspectives on 
the Academy's review concerning how we believe financial 
management can be approved in the Federal Government. The views 
presented today are my own, and not necessarily those of the 
Academy as an institution.
    We are doing this review really in response to your request 
in March to the Academy, where you asked us to reflect on the 
current set of financial laws, regulations, procedures, and 
current practices, and consider how best to improve our current 
financial environment and, perhaps more importantly, develop a 
set of recommendations that would be helpful to the committee 
in strengthening further the financial management of the 
Federal Government as we move forward in the 21st century.
    In your charge to us, you directed us to be wide ranging in 
our thinking and to include such diverse topics as benefits 
from consolidating the myriad of laws and regulations to 
methods to enhance the strategic focus of financial managers as 
well as nonfinancial managers. The Academy is really excited 
about this opportunity because after 15 years of significant 
progress in financial reform, we believe it is time to assess 
how the Federal Government can best build on the successes of 
the past and avoid the pitfalls.
    We have developed a working group of our Academy Fellows 
who are thoroughly familiar with financial management practices 
of the Federal Government, as well as industry best practices. 
These Fellows have extensive hands-on experience, as well as 
academic acumen, and will form the core of our working group. 
In addition, we can draw on a great number of the other 550 
Fellows of the Academy.
    One of our Fellows, who is also the vice chair of the 
Academy's Board, Ed DeSeve, is here with me today to give you 
his own feedback and perspective on our discussions to date.
    We have established a work plan whereby our Fellows and I 
will meet with a series of experts across the Federal 
Government to receive their input on how best to improve the 
elements of financial management. We will hold these 
informational gathering sessions at the Academy and will 
solicit input from entities such as the CFO Council and the CIO 
Council, as well as its members, the program management and 
program performance community, the budget community and key 
representatives from the private sector, including the 
accounting consulting professionals who are also involved in 
these financial improvement processes.
    To date, we have held two sessions with a variety of 
members of the CFO community and really received a wide-ranging 
series of comments and suggestions from both political 
appointees as well as members of the Senior Executive Service. 
Based on the comments from these two sessions and input from 
other Fellows, I can share with you a few of the more 
significant themes that have emerged.
    First, we have focused exclusively on financial accounting 
systems and accounting process improvements to the exclusion 
and detriment of better budget and program and financial 
performance systems. There is no doubt that financial 
management and reporting of the financial information has 
dramatically improved since the initiation of the CFO Act and 
three or four--several acts that are related to that act that 
expanded the authorities.
    Most Federal agencies now receive an unqualified audit 
opinion, and many agencies have improved their systems so as to 
facilitate the preparation of financial statements and provide 
some better information to decisionmakers. But we have not paid 
similar attention to systems and processes that would bring 
about improved integration between the budget formulation 
systems and the financial accounting systems.
    Similarly, the linkages between budget, cost and 
performance management systems have been slow to materialize as 
agencies have tended to put their investment moneys primarily 
into improving their accounting systems.
    Second, in looking to the future, since the gathering of 
data about program performance has recently become a much more 
important element of government management, the linkages 
between program performance and budget development and 
accounting and cost systems need to be much clearer to 
government managers, both financial and nonfinancial.
    With the evolution of GPRA, the creation and now the 
implementation of the management and program performance rating 
system, we have seen an increasing interest by Federal program 
managers that they are now more conscious of the need to stress 
strategic planning, the linkage between plans and budgets and 
the overall linkage back to actual program performance. And it 
is clear in many of our discussions to date that government 
managers, financial and nonfinancial, need to become better 
aware of the necessary linkage between accounting, cost 
information and program performance.
    Third, the streamlining and consolidation of Federal 
management laws and regulations would be beneficial. Several 
CFOs observed that there are many different statutes, 
regulations, and OMB circulars that address the same 
requirements which have evolved over a period of time to 
address very specific problems and issues. And I think the 
consensus so far would be extremely beneficial to examine these 
requirements and consider consolidation of the directives in a 
more comprehensive form, perhaps a single statute and a single 
comprehensive circular.
    Fourth, organizational placement of the CFO and other 
offices involved in broad financial management implementation 
is handled differently in each agency. There is no clear 
consensus yet among our group on this issue. Some argue that 
the management function should be responsible to one senior 
departmental official since there is clearly linkage among them 
in both program and system design and, most importantly, 
process implementation. One cannot develop a comprehensive 
budget, for example, without information and data from the 
budget world, the world of accounting and cost data, and the 
world of strategic planning and performance management. Others, 
however, argue that just because there is an operational 
linkage, organizational responsibility and performance is 
better achieved by having separate, focused areas of 
responsibility.
    Others argue that all finance-related functions should be 
under the CFO--budget formulation and execution, as well as 
accounting and reporting--but that other related activities 
such as performance and strategic planning are best achieved 
and implemented separately.
    The importance of Senate confirmation of departmental CFOs 
was discussed among our participants and the consensus to date 
suggests strongly that the Presidential appointment and Senate 
confirmation of departmental CFOs, for example, is important 
unless there is a governmentwide decision made to reduce the 
overall number of Senate-confirmed positions.
    The related issue of a Chief Management Officer was 
discussed with one scenario being that the CMO be Senate 
confirmed and all other management positions reporting to the 
CMO would not be. Obviously, there is a wide range of 
organizational options available, and just as obvious, very 
passionate feelings about this issue; and we will have 
additional information and recommendations available for you 
when we complete the process.
    Mr. Chairman, the Academy welcomes the opportunity to 
really review and work with you on this important subject over 
the next several months, and we feel confident we can provide 
you some value-added for the committee and bring to you some 
sound recommendations.
    The Academy also appreciates your leadership on these 
issues. I know everyone at this panel. We have worked together 
at different times, and it is nice to have serious people 
interested in serious issues. And we are particularly excited 
about the establishment of the Congressional Management Caucus.
    Thank you, Mr. Chairman.
    Mr. Platts. Thank you, Mr. Kinghorn.
    [The prepared statement of Mr. Kinghorn follows:]




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    Mr. Platts. Mr. DeSeve. And actually I apologize. My staff 
is making sure I am following the proper procedures. I forgot 
to ask all of you to stand to be sworn in for your testimony. 
So Mr. Kinghorn it will be after the fact for Q and A. But I 
would appreciate if you raise your right hands.
    [Witnesses sworn.]
    Mr. Platts. Thank you. The clerk will note that all the 
witnesses affirmed the oath.
    And now we will continue with Mr. DeSeve.

    STATEMENT OF G. EDWARD DeSEVE, VICE CHAIRMAN, BOARD OF 
      DIRECTORS, NATIONAL ACADEMY OF PUBLIC ADMINISTRATION

    Mr. DeSeve. Thank you, Mr. Chairman. I am pleased to be 
here today to discuss my perspective on how the Academy thinks 
financial management can be improved in the Federal Government. 
As Mr. Kinghorn noted, I am the vice chairman of the Board of 
Directors of the National Academy and a professor and director 
of the Management Finance and Leadership Program at the 
University of Maryland School of Public Policy.
    For many years I have been a senior executive at State, 
local and Federal levels of government. My service in the 
Federal Government included being the Chief Financial Officer, 
at the Department of Housing and Urban Development, Controller 
at OMB and Deputy Director at OMB.
    The views presented today are my own and not necessarily 
those of the Academy as an institution.
    Mr. Kinghorn has discussed with you how we at the Academy 
have organized our work plan to review your charge to the 
Academy, and he has given a general framework under which we 
will do the work. We believe our work will lead to 
recommendations that will be extremely useful to your 
committee.
    What I'd like to do today is to spend a few more minutes 
giving you some comments from the meetings that we have had so 
far. And these are some headlines. We are sure there will be 
more to follow.
    First, generally in financial management we have managed to 
downplay or overlook the Department of Treasury as a major 
player in the financial management world. Treasury, we think, 
can provide strong leadership if given the opportunity.
