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



 
15 YEARS OF THE CFO ACT--WHAT IS THE CURRENT STATE OF FEDERAL FINANCIAL 
                              MANAGEMENT?

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

                                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

                               __________

                           NOVEMBER 17, 2005

                               __________

                           Serial No. 109-121

                               __________

       Printed for the use of the Committee on Government Reform


  Available via the World Wide Web: http://www.gpoaccess.gov/congress/
                               index.html
                      http://www.house.gov/reform
                                 ______

                   U.S. GOVERNMENT PRINTING OFFICE
26-239 PDF             WASHINGTON : 2006
_________________________________________________________________________________
For Sale by the Superintendent of Documents, U.S. Government Printing Office
Internet: bookstore.gpo.gov  Phone: toll free (866) 512-1800; (202) 512-1800  
Fax: (202) 512-2250 Mail: Stop SSOP, Washington, DC 20402-0001





                     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
JON C. PORTER, Nevada                C.A. DUTCH RUPPERSBERGER, Maryland
KENNY MARCHANT, Texas                BRIAN HIGGINS, New York
LYNN A. WESTMORELAND, Georgia        ELEANOR HOLMES NORTON, District of 
PATRICK T. McHENRY, North Carolina       Columbia
CHARLES W. DENT, Pennsylvania                    ------
VIRGINIA FOXX, North Carolina        BERNARD SANDERS, Vermont 
JEAN SCHMIDT, Ohio                       (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
                          Erin Phillips, Clerk
            Adam Bordes, Minority Professional Staff Member




                            C O N T E N T S

                              ----------                              
                                                                   Page
Hearing held on November 17, 2005................................     1
Statement of:
    Combs, Dr. Linda, Controller, Office of Federal Financial 
      Management, Office of Management and Budget................     3
    Steinhoff, Jeffrey C., Managing Director, Financial 
      Management and Assurance, Government Accountability Office.    10
Letters, statements, etc., submitted for the record by:
    Combs, Dr. Linda, Controller, Office of Federal Financial 
      Management, Office of Management and Budget................     5
    Steinhoff, Jeffrey C., Managing Director, Financial 
      Management and Assurance, Government Accountability Office, 
      prepared statement of......................................    13




15 YEARS OF THE CFO ACT--WHAT IS THE CURRENT STATE OF FEDERAL FINANCIAL 
                              MANAGEMENT?

                              ----------                              


                      THURSDAY, NOVEMBER 17, 2005

                  House of Representatives,
Subcommittee on Government Management, Finance, and 
                                    Accountability,
                            Committee on Government Reform,
                                                    Washington, DC.
    The subcommittee met, pursuant to notice, at 2:40 p.m., in 
room 2247, Rayburn House Office Building, Hon. Todd Russell 
Platts (chairman of the subcommittee) presiding.
    Present: Representative Platts.
    Staff present: Mike Hettinger, staff director; Tabetha 
Mueller, professional staff member; Dan Daly, counsel; Erin 
Phillips, clerk; Adam Bordes, minority professional staff 
member; and Cecelia Morton, minority office manager.
    Mr. Platts. This hearing of the Government Reform 
Subcommittee on Government Management, Finance, and 
Accountability will come to order.
    As stewards of the taxpayers' money, we in Congress have 
perhaps no greater responsibility than to ensure that every 
dollar is spent wisely. Regardless of party affiliation or 
ideological bent, all of us entrusted with public resources 
agree that they must be managed effectively and safeguarded 
from fraud or misuse.
    Toward that end, President George Herbert Walker Bush 
signed the Chief Financial Officers Act on November 15, 1990. 
The CFO Act was heralded as the beginning of a new era not only 
in Federal management and accountability but also in efforts to 
improve government operations. The law laid a foundation for 
comprehensive reform, establishing Chief Financial Officers in 
all major executive agencies as well as a Deputy Director for 
Management and a Controller in the Office of Management and 
Budget.
    With the understanding that transparency brings 
accountability, the CFO Act also instituted the requirement for 
Federal agencies to submit audited financial statements, begun 
on a piloted basis and eventually extended to all agencies.
    In 1996, when the first year audits were performed 
governmentwide, agencies took 5 months to close their books. 
Only six were able to earn a clean opinion. Fifteen years 
later, we have seen progress. Instead of 5 months, agencies now 
have only 45 days to submit audited statements. As opposed to 
only a handful of agencies, the majority of Federal departments 
now earn clean opinions on a regular basis. Two days ago, all 
agencies were required to submit their statements for fiscal 
year 2005, and we will discuss the results of those audits here 
today.
    It is important to note that sound financial management 
does not end with a clean opinion. In fact, clean audits are 
merely a starting point. What we need is timely, accurate, 
useful financial data to manage programs effectively, to shift 
resources if necessary, and to make informed decisions. This 
was a need that was highlighted by the response to this year's 
devastating hurricane season.
    Despite progress in a general sense, the audits reveal a 
troubling picture at some of our most important departments. As 
a nation at war and under the threat of terrorism, management 
at the Department of Defense and Homeland Security should be 
top-notch. Yet these two departments have never been able to 
earn a clean opinion, a trend that unfortunately continues this 
year. It is dangerous to assume that an important front-line 
mission should relegate management to the back burner. On the 
contrary, sound financial management can only enhance mission 
performance. This is why it must be a priority at every 
department. This level of transformation can only occur with 
the commitment of top leadership.
    We are honored to have two influential leaders in financial 
management before us today. The Honorable Dr. Linda Combs is 
the Controller for the Office of Federal Financial Management 
at OMB, one of the key positions established by the CFO Act. 
Dr. Combs has served as CFO at the Department of Transportation 
and the Environmental Protection Agency and brings an important 
perspective as she guides CFOs governmentwide.
    Mr. Jeffrey Steinhoff is the Director of Financial 
Management and Assurance at the Government Accountability 
Office. He was part of the team that was instrumental in 
drafting and enacting the CFO Act.
    We thank both of you for being here today and for your 
continued work with the subcommittee. We will look forward to 
your testimonies. As a practice, we will have both of you stand 
and be sworn in. If Mr. Towns joins us during your testimony, 
we will see if he has a statement that he would like to offer 
before we then go into questions, depending on his interest.
    If you would both raise your right hand, and any staff that 
will be guiding you today, if they would stand and be sworn in 
as well.
    [Witnesses sworn.]
    Mr. Platts. Thank you. The clerk will note all witnesses 
affirmed the oath.
    We appreciate, as always, your substantive written 
testimonies and allowing us to be well prepared for a good 
dialog here today. We are going to set the clock for 8 minutes, 
but we really do appreciate both your time and efforts, and 
that is a guide. But don't worry, if you need more time to 
complete your statements, please take the time. We really want 
to hear what you have to say.
    Dr. Combs.