    I am told--this is an aside--I am told that there was a 
turf battle around the time of the CFO Act within the 
administration, and the decision was made to give OMB the 
function and not to give the Treasury the function of chairing 
the Chief Financial Officers Council. So there is some history 
here that perhaps could be revisited if legislatively you 
decide to open up the issue of overall organization within the 
Federal Government.
    The discussions in our meetings have centered on several 
elements such as the need for the Treasury Department to 
provide timely data, their need to perform cash reconciliation, 
the need for more modern systems to facilitate the transmission 
of data and often, most cited, the need for the Department to 
operate in close coordination with OMB. It is a structural 
thing we think needs to be looked at.
    Well within the scope of this committee is the coordination 
between the CFO Act and the ITMRA, also known as Clinger-Cohen. 
Several executives have suggested that the two acts need to be 
harmonized to ensure that the objectives of Congress are being 
met by those two laws, particularly given the CFO 
responsibility for financial systems. I think, again 
parenthetically, that people were worried that the CFO has the 
responsibility for implementing financial management systems 
and the CIO has the responsibility for implementing information 
systems, and if the two of them aren't working together well, 
that there is a potential for a problem. So there may need to 
be some ironing out of the demarcations of the boundaries 
between those two actions.
    Third, the organization of financial and budget data and 
related information has not been uniformly useful to successful 
program management. Here again, I think around the time of the 
CFO Act, we decided to start, and almost in the way I believe 
Chinese writing is interpreted--that is, from the right to the 
left--in a sense we started at the back end of process with an 
audit and moved forward to the budget process itself.
    We think that needs to be revisited, that the almost 
exclusive focus, or very heavy focus, on audited financial 
statements and timely audited financial statements needs to be 
looked at in the context of what is needed by the program 
managers on the front line every day.
    We think that information should be useful, useful and 
useful--useful to the people who use it each day, useful to the 
people who oversee that function and, finally, useful to the 
Congress as they go about their business. And it may be that 
the information we have now does not fill that bill.
    Fourth, the linkage between enhanced internal controls and 
performance management has greatly improved the public 
stewardship of government programs, but more needs to be done. 
Internal controls are extremely important to make sure that 
funds are spent wisely, that malfeasance, misfeasance and 
nonfeasance is avoided. But at the same time, the effectiveness 
of the program needs to be similarly demonstrated.
    The consolidation now into performance and accountability 
reports is a good step forward. I believe, and either Mr. 
Kearney or Mr. Tierney tell me that I am wrong, but we 
currently have at least FFMIA, FMFIA, GPRA, the CFO Act, the IG 
Act and GMRA all being dealt with and perhaps well dealt within 
the context of performance and accountability reports.
    It may be that Congress wants to look at those reports and 
specify the contents of these reports in general so that we 
have gone back and made honest people of those who have done 
something very creative, trying to blend all of those items.
    We also feel that the role of the inspector general in the 
21st century needs to be reconsidered. The IG was given audit 
responsibility in the CFO Act and expanded in the Government 
Management Reform Act, and many IGs have done a very good job. 
Others were not well prepared for that function. They can be 
good partners, especially as the audit of performance 
information or at least the examination of performance 
information becomes important along the way.
    As I mentioned earlier, I am pleased to be with you here 
today, and financial management has been my profession for more 
than three decades. I have functioned at various levels, and I 
am now teaching students who will be the financial managers of 
the future. So I would like to assist you in any way I can, and 
certainly the Academy is at your disposal in this matter.
    Thank you.
    Mr. Platts. I thank you, Mr. DeSeve.
    [The prepared statement of Mr. DeSeve follows:]



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    Mr. Platts. Mr. Kearney.

 STATEMENT OF EDWARD F. KEARNEY, MANAGING PARTNER, ACCOMPANIED 
             BY CORNELIUS E. TIERNEY, KEARNEY & CO.

    Mr. Kearney. Mr. Chairman, thank you. I am the managing 
partner of Kearney & Co., a CPA firm. We provide audit, 
accounting and consulting services exclusively to Federal 
Government agencies.
    Joining me today is Neil Tierney on my left. Neil is the 
author of almost every single book that has been written on 
Federal auditing and Federal accounting in the past 30 years.
    We are pleased to have the opportunity to appear before the 
committee today. We think that the efforts to consolidate, 
streamline and promote efficiency in all of these laws are 
certainly needed and very, very timely.
    Rather than read my testimony, I would like to just hit on 
a few of the high points in the interest of time.
    What we see today is 23 years' worth of layered laws and 
directives. Each law has a unique emphasis, and despite good 
intentions, we believe that the stewardship reporting has 
lagged somewhat. If you look at the number of laws themselves 
and the timing of the laws over the past 23 years, we think it 
creates confusion in agency financial managers. We have 
multiple laws requiring financial audits. We have multiple laws 
covering systems control.
    As an auditor and an accountant, we see both sides, both 
from the review perspective and from the side of those people 
that are actually performing the functions; and what we see is 
an uneven application of the laws and requirements varying by 
agency budgets and skill levels of the financial managers.
    Implementation of each one of the requirements associated 
with the laws takes many years, and given the fact it takes 
many years--and very often we see agency administration turning 
over in as few as 12 to 18 months--it is quite possible that 
some of the initiatives passed in earlier years never reached 
fruition, or are never completed because a new administration 
might be emphasizing something slightly different or something 
new. That is one of the risks that we have seen to the layering 
of these initiatives over the years.
    We also find that staggering the requirements over the 
years sometimes also creates a problem in agency officials. If 
we look at the Defense Department, for example, today, the 
Defense Department was excluded from the application of the CFO 
Act when it passed in 1990. But today they are working 
diligently to prepare auditable financial statements, and they 
are still several years away from completion of that effort. 
That is almost 15 years before they began the effort, and we 
are still looking at several more after that.
    With the mobility of the work force, what we see as a 
problem moving between the civil and defense side of the 
businesses are just different skill levels and different 
understandings of the requirements as they apply to the 
government.
    We believe the CFO Act probably had the largest impact on 
financial management. The audit concept is trust, but verify, 
and that requires each agency, once a year, to have their 
financial statements prepared and audited by an independent 
organization.
    In the years following the passage of the CFO Act, what we 
found in the early opinions of each one of the Cabinet-level 
agencies was that despite FMFIA being passed in 1982, which 
mandated strong structures of internal control, the reality 
was, many agencies had not achieved the goal; and until we 
attempted to verify it through audit, we just didn't see that.
    The gap between the private sector and the Federal sector, 
we believe, is narrowing, and we think that is a good thing. 
The agencies are being required to prepare financial statements 
and have them independently audited. That is what we do in the 
private sector to ensure that people are honest. And there is a 
joke that people are basically honest, and they are even more 
honest if you watch them like a hawk. I am not suggesting that 
we have a problem everywhere, but having somebody look at 
things after the fact, we think, is helpful.
    The Federal Government has adopted recently the internal 
control structure used by the private sector in the latest 
publication of OMB A-123. It has adopted the COSO framework, 
which really says that everything in internal controls in the 
Federal Government is what is expected in the--or what is in 
the private sector is what is expected in the Federal 
Government as well.
    There still are differences between the two sectors. It is 
important that legislation reflect those differences. By way of 
example, when you pass laws that suggest, for example, that the 
financial statements of the Defense Department include plant 
property and equipment be valued in the same manner that you do 
in the private sector, that may not be practical. It may not be 
cost efficient. So we need to find other ways to get around 
that so it is a good common-sense application.
    Correcting the systems and all of the difficulties 
identified during the audit process has a price, and that price 
is not always included in agency budgets because of the way 
that they are structured today. Most of the cost of financial 
management is really in the budget of either the IG or the CFO. 
It may be time to consider a levy on appropriations or major 
programs that makes sure that when problems are identified 
during the audit cycle they can be cured in a very timely 
manner, because today, with the way the budget structure works, 
it may be a year before anybody gets a chance to work on 
solving those problems.
    The final point that I think I would like to highlight is 
that Federal financial managers must be homegrown. Although we 
are fortunate to have Mr. DeSeve on the right, who is currently 
teaching people in Federal financial management, at the 
University of Maryland, and on my left, Professor Tierney had 
taught, many years, government financial management, most 
universities do not do that. And since you don't have programs 
in Federal accounting and Federal auditing, we don't groom the 
people that we need. Everybody needs to be homegrown.
    More importantly, there is no incentive for research. And 
since there is very little research being done in this area, 
with the exception of research that is done on a voluntary 
basis, it may be time to look at demonstration projects where 
we encourage agencies to attempt to do things differently. I 
don't know what the vetting process would be for that, but 
nonetheless, it may be time to look at doing something like 
that.
    Mr. Chairman, that is all I have to say in my opening 
remarks. We look forward to working with the committee. Again, 
we are pleased to be here. We think the efforts of this 
organization are very timely and very much needed. Thank you.
    Mr. Platts. Thank you, Mr. Kearney.
    [The prepared statement of Mr. Kearney follows:]


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    Mr. Platts. I understand, Mr. Tierney, you don't have an 
opening statement, but you are going to be available for 
questions.
    Again, we appreciate the four of you being here, and 
especially the wealth of experience that each of you brings to 
this discussion, and not just here today, but in the months to 
come, and your willingness to be point persons for us on the 
private side in gathering information, narrowing sights and the 
real-world impact of some of these laws in the last several 
decades and what would be achieved by some of the 
consolidation.
    Mr. Kearney, I think you just referenced in your statement, 
and it might have been Mr. DeSeve, about over the years all of 
these laws are passed, with great attention, the result is a 
pretty confusing myriad of laws. And if you are a new financial 
manager out there, not even new, but in a new position, a new 
level, the ability to accurately comply with all of these laws 
in an effective manner is going to be a little challenging.
    That is certainly what this hearing is about, and this 
dialog that we have begun is about, is to try to streamline it 
to allow a more efficient process to happen and allow Federal 
managers to do what they are trained to do and want to do, 
which is to be good managers, good stewards of financial tax 
dollars, and help their departments and agencies to be well 
run.
    I have a number of issues I would like to touch on. I will 
start with Mr. DeSeve.
    In your comments and one of the items you highlighted was 
just the focus of managers and financial community often is 
about that clean audit, getting an unqualified opinion. And you 
specifically referenced not the daily information benefits and 
that if we really have at DOD a more efficient financial 
management system so that every day of the year the 
decisionmakers over there know what moneys are in what accounts 
and what their supplies are and what they need, that they are 
going to be able to more effectively fight battles and win 
wars.
    Do you want to expand on that issue and what you--feedback 
you have gotten and how you think we can better get everyone to 
buy into not just getting that unqualified opinion, but to 
truly get useful information in a timely fashion?
    Mr. DeSeve. The CIA talks about actionable information. I 
understand I am not on the Intelligence Committee, and the 
Representatives here may be; but we don't have actionable 
information in the Federal Government for program managers. So 
setting a standard for financial managers that says that on a 
real-time basis both cost and revenue information should be 
made available to the agency and to the people in oversight 
capacity.
    Now, one of the things we have seen is that some agencies 
are starting to close their books every month or close their 
books every quarter, which is a good thing. Certainly, closing 
their books in a timely fashion, it used to be the standard, 
was somewhere between 4 and 6 months in order to be finished; 
it is now down to between 30 and 60 days for the audited 
financial statements to be finished. If that is possible, then 
real-time financial information for managers on the cost of 
their programs, the availability of appropriations in their 
accounts, and the revenues that they are generating, if it is a 
revenue-generating activity, is certainly a standard that we 
can seek. I think that program managers will warm to that 
standard, will come to that standard.
    My friend John Hamre, who was the--at the time, the 
Controller of the Department of Defense, used to tell me how 
useless most of the information he was getting was and how 
practical he felt certain other information was. So the 
question is, ``How do we involve the program managers in 
understanding the practicality, the usefulness of that 
information to them?''
    It is harder to put that in a statute than it is to put in 
the standard of auditing because there are groups that have 
spent time--the Federal Accounting Standards Advisory Board and 
others, that spent time setting audit standards. So it is a bit 
more difficult, but a congressional piece of legislation that 
set the goal in trying to integrate this information, make it 
available on a continuing basis.
    When I was at the city of Philadelphia I had a daily cost 
report on my desk. It was broken down by major activity. It was 
broken down by major spending category, a daily revenue report 
on my desk. And I used those every day in managing the number 
of full-time equivalents I could allow, the ceilings and 
contract spending that I could allow in that circumstance. So 
that is what we are really talking about.
    Mr. Kinghorn. Could I quickly add, I think--I mentioned 
before that I think the investments we have made in accounting 
systems--and I put one in at EPA in the Dark Ages and then one 
at IRS when I went there in 1990, both, I guess, successfully 
because they worked and gave us data.
    The question is really--most of these systems, including 
mine, were designed for and by accountants and primarily used 
to, first of all, be able to develop financial statements 
relatively easily and efficiently with accurate data; and 
second, if it was a problem, to make better payments more 
accurately and quicker.
    What we then tried to turn to, though, was, what does that 
mean for a program manager running a compliance program at IRS 
or running an air quality program at EPA? And essentially doing 
that part of it really meant nothing to them. They had no 
better information for the program than they did before. They 
might have had a better belief the data was accurate, but they 
really didn't have any better program information.
    So I think what we are hearing here is that for the next 10 
years we have really got to turn this focus around to involving 
program managers, first, in developing the reports that come 
out of these systems. Most of the reports that are generated by 
these new accounting systems were, again, designed by the 
accountants so they could make payments quicker, more 
accurately; and if they are lucky, for the budget shops who may 
not have been so much involved to at least have better budget 
information at a very gross level. But the program managers 
were rarely, if ever, involved.
    And so, until you involve a program manager, running CMS or 
running Social Security, sit down with the people designing 
these systems and say, ``Here are the six reports as the head 
of this program that I would like to see, they will never be 
built into that system.'' I think our focus really has to turn 
this around, not to lose accounting interest, but in effect, 
turn it around to the program manager.
    Mr. Platts. And your comments open up a number of avenues I 
would like to explore, and maybe first, and I want to get to 
Mr. Gutknecht with questions too.
    But, Mr. Kearney, you referenced that one of proposals 
about getting a buy-in of the program managers to this big 
picture--and in the levying of the expense of doing the cost of 
internal controls, does that get to some of what the other 
gentlemen have just talked about, getting program managers, if 
they are having to pay for it out of their own funds--that is, 
naturally they are going to be a little more in tune with what 
is being done and the benefits of it if it is coming out of 
their budget.
    Is that the type of thing you had in mind from your 
testimony?
    Mr. Kearney. It is to a point.
    One of the things that I think it does, it reinforces the 
fact that everybody's responsible for the controls and 
financial management of an agency, and Sarbanes-Oxley has 
really reinforced that in the private sector today. So 
reinforcing that in the Federal sector, I think, works very 
very well.
    But the points that were made about involving the program 
managers a little bit more, I also think, carry a lot of merit, 
especially when you look at the fact that we are implementing 
COTS packages today, the commercial off-the-shelf software 
packages that frankly need significant modification to work in 
the Federal arena. That may be indicative of the fact that we 
are doing things a little too differently from the private 
sector. We might need to rein it back in with the help of the 
program people, who are also not being satisfied with the 
information needs they have.
    Mr. Platts. OK. Thank you.
    Mr. Gutknecht.
    Mr. Gutknecht. Thank you, Mr. Chairman.
    Thank you very much for coming today. And some of the stuff 
that you have presented to us, including the alphabet soup of 
various management agencies, some of that blew past me like a 
Nolan Ryan fast ball.
    Mr. DeSeve. That was my purpose, sir, to confuse you.
    Mr. Gutknecht. I do mean, seriously, thank you.