  STATEMENT OF DR. LINDA COMBS, CONTROLLER, OFFICE OF FEDERAL 
     FINANCIAL MANAGEMENT, OFFICE OF MANAGEMENT AND BUDGET

    Ms. Combs. Thank you, Chairman Platts, and we welcome the 
opportunity to be with you today. It is a great opportunity to 
appear before this committee and discuss the CFO Act and the 
overall state of financial management in the Federal 
Government.
    When the CFO Act was passed in 1990, I was the Assistant 
Secretary for Management at the Department of the Treasury. So 
for those of us who have worked on the CFO Act from its initial 
passage and have been passionate about financial management in 
the Federal Government for all these years, it is indeed a 
welcomed opportunity to have a 15-year reflection and to remind 
ourselves of how far we have actually come thanks to the 
committed efforts of people sitting here at this table and 
people behind the bench where you sit as well. So I thank you 
again for this opportunity and for the financial management 
support that you give in the Federal Government.
    I think there has been tremendous, strong progress in 
Federal financial management, and recognizing the 
accomplishments of hard working financial managers across the 
Federal Government is a tremendous, wonderful way to celebrate 
the 15 years that we are here to talk about today.
    When the CFO Act was signed 15 years ago, the Federal 
Government was responding to many financial management 
challenges. And in responding to these challenges, the act, as 
you pointed out, set forth many ways in which financial 
management should be strengthened. One of those ways was in the 
leadership. Another was in implementing more disciplined 
financial controls and producing more timely and reliable 
financial information for day-to-day decisionmaking.
    I am proud to share that today. Here 15 years later, we do 
have the CFO community that's committed to very, very strong 
financial leadership, committed to transparency in financial 
reporting, and committed to meeting the very highest standards 
in reporting, and that we are reporting on those highest 
standards to be the highest in our modern memory.
    The administration monitors our financial goals using the 
improved financial performance initiative under the President's 
management agenda. We are definitely looking for results in 
financial management. We believe that what gets measured gets 
done.
    The improving financial performance initiative, as part of 
the President's management agenda, includes a very detailed set 
of financial standards that every Federal agency is accountable 
for meeting. As the Controller in the Office of Management and 
Budget, I work very closely with each of our agencies' CFOs to 
develop financial management improvement plans and to monitor 
those results.
    I want to say that I am very, very proud of our CFOs. I am 
proud of their hard work, diligent efforts, and continuing 
efforts to improve Federal financial management. We in the 
administration know that money we spend is indeed the 
taxpayers' money. Therefore, we must be good stewards of the 
people's money. And over the past few years, we have made 
tremendous strides in accelerating, improving, and streamlining 
financial management processes.
    Timely audits are vital for ensuring that taxpayer money is 
spent honestly and wisely. When the CFO Act was passed in 1990, 
as I recall there were only five agencies at that time that 
were participating in a pilot to see if they could even produce 
auditable financial statements. As I recall, the result of that 
was that one of those pilots actually attained a clean audit.
    Moving forward to 10 years later, in 2000, when we came 
into this administration, the CFO Act agencies were taking as 
long as 5 months still at that time to complete their financial 
statements. And now we have Federal agencies that are reporting 
45 days after the end of the fiscal year. And this year, just 2 
days ago, we reached a remarkable milestone in regard to that 
45-day reporting deadline. On Tuesday, November 15, every major 
Federal agency completed its performance and accountability 
report just 45 days after year end of the 2005 fiscal year. 
This is the first time every audit was completed since that 
deadline was set in 2001. That is, in and of itself, a 
remarkable success story.
    As a result of the accelerated reporting process and the 
expectations of high standards, the overall quality of 
financial reporting at Federal agencies has consistently 
produced clean audits. For 3 consecutive years the number of 
unqualified opinions has remained relatively stable. 
Additionally, I believe our steps to bring about stronger 
internal controls, which are emphasized in the revisions to 
Circular A-123, represent tremendous advances toward timely and 
reliable financial information.
    Beginning with this fiscal year, and already in progress, 
agency managers are required to undertake a strengthened 
internal control assessment process. Key milestones from these 
plans are being incorporated into the improved financial 
performance initiative scorecard to ensure that agencies are 
accountable for meeting their goals. These efforts will 
culminate in the agencies' first management assurance statement 
for internal controls over financial reporting on June 30, 
2006.
    In closing, I continue to believe that the President's 
management agenda is one of the most effective tools we have in 
promoting financial improvement and excellence to hold agencies 
accountable for good, positive results. The administration 
remains dedicated to being a good steward of taxpayer dollars 
through strong financial management. Specifically, we hope to 
accomplish this through continued good leadership, our 
dedication to transparency, and our adherence to the highest 
standards possible.
    I look forward to continuing to work with this subcommittee 
on the overall financial management of the Federal Government. 
Thank you, Mr. Chairman, for the opportunity to be here with 
you today. I will be pleased to address at the appropriate time 
any questions that you may have. Thank you.
    [The prepared statement of Ms. Combs follows:]
    [GRAPHIC] [TIFF OMITTED] T6239.001
    
    [GRAPHIC] [TIFF OMITTED] T6239.002
    
    [GRAPHIC] [TIFF OMITTED] T6239.003
    
    [GRAPHIC] [TIFF OMITTED] T6239.004
    
    [GRAPHIC] [TIFF OMITTED] T6239.005
    
    Mr. Platts. Thank you, Dr. Combs. We appreciate your 
testimony. Mr. Steinhoff.

STATEMENT OF JEFFREY C. STEINHOFF, MANAGING DIRECTOR, FINANCIAL 
   MANAGEMENT AND ASSURANCE, GOVERNMENT ACCOUNTABILITY OFFICE

    Mr. Steinhoff. Chairman Platts, it is a special privilege 
to be here today on the 15th anniversary of the passage of the 
CFO Act, widely heralded as the most far-reaching financial 
management reform legislation in 40 years. A decade and a half 
later, the act has clearly stood the test of time and is the 
foundation of efforts to strengthen financial accountability.
    Today, I would like to do three things: Provide a quick 
historical perspective of what the framers of this act were 
trying to achieve; second, share my thoughts on the impact of 
the act to date; and, finally, to talk about some of the 
challenges going forward, as we are not yet at the finish line.
    Let me quickly touch on the historical perspective. In 
1990, the environment was one where financial systems and 
controls were abysmal and there was hardly any good year-end 
financial reporting. Clearly, financial management was not a 
high priority and the CFO job was typically part of a broader 
range of duties and received short shrift. The CFO Act was 
directed at establishing financial accountability and managing 
the cost of government. It was even recognized back then that 
we did face serious financial challenges and we had to manage 
our costs much better.
    While understandably there is a lot of focus on the audited 
financial statements, the end game has always been the 
establishment of a fully functioning CFO operation that 
includes a cadre of highly qualified CFOs and supporting staff, 
modern financial management systems that provide reliable, 
timely, and useful information to support day-to-day 
decisionmaking and that enable the systematic measure of 
performance--this is not about accounting, it is about 
accountability--and, finally, sound internal controls that 
safeguard assets and ensure accountability.
    Regarding the impact of the act 15 years later, I would 
like to answer a few questions tied directly back to the act's 
objectives.
    Has the quality of financial management leadership been 
strengthened? The answer is an emphatic yes. The CFO position 
has moved from the back room to the board room. Dr. Combs, who 
came to this job with a proven track record in financial 
management, not in something else, exemplifies today's CFO.
    Have financial management systems improved? Again, yes. 
While systems continue to be the most difficult challenge by 
far, we are not close to the finish line there. There has been 
important progress, people have come a long way, whether it be 
standardization, core systems, or better defining what is 
required and needed. And for most agencies the problems are not 
nearly on the order of magnitude they were in 1990. There are, 
nevertheless, very difficult challenges ahead, and they fall 
mainly in the area of systems.
    Have there been improvements in internal control? Again, 
yes, but it is with financial management systems that 
additional improvements are needed. Importantly, recent 
revisions to a 123 that you and Dr. Combs referred to, which 
GAO fully supports, have bolstered the emphasis in this 
important area.
    Has financial reporting improved? As you pointed out in 
your opening statement, 18 clean opinions versus 6. In 1990, no 
one even imagined we would have a requirement for audited 
financial statements. There were pilots. They weren't expected 
to go too far. No one would have ever imagined one clean 
opinion versus 18, much less in 45 days. Where the law gives 
folks 5 months, the fact of the matter is in some of those 
earlier years, there were some agencies that took up to 13 and 
14 months. So this is a major achievement.
    Most importantly, we have witnessed a culture 
transformation. In 1990, not everyone in the CFO community was 
supportive of the CFO Act. Some believed the demand for reform 
would simply run its course and fade away. Well, that has not 
been the case. We have seen strong support from the past three 
administrations. From the outset of the current administration, 
improved financial management has been one of the cornerstones 
of the President's management agenda. We have seen strong 
support and continuous oversight by the Congress. Especially 
important has been this subcommittee's strong leadership.
    As Dr. Combs mentioned, you get what you measure. And one 
measure, a very important measure, is whether Congress really 
cares.
    Fifteen years later, people no longer question the value of 
the concepts in the CFO Act. Today, the question is no longer 
why do I have to do these things, but rather how can I do them 
better?
    While I have spoken about the positive impact of the act, 
the journey to excellence in financial management is far from 
over. I see five principal challenges for the future.
    First and foremost, agencies must take full advantage of 
modern technology and develop financial management systems that 
are integrated with a range of other business systems. This is 
a key requirement of the CFO Act.
    The past is littered with far too many failed systems 
initiatives and/or projects that simply perpetuated stovepipe 
systems. One need only look at the Department of Defense. 
Despite spending tens of billions of dollars, and at last count 
having over 4,200 business systems, DOD remains high risk in 
every primary business area and cannot produce auditable 
financial information. Today, we see strong commitment in DOD 
to transform its business operations and to overhaul financial 
management. But it will take many years under the best of 
circumstances to address deeply rooted problems.
    Second, the financial management work force of the future 
will have to be able to provide even greater strategic decision 
support in order to add value to program managers. The goal is 
to move primary focus from transaction processing and 
reconciliation and cleaning up of errors to the systematic 
measurement of performance and the development of cost 
information, as called for in the CFO Act. This will require a 
different skill set.
    Third, addressing internal control weaknesses will be an 
ongoing challenge. Good internal control requires constant 
vigilance. It is not a one-time event and an ability to 
leverage technology. Improper payments and computer security 
are two cross-cutting issues that are now being addressed.
    Fourth, we must continue to refine financial reporting so 
that there is better transparency regarding our Nation's fiscal 
condition. A summary consolidated financial report and 
different ways of recognizing the range of Federal commitments 
are two areas on the radar screen.
    Finally, we must deal with the long-term nature of reform 
and provide for continuity in an environment where leadership 
changes are a way of life. The President's management agenda 
has provided a sound framework for reform. It fully supports 
the concepts of the CFO Act and has been very important in what 
we have seen in the last 5 years. The job, though, will not be 
complete at the end of this administration and continuity will 
be critical going forward.
    In closing, I want to thank this subcommittee and its 
predecessors who had the vision to enact the CFO Act and for 
the positive continuous support and oversight over the past 15 
years. Your continued attention has been instrumental to the 
very positive results we have seen to date and will be 
essential in reaching the goals of the CFO Act going forward.
    This completes my summary statement. I will be pleased to 
answer any questions that you may have at this time.
    [The prepared statement of Mr. Steinhoff follows:]
    [GRAPHIC] [TIFF OMITTED] T6239.006
    