    It strikes me from a management perspective there are 
several things at play and I think you have touched on this, 
and I am going to put some of it in language that at least I 
understand. And let me give you a specific example.
    I think part of the problem we have, and not just at the 
Federal Government, but the Federal Government is such a large 
bureaucracy, I think in some respects it is endemic in every 
bureaucracy. But part of the problem we have is an attitudinal 
problem, and I will illustrate that.
    I would suspect that the people at the Social Security 
Administration are doing a marvelous job of getting the checks 
out. I don't know how many checks they mail out every month, 
but it is a lot of checks. And I think they do a very good job 
of making certain that the debits and the credits all match, 
and that we know exactly how much money is going into or coming 
out of the Social Security trust fund.
    But a little over a year ago, well over a year ago now, I 
had an inspector general from Social Security come to my 
office, and he told me that it was his estimate that we are 
paying over $1 billion a month--well, I'm sorry--potentially up 
to $1 billion a month in Social Security benefits to dead 
people. And when I raised that issue with some of the other 
people at Social Security, well, again, they gave me some 
bureaucratic-speak. But at the end of it all, it really boiled 
down to, well, that is not our problem.
    And I don't know how you change the attitudes in some of 
the agencies. I don't know how you give them a sense of 
mission, a sense of purpose or a sense of urgency. And I am not 
sure you can do that with accounting controls.
    We had an inspector general come back this year and his 
estimate was--he said, well, it is significant, but it is less 
than $1 billion a month. But either way it is real money. And 
in the ensuing year, Social Security has done nothing that I 
know of to see if we can't rein in on the money that is going 
out to dead people.
    Would any of you care to comment on that?
    You know, this goes beyond accounting controls and auditing 
procedures. I mean, this attitude that it's not really our 
money is one that we have to fight all the time. And we have to 
figure out ways to do a better job of that. I think that's a 
big enough piece to chew on. Go ahead.
    Mr. DeSeve. Let me try.
    We went through a very similar problem with the Medicare 
program, and the problem is still there. The first audit of the 
Medicare program showed--and I am doing this from memory, and I 
apologize--that it was about $30 billion a year of improper 
payments, or unmatched payments, where you couldn't quite 
figure out the service that was being paid or it was too high 
or too low. So you would have to net some of that out.
    The Secretary at that time, along with the Inspector 
General, worked very hard to make it everybody's problem. And I 
think the role that this committee can play there is to ask 
them to come back with a plan for doing whatever they think is 
right and proper, to solve as much of the problem as possible.
    In the old food stamp program, when we had paper food 
stamps, we used to think that States did a good job if the 
improper issuance was less than 5 percent. I don't know what it 
is in the electronic area. And everybody in the oversight 
community agreed that a State under 5 percent was doing the 
best it could, that there was some breakage in the system.
    So I think if you could engage with Social Security, have 
them develop a plan for eliminating these erroneous payments, 
bring it back to the committee, along with the IG, and engage a 
conversation.
    What I tell my students is, ``look, lay a plan out that you 
think is appropriate and then get people to agree to it. If 
they won't agree to it, then you've got to go back and fix the 
plan.''
    So I think in that instance, for erroneous payments, 
getting all the usual suspects together and having you provide 
the leadership and the oversight, having the IG do the work, 
having the CFO at Social Security--who will probably hate me in 
the morning for having suggested this--is very good.
    But we certainly did that at HUD when we had some terrible 
problems in mortgages. I remember sitting with Mrs. Mikulski's 
staff at the time and laying out the plan for dealing with some 
of the loans that had gone terribly wrong. So I would suggest 
that would work well here.
    Mr. Kinghorn. Giving a little perspective on that, 15 or 20 
years ago, before the CFO Act was passed, there were a lot of 
agencies, and still are some of them, who had real trouble with 
collections process. Education was one of them. Other agencies 
were involved, Social Security, Medicare and Medicaid.
    And with the passage of the CFO Act and the fact that 
agencies took heat for not getting clean opinions, which all of 
those agencies had problems with in the beginning, the light 
was shined on those issues because they were clearly in IG 
reports years before. In trying to get a clean opinion, you 
really had to look at your financial processes and realize the 
reasons why you had a billion a month in certain programs.
    Fast forward now 20 years later, at least my reading of the 
people that are on the line responsible for this, I doubt--I 
mean, I was very shocked that someone would say openly or tell 
the IG or the IG would say, they don't care. I sense they do 
care now.
    And I would agree with Ed. I think they have better tools. 
They have better financial information to know not only where 
their problems are, but hopefully why they have problems. And I 
would agree. A light shined on issues constantly tends to get 
things improved.
    And the sense is, in government, that they can wait us out. 
I think you can make it pretty uncomfortable to wait out on 
those big issues. But I would bet because of the last 10 or 15 
years, Education certainly now is much more interested and has 
its act together on that issue, whereas 15 years ago I think 
they did say, it's not my problem; my job is to get money out 
to students and to schools. Now they say, ``My job is to do 
that, but I realize if I am wasting a billion a month, that's a 
billion that could go toward those customers.''
    So I would really recommend shining the light on it. And 
through these innovations they have a better idea of the 
problem and what causes the problem, which they didn't have 8 
to 10 years ago.
    Mr. Gutknecht. If I could just say that--Mr. Chairman, my 
apologies. We are going to have a series of votes, right?
    Mr. Platts. Apparently it's just going to be one. Previous 
question is what we're being told. We are checking.
    Mr. Gutknecht. OK. But that was lots of bells.
    But let me just add to that point. We, the Congress, have 
become enablers because when we hear about departments or 
agencies that can't pass their audit, that can't account for 
literally hundreds of millions, if not billions, of dollars. 
The remedy which our appropriators usually serve up the next 
year is, well, I guess we'll just have to give them more money. 
And in some respects, we do.
    I think that attitude, that sometimes is fostered by us in 
Congress, perpetuates the problem because I have seen agency 
after agency that couldn't pass an audit, that had serious 
financial problems, and the next year their budget went up. And 
the law teaches. And the Congress teaches.
    So, again, thank you. And this is--but I do, I think the 
suggestion that somehow we send a clear message that it is the 
responsibility of the people in whatever agency to develop a 
plan; and it is our job to make certain that plan is 
implemented and reviewed. Thank you.
    Mr. Platts. Thank you, Mr. Gutknecht.
    And apparently it is the previous question, and now 
apparently they are going to do a roll call on the rule, not 
voice it, so there will be two votes.
    I think we will go and get in as many questions as we can 
and see where we are, whether we try to have me sprint over and 
back, or see if we can get far enough along.
    Mr. Kearney, one of your comments was, one of the 
challenges of the public sector is because we do things so 
differently and we basically have to have everybody homegrown 
for financial management in the Federal Government.
    And you touched on, maybe we have gone too far away from 
the private sector and should be looking at trying to get back. 
And our hearing, our dialog, has begun with--about 
streamlining, consolidating. But by your comment, it may be 
that we all should be more serious about also refining not just 
consolidating what we have, but looking at what we should be 
doing differently, meaning similar to the Federal or the 
private sector, as opposed to the way the Federal Government's 
done it.
    Are there examples of that you would want to highlight that 
we should be looking at, things that jump out that maybe--20 
years ago maybe were justifiable, but today we need to rethink?
    Mr. Kearney. Well, the concern that I was really trying to 
express was that there hasn't been a lot of new initiatives. 
There have not been a lot of changes. We still do accounting 
with the budgetary and the proprietary accounts, the way that 
we always did. And it is probably a good time to encourage some 
agencies to possibly work toward something simpler.
    Maybe we don't need the same complexity in the budgetary 
and proprietary accounting accounts that we have today, and by 
selecting an agency or two that could be a demonstration 
project, maybe we could find out if there are better ways to do 
things.
    And I mention--I mean, even in light of Mr. DeSeve's 
comment about the report he received every morning in the city 
of Philadelphia, it had basic management information that he 
needed to do his business that day.