    [GRAPHIC] [TIFF OMITTED] T6239.007
    
    [GRAPHIC] [TIFF OMITTED] T6239.008
    
    [GRAPHIC] [TIFF OMITTED] T6239.009
    
    [GRAPHIC] [TIFF OMITTED] T6239.010
    
    [GRAPHIC] [TIFF OMITTED] T6239.011
    
    [GRAPHIC] [TIFF OMITTED] T6239.012
    
    [GRAPHIC] [TIFF OMITTED] T6239.013
    
    [GRAPHIC] [TIFF OMITTED] T6239.014
    
    [GRAPHIC] [TIFF OMITTED] T6239.015
    
    [GRAPHIC] [TIFF OMITTED] T6239.016
    
    [GRAPHIC] [TIFF OMITTED] T6239.017
    
    [GRAPHIC] [TIFF OMITTED] T6239.018
    
    [GRAPHIC] [TIFF OMITTED] T6239.019
    
    [GRAPHIC] [TIFF OMITTED] T6239.020
    
    [GRAPHIC] [TIFF OMITTED] T6239.021
    
    [GRAPHIC] [TIFF OMITTED] T6239.022
    
    [GRAPHIC] [TIFF OMITTED] T6239.023
    
    [GRAPHIC] [TIFF OMITTED] T6239.024
    
    [GRAPHIC] [TIFF OMITTED] T6239.025
    
    [GRAPHIC] [TIFF OMITTED] T6239.026
    
    [GRAPHIC] [TIFF OMITTED] T6239.027
    
    [GRAPHIC] [TIFF OMITTED] T6239.028
    
    [GRAPHIC] [TIFF OMITTED] T6239.029
    
    [GRAPHIC] [TIFF OMITTED] T6239.030
    
    [GRAPHIC] [TIFF OMITTED] T6239.031
    
    [GRAPHIC] [TIFF OMITTED] T6239.032
    
    [GRAPHIC] [TIFF OMITTED] T6239.033
    
    [GRAPHIC] [TIFF OMITTED] T6239.034
    
    [GRAPHIC] [TIFF OMITTED] T6239.035
    
    Mr. Platts. Thank you, Mr. Steinhoff. Again, both of you, 
we appreciate your testimony here today and your written 
testimonies. I think both of you well captured where we are 
today with some great successes, all major agencies reporting 
in 45 days versus months and months and months in the past.
    Mr. Steinhoff, your statement about the importance that 
this is about accountability, not simply accounting, and what 
are the taxpayers getting for their money that is being 
expended, at the end of the day is it a good investment? And 
you mentioned the challenges that still lie ahead. But the team 
effort that has transpired in the last 15 years from those who 
were behind the legislation, and you certainly played a direct 
role in writing that legislation, and then everybody since, the 
Department CFOs in your past positions and now in your current 
positions, the GAO continuing to be very engaged, OMB, and that 
Congress needs to stay part of the effort. If we continue as a 
team in that fine-tuning and strengthening, whoever is sitting 
in this chair 15 years from now will hopefully, though there is 
always going to be room for improvement, but hopefully there 
will be less room for improvement.
    And who knows, maybe even DOD will have had a clean 
opinion, or actually have an opinion. Maybe not clean, but we 
will take just an opinion.
    One of the examples I think that is very relevant, Dr. 
Combs, that you highlight in your written testimony is the 
financial management community working closely with each other. 
The CFO Act in creating the CFO Council, I imagine there was 
some interaction either informal or formal, but having a formal 
structure for CFOs to work together and share best practices.
    And as we talked earlier this week, the example with 
Katrina and how your twice-a-week meetings with all the 
relevant CFOs is a perfect example of that structure being in 
place to ensure that we are kind of all on the same page and 
working ahead.
    With all the advancements that have occurred, and now in my 
third year as chair of the subcommittee, I am looking at where 
we came from and where we are. And when I look at the numbers, 
despite great advancement, at least 11 different major agencies 
have received less than unqualified opinions. And as we saw 
last year, our number of restatements rose from five in 2003 to 
11 in 2004. This year, when we look at the numbers, we kind of 
held even in unqualified opinions at 18 and we dropped from 4 
to 3 on those with no material weaknesses, no evidence of 
noncompliance.
    It seems we have kind of leveled off. Is there anything 
that kind of explains that or that we need to be conscious of 
to not just stay at this level but to keep pushing? And why are 
we seeing those numbers where they are; somewhat kind of 
leveling off? We have seen great gains, but then hit a plateau. 
We don't seem to be able to continue the path upward.
    Ms. Combs. I think that one of the major situations we are 
dealing with here relates to the move forward and where we are 
right now with our internal controls. I think the 45-day 
deadline has given us a tremendous opportunity to cause 
quarterly statements to have to be issued during the year to 
provide a tremendous amount of stability during the year. But I 
think where we have to go henceforth is continuing to work 
through those material weaknesses, reportable conditions, and 
our internal controls governmentwide.
    Because in each and every department, it's extremely 
important to do that day-to-day work and to get it done right 
all during the year and not to wait until year end. I think, if 
anything, the 45-day time limit has forced agencies to be more 
aggressive, more determined at each quarter, at each month in 
presenting their statements. And I think that has had a 
tremendous impact on where we are right now.
    In order to continue to strengthen that base and in order 
to add two or three or four or more departments to the clean 
audit rank up for next year, I think we have to work very, very 
hard this year to certify these internal controls, and I think 
that will add as much stability as anything that we can do.
    I also think Jeff hit it exactly right in terms of the 
technology and the systems integration that we have to continue 
to work toward in these departments. It cannot be manual and 
heroic efforts. It has to be sustained through these diligent 
internal control efforts and having the right technology and 
processes in place in order to get continuous improvement.
    Mr. Platts. The focus on the internal control initiative, I 
would agree and hope that is kind of the impetus that gets us 
off the plateau; that initially it could even have us off the 
plateau in a regressive way. But long term it has to be key to 
getting not only just 18 but 19, 20, and continue chipping away 
at a complete success.
    So we will be anxious as we move forward with that to see 
how that plays out.
    Mr. Steinhoff.
    Mr. Steinhoff. If you look at 2005, you have three agencies 
that went down from the previous year. And in looking at the 
type of problems they cited for two of those three it directly 
related to putting up a new system, and that's a risky 
proposition.
    We audit the IRS, and they were going to roll out the first 
module of their system about a year and a half before they did. 
And as the auditor, we said, ``Well, gee, are you really ready 
to turn that thing on October 1st?'' And there was a little bit 
of a pause there. Well, that's the date. We said, ``You're 
taking a big, big risk here. That's a date driven decision and 
if you don't do it right, you will probably lose your opinion 
and you may lose it for several years.''
    So they stepped back and made sure that disciplined 
processes were followed. I give Mark Everson a lot of credit 
for that, and they rolled that system out this year and it 
worked fine.
    But for two of those three that went down, it was a result 
of having a new system in place. I think people are learning 
more. There were perhaps problems in previous years that 
management just was not aware of. There might have been a roll-
out in a new site where certain things were not picked up. I 
think the auditors are becoming more savvy and they have a 
better understanding of the risk of some of these entities.
    When entities have a lot of adjusting entries at year end, 
it's not what you want to see. Maybe if you have four or five 
of them, but not thousands of them. And I think some of it is 
the fact that you have had heroic efforts in the past. And as 
people become more sophisticated, they can get down underneath 
the numbers a little better.
    The other area which I think has driven some of the going 
back and forth on agencies from clean to a disclaimer or a 
qualified opinion are some of the unique financial statements, 
the statement of budgetary resources. Some of these have become 
somewhat confusing to some. I do not think they're rocket 
science, I do not think the problem is the lack of guidance 
from OMB, which some have claimed, but I think it's the lack of 
familiarity. And I think some of the auditors had to learn what 
those statements really were. They were signing off on them 
with gigantic errors that were fairly easy to find.
    So I think it's a learning process. The two you mentioned 
in your opening remarks, DOD and Homeland Security, are the 
ones that face the biggest problems, biggest challenges. I 
wouldn't see them on the radar screen for a thumb up or two in 
the next couple of years.
    Mr. Platts. Hopefully not my 15-year prediction.
    Mr. Steinhoff. It shouldn't be 15 years. It shouldn't be 15 
years.
    Mr. Platts. Mr. Steinhoff, you touched there and in your 
written testimony on the system issue.
    Mr. Steinhoff. Yes.
    Mr. Platts. And in your statement you reference about NASA 
and DOD not following the necessary disciplined processes for 
developing the systems. We have seen that earlier in your 
statement where you referenced the billion dollars the Navy had 
spent on the four enterprise resource planning systems, and 
currently underway with a new program, $800 million, what is 
the best thing we can do, either as a subcommittee with 
oversight or OMB in their coordination with all these, to try 
to ensure that type of up-front preparation is occurring?
    Because I would think that after the number of failings in 
DOD alone or elsewhere, anybody out there looking to do one of 
these systems saying, ``All right, what are these disciplines, 
what are the steps we want to make sure we follow,'' but that 
doesn't seem to be the case. So what do we need to do different 
to ensure that does happen?
    Mr. Steinhoff. I think it's very important that when 
funding is provided for these systems that the Congress has 
oversight directly over those that represent a major 
investment. When you're talking $800 million, a billion, you 
are talking big dollars there. And it is not uncommon in a 
large activity like defense to have development projects of 
that size. They become unmanageable. You don't have any direct 
accountability over them, you have multiple project managers. 
At the time it's finished, someone is in charge that had 
nothing to do with all the mistakes made along the way.
    It is a matter of holding someone accountable along the 
way, having regular oversight, making sure that the agencies 