    We punish financial managers in the Federal Government that 
deviate too far from whatever the rules are. Today, we have a 
rules-based system that probably could lend itself to being a 
little more principles based, and by identifying opportunities 
for change, or that might foster change or new or creative 
original thinking, then we can go a long way to making things 
better.
    And my comment on moving toward the private sector model is 
really a practical observation that would probably increase the 
number of financial people that we have, so they don't all have 
to be completely homegrown.
    Mr. Platts. On the one hand, trying to incentivize for 
managers to think outside the box and be more creative: The 
other side of that is that in the sense of when they do things 
that maybe we don't want, or are not appropriate, what are the 
consequences for not following the various financial management 
laws for the last 20-some years. In the private sector there 
are more direct consequences--firings, demotions, stock options 
that aren't given, whatever it may be.
    But one of the things we keep hearing in regular hearings 
here--and it is really a question maybe for all four of you--
is, how do we convey? And a little bit of what Mr. Gutknecht 
said is that if you don't follow these Federal laws as internal 
controls under the Integrity Act, whatever the requirements 
are, there are consequences.
    Sarbanes-Oxley is very much about consequences in the 
private sector. But--and an example right now is, we passed new 
legislation last fall that the President signed regarding the 
new Department of Homeland Security regarding financial 
accountability, that they will have an audit of their internal 
controls after the 2005 fiscal year and basically a 2-year 
lead-in--and they would like to push that back, even though the 
President just signed that bill, and say, well, we are not 
going to be able to comply; if we don't, so be it, in essence, 
is the way I read their response because there is not 
necessarily any spelled-out consequence for the Secretary or 
the CFO over there, if you don't do this, your pay is docked or 
whatever.
    Is there a way to have more accountability across the board 
that should be part of this look of consolidation, 
streamlining, and that whatever our end result is that you 
comply or pay the consequence?
    Mr. DeSeve. I am still waiting for the first person to be 
criminally sanctioned under the Anti-Deficiency Act. Each year 
I would get half a dozen anti-deficiency cases which I have 
thought, on their face, some of them were potentially 
sanctionable, and I couldn't get the Justice Department to 
pursue them. Now there is a sanction that is in place.
    Mr. Platts. And we see that probably a month ago, I think 
it was, was it DOD and the computer, $130 million was spent. 
And I said, well, has anyone been demoted? Have we sought 
recoupment of the money that was paid for something that 
doesn't do what it's supposed to do?
    And the answer was, not to the best of our knowledge.
    I think it was actually Justice, in fact. It was not DOD; 
it was Justice. They said, no, not to best of our knowledge, no 
one's suffered any consequences for the failure to really look 
out for the taxpayers.
    Mr. DeSeve. I think the--one way to approach it, when I was 
a political appointee in the Department of Housing and Urban 
Development, I actually had as an object lesson Judge Arlen 
Adams, who was sitting in Philadelphia. And there were dozens 
of HUD employees who were indicted by that grand jury, and 
several who went to prison as an object lesson. The rest of us 
in HUD were fairly focused at that point. That focused our 
attention because Judge Adams continued to sit.
    I think the issue is to let the political appointees within 
the departments, as opposed to the career staff, know that you 
will be asking them to come and explain the problems that 
existed.
    Obviously, Mr. Mueller, I am sure, explained what went on 
with the FBI system, but letting him know that the Assistant 
Secretary--that the Deputy Director of the FBI, the Assistant 
Director of the FBI should be similarly culpable. And almost 
like putting a letter in their files, if you will, not quite 
the same thing, but having this committee have hearings and 
make findings that something went wrong: ``it was your watch, 
and we want you to come and explain what happened and we are 
going to make that a matter of record.''
    That scared the hell out of me. I mean, it really did. I 
worried each day that there would be something in the 
Washington Post.
    Again, it was Mrs. Mikulski at the time, and she had a 
clerk who was a pain in the neck, who I would name but he is a 
friend of mine now. And I was just terrified that they would 
come down and open something up and try to embarrass the 
Secretary.
    Now they were the same party, so there wasn't quite as much 
incentive for that embarrassment. But I think holding people up 
to the light of day and asking them to explain why they didn't, 
on their watch--I teach the 9/11 Commission report as a case 
study. There's a lot of careers in the 9/11 report that are 
never going to be the same as a result of the findings in that 
report.
    So that is where I would go with it, and I think only this 
committee or committees like it can do that.
    Mr. Platts. Mr. Tierney.
    Mr. Tierney. Mr. Chairman, I guess I am the only one at the 
table to say I am older than Ed DeSeve.
    Mr. DeSeve. Excuse me. May I stipulate that Mr. Kinghorn is 
older than I am.
    Mr. Kinghorn. I am not speaking.
    Mr. Tierney. But this question--I chaired many years ago a 
Government Accounting Association committee and also one by the 
American Association of CPAs. Both of those led to reports that 
were basically a major piece of--the CFO Act came out of those 
reports. Both government officials and executives and people 
with the--at that time, it was called the Financial Executives 
Institute, of the private sector, Fortune 500, many of whom 
spent time in the Federal service. They left their careers in 
the private sector, did time in the Federal service.
    They had the same conclusion, and it was in both of these 
reports that the laws, as written, made no one responsible for 
doing something. It was like ``the head of the agency shall,'' 
and then, of course, the head of the agency changed three or 
four times in 3 years. And then when something went wrong, no 
one to blame, so there is nobody accountable either way.
    So people weren't made responsible by--well, certainly not 
name, but by a specific position; and to hold the head of the 
agency responsible when they are 5,000 feet above the problem 
that occurred, was made almost unenforceable.
    The other thing is that I appreciate what the committee is 
attempting to do because in preparing for this session, I took 
quite an interest in it, and just curiosity, looked it up; in 
the 1990's, the decade of the 1990's, more financial management 
legislation was passed than in any 10 years in the history of 
the country. A lot of well-meaning people, your colleagues and 
predecessors, tried to do things. I think what we ended up with 
was an overwhelming number of laws that we haven't fully 
digested.
    So I did some other research and found that every so often, 
or at least once before, predecessors in Congress had faced 
that same thing. In fact, I speak of the Budget and Accounting 
Procedures Act of 1950. That law, I found, changed 106 laws 
that went before it over the past 40 years. The 1921 act set up 
GAO, the FBI Bureau, the budget; those laws were on the books 
and a lot of others. And in 1950 that act cleaned out 106 laws 
and parts of many other laws too.
    So this is a challenge, but I think it is needed. I think 
most of what has to be said in laws has been said. It is a case 
of refinement, picking out the things. Ed mentioned--Ed DeSeve, 
Ed Kearney--about the need for audits, and trust and verify. I 
think that is fine. I think we need that because when you look 
at the CFO Act, and people point to the success of the CFO Act, 
the only things that have succeeded are the things that were 
audited.
    At last count, there was about 20, maybe a couple of dozen 
items, in the CFO Act, financial management, that should have 
been done, but basically the things that were done were the 
things that were audited. So you can't--you know, you can't 
really knock the trust and verify, because the things that were 
done are the ones we verified.
    Mr. Platts. Mr. Tierney, I don't want to cut you off, but 
if you can hold the thought, I am going to run over and get two 
votes in. I think I can be back in about 7 minutes, if you will 
bear with me. You can time me.
    So we are going to stand in recess, hopefully for no more 
than 7 minutes.
    [Recess.]
    Mr. Platts. And for the record, if they hadn't kept the 
vote open for an extra 8 minutes on the first one, I would have 
made my 7 minutes. But politicians, promises, promises. Right? 
So my apologies for having you wait.
    Mr. Tierney, as I ran out the door, in your comments you 
touched on the breadth of new laws in the 1990's and the 
substantive nature of those, and we are in a sense still 
digesting and moving forward with some of those. Is our effort 
at all premature because we haven't allowed the work of those 
new laws to be fleshed out and moved forward in a positive way? 
Or is it here we are in 2005, this is a good time to see, well, 
they are all in place, and they are starting to be implemented 
and better understood, so it is a good time to be looking at 
this from how to streamline or consolidate?
    Mr. Tierney. No. I think the timing is just right. I think 
it is just right. In fact, we see--as you have heard at the 
table this afternoon, we have heard that if things are not 
followed up and that, they don't happen. A few things that 
happened to the CFO Act where the ones that were--the things 
that were audited. We have some agencies 15 years later that 
after a while you figure, well, maybe they just don't want to 
do it. Because we are not talking rocket science here, we are 
talking about transactions that happen every day, money is 
spent every day, and it is recorded somewhere. I mean, it is 
not that difficult.
    Mr. Platts. Expanding on that to you and to, again, all of 
our witnesses. One of the specific issues--and we are getting 
into some more specifics as opposed to the broad big picture, 
but the idea that the CFO Act, because of requiring audits, 
requiring a specific act forced the Department's agencies to 
actually respond because it was more delineated. In that bill 
that I referenced earlier with DHS and the internal control 
audit requirement that is specifically to that Department, the 
rest of the departments are now governed by the new regs put 
out by OMB where they have to review their internal controls 
and make an assessment and perhaps do more depending on their 
assessment.
    Should we be maybe leaning more toward that internal 
control audit being more pervasive across the Federal 
departments and agencies, or at least the larger departments 
and agencies, or should we let the OMB reg circular run its 
course and see how that comes back?
    Mr. Tierney. Well, I think the OMB at this point has tried 
to pull together the essence of the legislation. I do think 
that controls are a big piece of the answer, the emphasis on 
controls. But that gets you immediately into the details. And I 
say controls from a couple of standpoints.
    In many agencies I will describe what I characterize what 
they call the fiscal controls where somebody signs a piece of 
paper authorizing. But historically, as we look at the Federal 
agencies, sad to say, many of the Federal agencies are still 
running with what we in the trade call the legacy systems, the 
old system. And with innovation, improvement and that, I think 
data computerization has changed the whole equation that--and I 
am not sure, I don't have any evidence to back it up, some 
evidence, but not a perfect case to make, that we haven't 
changed the controls to meet the automation. So I think you get 
into the details.
    I think it is a case of controls and as well as the audit. 
A lot of people are trying very diligently to bring together 
these pieces of legislation. OMB with the 123 has basically 
adopted Sarbanes-Oxley except for the audit.
    Mr. Platts. And we are delighted with OMB, I mean, in 
essence, that a cooperative effort, that while we would only 
request the mandatory internal control audit for DHS in return, 
in essence, for OMB being maybe more diligent through the 
circular approach of having this review conducted and then 
identifying whether any additional departments or agencies 
should have an actual audit done of their internal controls. I 
would be interested if--Mr. Kinghorn.
    Mr. Kinghorn. Mr. Chairman, I think what revisions to A-123 
really were is really trying to bring in this COSO approach 
that was mentioned, the Committee on Sponsoring Organizations, 
which came out actually of the Coopers & Lybrand firm that I 
was a partner of a long time ago. I wasn't involved in that. 
But the idea there is that everything an organization does is 
internal control. It is not just the finance piece, not just 
accounting, it is how you as CEO operate and what kind of 
culture you establish, etc. So I think we should give them a 
lot of credit to do that.
    My guess is in their heart of hearts, many of the folks 
over there where several of us used to work probably would have 
liked to have gone further. I think if you probably scratch the 
surface, they might like to consolidate statutes, but my guess 
is from their perspective they don't see that as a short-term 
objective, nor is it something perhaps they want to do.
    I think the value--if you look at the OMB circular 123, I 
think in one of the sections they themselves mention 14 
incredibly broad sources where you as an organization in 
management can go to all the information on all the problems 
you have. And those 14 sources--these are broad categories--
then fall back to the 20 or 30 acts.
    So there is no shortage of information where you find your 
problems. If you go to sort of a performance report, you go to 
SSA, Social Security, who has a certificate of excellence from 
AGA--and I was actually involved in the review of the first 
time they got their certificate years ago--it comes out at 12 
megs on the Internet to download and 240 pages. It is 
telephone-book-like. And it represents this enormity and 
complexity of what statute, what function you go to. And I 
think that creates enormous waste in terms of just the ability 
to understand.
    So I think the OMB approach here was--I think what really 
was--consolidate some things, I think, very helpfully and 
really try to reemphasize, which was very popular 20 years ago. 
Twenty years ago when I came into this business, that is all we 
did was internal control reviews. We had management reviews on 
program. Then the CFO Act came in, and it went back to an 
accounting focus and financial statement focus. So this is 
really a return to the past. And I think if done well, with the 
consolidation of statutes so it is not so confusing, I think 
could be a good start.
    Mr. Platts. It is, in essence, trying to reaffirm the 
merits of the Integrity Act of 1982 and the internal control 
requirements of that act 23 years later.
    Mr. Kearney, did you have something else you wanted to add?
    Mr. Kearney. I might add on the A-123, you had asked 
earlier about is there any penalty for not conforming to 
whatever the laws might call for. A-123's approach prior to 
doing the audit opinion on internal controls, I like what they 
are doing at OMB. And they are saying as long as there is not 
systemic or consistent problems, an audit opinion wouldn't be 
required. So you really are imposing a bit of a penalty on the 
agencies. As long as they do what they are supposed to, the 
audit opinion isn't required. To the extent there are recurring 
problems, there will be an opinion. So I think that is an 
approach worth----
    Mr. Platts. So if you stay on top of it, you don't have to 
go through the effort and spend the money on that internal 
control audit incentive not to get that problematic.
    Mr. Kearney. Correct.
    Mr. Platts. A number of times throughout your testimonies, 
a number of you have mentioned, and Mr. Kearney just did, about 
legacy systems and technology and ability to modernize and 
really have the benefit of today's technology that gives us 
what we are looking for in information and relates to the 
conflict that was referenced earlier, the CIOs, CFOs, and how 
to better mesh those two positions. And is that something that 
we should be taking a close look at as part of this 
streamlining is to have better coordination between those two 
positions?
    Mr. Kinghorn. I will speak for myself, because we have 
talked a little bit about the group, a group we have. And we 
haven't gotten into this, but it is one of the areas we are 
going to get into. But from my experience--I was at IRS from 
1990 to 1995; I was brought in from the outside to really 
create a controller CFO function, and it was in their second 
stage of failing on their major systems. And it was not for 
lack of trying, it was a very long-term project, but there were 
two systems. There was one system in 5 years that I was there 
that was successful in being brought up, and it was the 
financial system that was brought up just as the CFO Act was 
passing. It is not because I brought it up; it is because of 
the structure which we used. I was in charge of that system and 
funded that system in conjunction with the CIO operation, but 
everyone knew who was responsible. And I think that is the key.
    Many of these systems have very confused management 
structures internally and in organizations, as some of the 
fellows in our group have asked, who is in charge, the CFO or 
the CIO? It is not an organizational issue. Someone has to be 
in charge and responsible that if it fails, Kinghorn is out of 
here. The problem--you don't see Kinghorn out of here--it is 
unclear even to the heads of agencies of who was in charge. So 
I think clarity of responsibility is key.
    Second, the funding is key. And I think that was crucial.
    And the final thing is that we don't give enough interest 
to the project management aspects of these large systems. We 
tend to overmanage contractors by layering upon the contractors 
an additional management oversight. And then I think agencies 
fail to manage what they should manage, which is the very high-
level oversight and quality control of the contractors. So it 
would be an area we really should get in with you.
    But I think you have to have responsibility of who is in 
charge. It is not an organizational issue, although I think in 
most cases, if it is a financial system, the CFO should be in 
charge of overall working with the CIO. If it is a new system 
for Medicare and Medicaid, the program manager of that program 
should be in charge and responsible, not the CIO, but it has to 
be in conjunction with the CIO.
    Mr. Platts. Mr. Kearney.