and departments are following disciplined processes in 
practice. Many activities have a good set of rules. If someone 
wanted to look at a leading organization in terms of written 
practices, DOD would have those written practices. But these 
are very complex operations. You have many, many stovepipes 
involved. You have many players. You have numerous committees 
or jurisdictions on the Hill that have responsibility. You're 
going to have to have a way for the major large dollar 
investments to have some kind of oversight mechanism where they 
have to come back to the Congress or come back to OMB or come 
back to someone and say we have achieved X, Y and Z and here is 
the return on investment.
    I remember a number of years ago looking at a system and 
the return on investment at that time was projected to be 2 
percent. That was before they started. Well, no one would ever 
invest $1 billion, especially in the early years of computer 
technology, to get a 2 percent rate of return. Private sector 
wouldn't invest unless it was a large rate of return.
    So systems, I think, are a real difficult issue. The 
disciplined processes, the enterprise architectures, investment 
management, concept of operations requirements, management, 
testing, they can't shortcut any of those things. And, 
typically, when one does a postmortem when they go down, you 
will find some or all of those things.
    I would think right now, we just issued that Navy ERP 
report, that some in the Navy would be asking some very tough 
questions. How is that effort that has just started going to 
fit in with the other 44 systems it is supposed to integrate 
with? I do not think they have any idea. So I'm not sure I 
would invest that amount of money in something until I knew. 
But it is really a lot of oversight over that is needed.
    Mr. Platts. Dr. Combs, is there any consideration at OMB 
to, through executive action, put that type of threshold review 
in place with OMB; that if it's going to be--and I would 
probably start low, low relative to DOD--say $10 million, if 
you are going to spend X amount, whatever X is, on a new 
system, that it has to be presented to and reviewed maybe by 
OMB and GAO; that you have dotted the I's crossed the T's 
before going forward?
    Is that something you are doing or are willing to look at 
as a possible action?
    Ms. Combs. Mr. Chairman, we are already in the process of 
reviewing each and every financial system upgrade, each and 
every financial systems change that is being presented. And the 
way we do that is individually, department by department. It is 
amazing. There is a considerable amount of knowledge out there 
about what not to do, and it is quite amazing how much of that 
knowledge we end up sharing with people who are either 
beginning the thoughts of their business plan to eventually get 
into a new financial system.
    But first and foremost we are requiring them to do a very 
detailed business plan for any kind of core financial system.
    Mr. Platts. What's the consequence if you review it and 
don't think that they are ready to move forward? How does that 
play out?
    Ms. Combs. Well, I will give you an example. There was a 
department this past year, just a few months ago, that we 
worked with them, they worked with us. It was a very collegial 
working relationship, because no one wants to be written up as 
getting on the front page of the Washington Post for wasting 
the taxpayers' money. There is nobody out there that wants to 
do that. They all want to do it right. So this department was 
actually seeking help.
    We were able to work with them and show them where the high 
risk areas were, where the pitfalls potentially could be if 
they stayed on the same plan that they were on. And they, along 
with our consultation, decided to do something very similar 
that Jeff talked about with the IRS. They decided to delay 
their implementation for a year so that they could get on to a 
very good business plan, get it broken up into very 
constructive pieces, and reduce their risk of running into a 
problem.
    Mr. Steinhoff. One of the difficult challenges, and DOD is 
a bit different, there is a little bit different kind of 
oversight in DOD, and in DOD about 80 percent of the financial 
information comes from nonaccounting systems, so these systems 
wouldn't necessarily go through that prism of the financial 
system prism. They would go through a different set. So you 
have various sets of looking at it and you have totally 
different, in the end, funding mechanisms in DOD where they are 
dealing directly with the Congress verses through OMB. They go 
through OMB but it's different.
    Mr. Platts. So if it's a specific line item in approps for 
DOD for this program, that is financial management related but 
it is specifically delineated in the appropriation, OMB, you 
are still going to engage; right? Will you still review that 
type of program, even if it is a specific line item for a 
program versus here are your funds for financial management and 
they decide to use some of those funds to upgrade?
    Ms. Combs. Well, I would say that our first and foremost 
priority is looking at core financial systems. And quite 
frankly, Mr. Chairman, I'd be really, really in good shape if I 
think we have reviewed all core financial systems and had them 