    Mr. Kearney. I might add that we have a similar problem in 
the private sector as well. And whenever you are undertaking a 
large systems effort, as we are going to suggest it, you do 
need one throat to grab. And if it is the CFO that is 
ultimately responsible, that is the person that should have a 
greater role in what is being done even though the CIO might be 
providing the technical expertise.
    I think it is definitely a good area to get into just 
simply because of the size of the projects. And I am not sure 
that there is an easy solution. Many years ago when I ran 
Sallie Mae's Loan Accounting operations, the only way I was 
able to solve my systems dilemma was to have the CIO staff come 
to work for me until 6 or 12 months went by and I had my 
systems up and running, because ultimately it was me that was 
on the hook, and those systems supported my operations. My 
ledgers used to be under my desk; today they are on somebody's 
data base someplace, but it is still me that is responsible for 
the function. So I do think that it is definitely within the 
scope of what you are doing, and I do think you have a tiger by 
the tail.
    Mr. Platts. An encouraging send-off. Well, we are glad to 
have you guys helping to grab hold of that tail with us.
    Did Mr. DeSeve--Mr. Tierney, did you have anything on that?
    Mr. Tierney. Not on that point.
    Mr. Platts. OK. Mr. DeSeve, one of your points you 
highlighted was with the IG position and what was envisioned, 
and maybe the challenge of that position today, the kind of 
conflicting roles. And I spoke to a good number of the IGs at 
their annual convention this year about a month back or so in 
Philadelphia, and one of the things I said to them I thought 
was appropriate, their guy there in the place of our Founding 
Fathers in Philadelphia, and also in the time we are in with 
men and women in harm's way as we are gathered there in Iraq 
and Afghanistan, and, to me, the importance of IGs being 
courageous as our Founding Fathers were courageous, because IGs 
to me are--their budgets are basically handled by who they are 
actually supposed to be watching and the secretary and whoever 
their agency head is. And it is a position that if you find 
your wrongdoing and follow that wrongdoing in an appropriate 
way, you are not going to be a very popular individual within 
your department or agency, and all the more they need to be 
courageous.
    One of the things you touched on was term-limiting IGs, and 
I was wondering if you want to expand on anything with that of 
how we can lessen the confusion, the confliction, the 
conflicting responsibilities of IGs, and really empower them as 
was originally envisioned by the IG Act.
    Mr. DeSeve. One of my great pleasures was serving as 
chairman of the President's Council on Integrity and Efficiency 
and the agency councils below that, the PCIA as well as ECIA. 
And I got to know IGs pretty well, and their functions are 
severalfold. First, in some agencies there is a real law 
enforcement function, where the IG will go in and create 
sanctions against an individual or group who are taking money 
from the Federal Government. The Labor Department has a great 
deal of that kind of activity. That needs to be bolstered, it 
needs to be recognized, it needs to be understood, but it can't 
dominate the rest of the agency along the way.
    The second thing they have or were given in the CFO Act is 
audit responsibility. So here we have a guy who is--or a gal 
who spends a lot of time worrying about who should be able to 
carry a gun--that is one of the things they can do, they have 
delegated authority to allow firearms to be used by their 
individuals and on the other hand is worrying about, gee, what 
are the new accounting standards coming out of what used to be 
JFMIP--I have to get that in--and the Federal Accounting 
Standards Advisory Board. Those are conflicting roles.
    Then there is the third role, the role in the middle, where 
mismanagement, nonfeasance, misfeasance as opposed to 
malfeasance comes in.
    So I think that a relook and recognizing those three roles, 
having this committee reauthorize almost the IG statute to go 
back and look at it, to open it up, and to give them a set of 
responsibilities that provides clarity among their roles is 
thing one.
    Mr. Platts. Not necessarily separating out any of those 
roles anywhere else, but just better delineating within.
    Mr. DeSeve. I think they are quite appropriate. The CFO 
can't be the auditor; he can't audit himself. If we create a 
separate law enforcement function, it is going to get confused, 
I think. And somebody has to be the overseer of good 
management, and so I think that the independence of the IGs is 
absolutely essential. And I think that, by and large--and I had 
to handle complaints against IGs when I was in the government. 
By and large the IGs have done a spectacular job of bringing 
integrity to the agencies, but some of them haven't had to 
recognize the multiple hats they were wearing; or, if they did, 
they didn't have an institutional sanction, they didn't have a 
law that said you are in the program management business, 
buddy; or here is the way in which you will execute the audits 
along the way. So I think that is No. 1.
    No. 2, there is good news and bad news. President Reagan, 
as I understand it, fired all the IGs when he arrived in the 
Federal Government, then he reappointed the ones that he cared 
about. That certainly was an interesting precedent. The IGs 
still talk about it, that everybody got fired, and then some 
people got rehired and some people didn't.
    On the other hand, other IGs believe that they have a right 
to the office perpetually; that to fire an IG is tantamount to 
firing a bishop or a cardinal. You can't do that.
    So I think that the idea of term limits, if the head of the 
FBI can have a term limit, if the head of the FAA can have a 
term limit, or the head of Social Security can have a term 
limit, putting a term limit that overlaps a potential of the 
administration, it allows for reappointment for a period, makes 
a lot of sense because there is then an expectation that there 
will be turnover at some point. That there will be an 
evaluation, there will be either a reappointment or a 
termination, one or the other--they simply won't be reappointed 
or they will--gives a new administration some discretion across 
the pool of IGs so that during their 4 years they can replace 
some IGs who have perhaps run out of gas. That happens 
occasionally.
    So I do favor some kind of term limit, but within the 
context of the delineated institutional responsibility and 
clarification, and engaging the IGs as to what they think about 
that. That is what we are really proposing is to bring the IGs 
in and have them talk to us about what they think their roles 
are.
    Mr. Platts. Hand in hand with the term limit would be that 
it is also a positive affixed term, meaning you are appointed 
for 5 years, and so you know are there and don't have to worry 
about, well, if I do something the administration doesn't like.
    Mr. DeSeve. That is right. Jane Garvey was the FAA 
Administrator for the first 2 years of the Bush administration 
and had been appointed by President Clinton. Greg Woods was the 
head of the Student Financial Assistance Program, had been 
appointed by President Clinton and so on. So, yes.
    Mr. Platts. And my understanding, that is something as part 
of the work of the Academy and your advisory committee you have 
put together is to reach out to IGs and to further explore some 
of their ideas.
    Mr. DeSeve. Yes.
    Mr. Kinghorn. Let me share, if I may, I think another 
consideration, which would be sort of another level, is 20 
years ago, 25 years ago, if you looked at the makeup and 
qualifications of most of the IGs, it goes a little bit to this 
point in a way. Most of them would be sort of like the neo-
attorneys of the world: professional CPAs, accountants, really 
focused on the accounting function, internal control function. 
If you fast-forward it now, I haven't quite kept up with all 
they are, but I think most of them now are probably law 
enforcement types or of predominantly that world. And I think 
like any organization, neither one is right or wrong, but if 
you look at qualifications for Inspectors General, I think we 
could give some thought to what we want in that leadership.
    If you have an accountant type, you are going to get an 
interest in accounting and internal control. If you have a law 
enforcement type, you are going to get that with accounting 
below that level. And I think some thought needs to be given, 
given all the other controls in government, which of those two 
or others that you would like to have laid out, if any, because 
leadership does change the focus of an organization.
    Mr. Platts. That actually relates to a specific question. 
We talked a lot about the CFO Act and the qualifications or the 
background of individuals. Deputy CFOs have a requirement for 6 
years with specific experience, and there is no such 
requirement for the CFO themselves. Is that something we should 
be looking at to--we have the Senate confirmation requirement, 
which hopefully then ensures more scrutiny of their 
qualifications and is going to lead to that, but should there 
be some statutory as far as what the qualifications are?