on the right track, not just for the DOD that we are talking 
about, but for each one of the 24 act agencies as well.
    In fact, there are people I have heard recently even stand 
up at meetings and say, ``Oh, I do not think there's anybody 
out there that has ever kept their clean opinion and done a 
core financial systems change.'' Well, I'm here to dispel that. 
We did it when I was at DOT and the CFO there. So there is a 
way to do a core financial system, get it into an agency or 
department and do it right and still keep your clean opinion. 
That's what we're seeking for all of our agencies.
    Mr. Platts. I want to make sure I understood you, Dr. 
Combs. Do I take that to mean that while that review should 
happen with all programs, it's not necessarily happening?
    Ms. Combs. Well, are you talking about the core financial 
systems?
    Mr. Platts. Yes, for the core systems.
    Ms. Combs. The core financial systems are being looked at 
individually by our division OFFM, the Office of Federal 
Financial Management, each and every one of those individually, 
department by department. We are reviewing their business 
plans, we are reviewing and having a great deal of oversight 
with anybody who wants to make changes in their core financial 
system. That is ongoing.
    Mr. Platts. So that is across the board?
    Ms. Combs. That is ongoing. We welcome transparency and 
continued good input from our colleagues in GAO as well as the 
Hill on each and every one of those.
    Mr. Platts. Mr. Steinhoff, your example in the ERP would be 
an example in DOD where it is outside of that core financial 
huge sum. It's a system investment that perhaps doesn't get the 
same level of scrutiny that OMB is able to give to the core 
financials?
    Mr. Steinhoff. Yes. And the part of the real challenge is 
who controls the money. Take, for example, the Navy system. 
That money really wasn't controlled by the Defense Controller, 
that was controlled by the Navy.
    And one of the things I think the Controller General has 
spoken to at these hearings is who controls the money. And 
perhaps in Defense, as they are putting their architecture in 
place, they should be looking from a corporate perspective. Is 
it worthwhile to spend this money on this system in the Navy or 
this system in the Army? Right now these individual services 
get their own money for their own systems for their own 
committees. And, again, when it's part of a broader array of 
systems that feed into a financial system, you need to look 
even harder at it.
    So you don't have the same degree of control when you don't 
control the funding. To the extent one controls the funding, if 
the Controller controlled the funding, that would be different. 
They can provide advice, they can suggest some things. But to 
the extent whoever controls the funding or oversees the funding 
makes the ultimate decision.
    Mr. Platts. With DOD, and this kind of leads to the next 
question I was going to touch on, is that easy one of what is 
it going to take at DOD and DHS, and maybe specifically 
starting with this issue of oversight of these systems 
investments.
    I apologize, my staff maybe can remind me of the name, but 
with the recent announcement with Acting Deputy Secretary 
England and taking the lead role on the business 
modernization--I forget the exact title--the Business 
Transformation Agency, yes. I was close. Do you see that 
helping to change the culture there, the environment, to have a 
more coordinated oversight? Or, again, not when we get into 
things like this.
    Mr. Steinhoff. OK, yes. First of all, I want to say that I 
have nothing but admiration for the capability of the defense 
managers. This is a unique, highly different environment they 
are in. It is the biggest entity in the world, really. They run 
cities, towns, school systems, hospitals. You name it, they do 
it. Seventy-five percent of the procurement dollars, most is 
discretionary spending. So they have a complex set of issues 
and have a lot of very highly capable people.
    The concern that we have raised is that, yes, we have 
certainly seen a change at the top in DOD. There were many 
years of denial or of, well, these rules don't really apply to 
us. You have now a very concerted commitment from the Secretary 
on down. You have the deputy, who is involved personally. And I 
have observed it, having attended some of these Defense 
business board meetings. He is personally engaged. He's a 
highly knowledgeable person. Very, very capable. If someone is 
going to achieve reform and get it done, you would have to do 
it at that level.
    The issue that GAO and the Controller General have raised 
is the duration of the time it will take for this reform to 
take place. A Deputy Secretary does not have a span of control 
or a span of office that is going to be sufficient to complete 
the task. And one of the proposals that we have made for 
consideration is to have a chief management official, or chief 
operating officer.
    And what one would do is just really have two deputies. You 
would have one deputy for the policy or the warfighting side 
that would be engaged in that, and a separate deputy in charge 
of business operations, and that person would be empowered to 
make those decisions across the department. The CFOs from the 
various services have a very strong dotted line relationship, 