    Mr. DeSeve. I seem to remember there were some more general 
guidelines in the CFO Act. When it was passed, there was a 
fairly huge debate on how specific the act should be in terms 
of requirements, and I think rightly so. It probably came down 
at the time on a more generic you had to have something in your 
background that looked like financial management. There were 
several CFOs, not to be named at the table, that came in at the 
very beginning who were, in my mind, less than qualified, who 
had something in their background about financial management, 
but probably weren't of a sufficient stature.
    I think, since the last 10 years, 11 years, really starting 
probably in depth with the Clinton administration, to give them 
credit, the CFO quality, I think, is incredibly high. And if 
you look at their backgrounds--I think it would be very 
difficult to get through someone who did not have something 
that looked and smelled like a CFO background.
    Well, I am sure this will come up, and it has come up a 
little bit in our discussion so far. I think we will have 
recommendations for you that, if you chose to strengthen those 
words, here is what might be appropriate. I would be very wary, 
frankly, of having an accounting requirement, because some of 
the best CFOs don't know anything about accounting, and some of 
the best ones do. So it is really more about management and 
structure. If you look at the CHCOs, the Chief Human Capital 
Officers, trying to organize now around their world just like 
the CFOs did, they are struggling because they think they need 
CHCO expertise at the most senior leadership level. And my 
sense would be they really need management and leadership 
expertise. And if you can get them combined with your 
functional expertise, great. If not, I mean, my best 
controllers in IRS in the field were former compliance 
officers, who, because they went after people on taxes, they 
were CPAs, so it worked. But they knew the program, so they 
really related well.
    So I would be a little wary of making it look and smell 
like an accounting function per se, but I think some of the 
qualifications will certainly have some comments from CFOs on 
that.
    Mr. Platts. Mr. Tierney, and if I remember, you were 
involved in the work that led up to the CFO Act.
    Mr. Tierney. Right. I might add that the--I would like you 
to pursue it. But having said that, I want to let you know a 
failure last time. Tenure for the CFOs, just like we were 
talking some kind of a tenure of office for the inspector 
generals, it honestly failed last time. You will see that in 
the record of the CFO Act. But it goes to something Ed 
mentioned with respect to systems. These are big systems. It 
takes a year or two to issue the contract, another 2 or 3 years 
to do it, 5 years or more, and Morgan's organization says 18 
months is the most we get out of an appointed official, 
executive, senior executives who might be very qualified. But 
in that time span you could have three or four. There is no 
corporate memory. Industry--that is one thing that industry 
doesn't suffer as much as the government. That turnover is just 
enormous. And it is just difficult to get corporate memory 
except with the career civil servants or maybe a CFO that has 
agreed to do 4 years, or we were talking about 4 to 6 years in 
some of the proposals to Congress, the testimony. But it did 
not happen. It did not happen.
    I think, with some of the systems and putting in the 
controls in place, those are long-term projects. And it is just 
difficult to lose the leader that had an interest and get the 
people energized with the next leader and the next one and the 
next one.
    Mr. Platts. I have seen that as a newer subcommittee 
chairman in just a little over 2 years now here and in my time 
with a number of departments where we started working very 
closely with CFOs, and the turnover happens, and you are 
starting over. And you have a good initiative and good 
progress, and then you start anew, and you really lose that 
momentum. And I took note of that, that average turnover every 
18 months is one of the challenges, is having that consistency.
    Mr. Kinghorn, with the Academy's review, is there a general 
timeframe that you envision your efforts as you seek comments 
from the various individuals in the community that you think 
you will be ready to come back with some more detail?
    Mr. Kinghorn. I think we planned with staff that we are 
looking at September and October as sort of the first real 
output. But what we would like to do is, like today's hearing, 
as we roll this out, share with you and your staff some of the 
findings. But I think what we would plan to do, the ultimate 
work plan was in September, October to come up with sort of the 
10 or 11, whatever the number is, areas that really deserve 
your focus of the 500 things you could do with some 
specificity. And then we will have other information in 
addition to that, but perhaps work with you on an ongoing basis 
to flesh that out more specifically; you will say the first 
three aren't of interest to us, and we will focus on these 
four.
    So September, October. But I think what we would try to do 
is to try to do this on an ongoing basis.
    Mr. Platts. And that is the timeframe we internally have 
looked at of trying to, I will say, narrow the scope, because 
one of the challenges here is going to be how big this effort 
could be and what is manageable and feasible, given some of the 
history of some of these different acts, what was tried in the 
past, and are we going to fight those same battles again, or 
are we likely to take the approach that, well, we are not going 
to put the effort over there because we are unlikely to 
succeed, and it is more appropriate to use our resources on 
another part of the effort. So we certainly welcome that 
feedback throughout the process and then as we get more 
detailed in the fall.
    Mr. DeSeve. Mr. Chairman, while we are doing that, may I 
ask you to do something for us? Would you think about the role 
of the appropriators as consumers of financial information, not 
as people who give money or withhold money? Because one of the 
frustrations that many CFOs have is that the process, for 
example, of budget preparation involves preparing the 
President's executive branch budget and turning around and 
preparing a different set of information for the appropriators, 
often using a different account structure. Structure is 
terribly difficult to do a crosswalk from the President's 
budget back to account structure the way the appropriators 
would like to have it.
    The other thing that I learned--so if you could help us by 
thinking and maybe having some of the staff talk with some 
appropriations staff about how important information coming up 
to the appropriators could be rationalized and made a byproduct 
of financial management systems.
    At the same time, I will tell a very quick story. The most 
uncomfortable testimony I ever gave in my life, I think, was 
before Mr. LaFalce, who had been chairing the Small Business 
Committee of the House, and he was an appropriator. And I 
learned more about credit reform in that committee than I had 
ever known before. I figured, why am I being called before an 
appropriations committee to testify about credit scoring?
    Well, it was very simple. Credit scoring affected the 
number of small business loans that could be given out 
throughout America. The way we had structured our financial 
management process around thinking about the nature of the cost 
of a loan was perfectly linked to the appropriations process 
and the way loans were given out. Once that happened, the Small 
Business Administration immediately changed their procedures, 
changed their processes for tracking loans, tracking loan 
cohorts, tracking loan performance, because the industry groups 
were beating them up about we don't have enough loans to give 
out.
    Mr. LaFalce--I used him only as an example--obviously was 
very engaged. So when the appropriators become consumers of 
financial information, it changes the behavior of the agencies 
as well, which is not to suggest that the oversight committees 
aren't important. You are, because you are our window to the 
appropriators. Often they don't listen to agencies; they have 
their own institutional memory which is different than anybody 
else's institutional memory. So if there is a way for you to 
help us----
    Mr. Platts. We are certainly glad to try to share that 
insight and facilitate some of that dialog with the 
appropriator staff, especially to really get into the nitty-
gritty of that data.
    Mr. DeSeve. We are not trying to change anything. Although 
I want to applaud Mr. DeLay; we are of different parties. I 
thought the bold move that he and others took this year in 
looking at the rationalization of the appropriation committee 
structure was very important. I may be out of the Democratic 
Party for saying something nice in public about Mr. DeLay, but 
it was a bold move, and it is the kind of thinking that will 
itself improve financial management. When it is easier to 
present information in a rational way to a rational group, I 
mean by that a rationalized group, it just helps everybody.
    Mr. Platts. Any other comments that any of you want to 
share before we wrap up?
    I want to again thank each of you for being here as we 
publicly begin a process that we have had some dialogs about 
and look forward to continue the discussion, and having your 
insights is going to be very important and very helpful to this 
effort, and those who described trying to grab this tiger by 
the tail. The more assistance we have, the more likely of any 
success we will achieve. So we welcome your input and 
appreciate your patience here today in getting started later 
than planned, and then also having a break for the votes.
    So we will keep the record open for 2 weeks for any of my 
colleagues for statements or any other information you want to 
share.
    This hearing stands adjourned.
    [Whereupon, at 4:28 p.m., the subcommittee was adjourned.]
    [The prepared statement of Hon. Edolphus Towns follows:]


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