almost a solid line--which is what the CFO Act envisioned--back 
to that deputy. That deputy would control the money for 
business operations.
    Granted, you would have to have the logistics heads and all 
those groups. I mean, they have their needs to carry out their 
missions. But it would not be the stovepiped type of approaches 
they have today. Today, it's stovepipe within systems, and 
that's what they're trying to break down. And we're very 
supportive of what they are doing, but the real tough question 
is how far do they get before another group is there, and what 
kind of staying power do you have?
    They have had initiatives before where they have had 
systems czars and what not, and it is a very difficult cultural 
type of barrier to break through. So you have to have a very 
strong person. They have to have unequivocal backing on high, 
probably some kind of contract or term, and it has to be 
someone who has done this before and who is going to be there 
for, let's say, 7 to 10 years to do it.
    Mr. Platts. That authority over all of those entities, a 
CFOs analogy on a much smaller scale, is with NASA.
    Mr. Steinhoff. Much smaller.
    Mr. Platts. And giving the CFO authority over all the 
center CFOs, so that they really have authority but one-
thirtieth or so of the budget.
    Mr. Steinhoff. Yes, much, much smaller. And DHS, which you 
mentioned before, that's a different situation somewhat.
    Mr. Platts. I was going to ask you to expand, because, 
again, a very important department, important mission, with 
obviously very significant challenges. Is there anything that 
you want to highlight regarding DHS?
    Mr. Steinhoff. I thought you might ask something about it 
today, so I gave it some thought. One day they did not exist, 
the next day they did. And you took a lot of entities, put them 
all together. They came from disparate agencies, and they all 
had different systems. Many of them came in there without the 
best systems in town and they had to operate. And it is 
probably a work in process in terms of how do you manage and 
how do you establish a culture.
    They say it takes 7 years to make cultural changes, 7 to 10 
years. Well, they have been in business a couple of years and 
they had maybe 10 or 12 cultures when they started. And they 
just don't have a cohesive set of business systems and they 
have certainly had some difficulty getting started because they 
had a whole host of other things they were trying to deal with.
    I remember having meetings there shortly after they set up 
shop and most people didn't have phones or offices or didn't 
know who their staff were. So you have a basic startup 
operation. I think their problems can be resolved much more 
easily than Defense's, but they do have serious problems. And I 
think you're going to have to have a very committed vision 
toward what those business systems are. You're going to have to 
consider that it won't get done in, let's say, the 3 years 
remaining in this administration. So you might have to have 
somebody that can sustain it from one administration to the 
next. But this is a very difficult challenge. It's not going to 
be easy.
    Mr. Platts. Dr. Combs, did you want to add anything on 
either DOD or DHS?
    Ms. Combs. Well, I think Jeff has hit on the high points. I 
think one of the real critical elements, whether it's these 
departments that you have just discussed with him or whether 
it's any of our other departments, top-level leadership is 
extremely critical. I think there are some committed people 
there who are committed to doing the right thing with the 
management of those departments.
    I think the other critical aspect is to have some very, 
very clear action plans, hold people accountable for those 
plans of action, and keep breaking those things down into 
manageable entities so that they can be worked on and people 
can see some success.
    Mr. Platts. Actually, before I move on, I want to go back 
to one followup, Mr. Steinhoff. On those Navy systems that were 
the $1 billion and the four systems, I expect I know the 
answer, but to the best of your knowledge was anyone demoted, 
fired, or any funds recovered regarding the billion dollars 
that were spent that proved not worthwhile; that they had to 
start over?
    Mr. Steinhoff. I do not know if there were any personnel 
actions taken or anything along those lines. In terms of the 
money spent, the money was spent. There were certainly some 
lessons learned. There was probably some things they gained 
they could take to the new project, but certainly not $1 
billion worth.
    And we felt at the end of the day that the effort was 
largely a waste. It just shouldn't have started and it really 
was not a return on investment.
    Mr. Platts. When I look at those numbers, and having just 
come to the hearing from the appropriations vote where I voted 
no on an appropriations bill that failed, the Education-Labor-
HHS, and specific things I looked at in this bill, Special Ed 
funding, an increase, but minimal increase, and proven programs 
like Even Start that was cut by 67 percent, that have proven 
successes out there. Then I see us turn around and spend $1 
billion on things that really in the end didn't help anyone. It 
just really makes me more certain that the vote I just cast was 
the right one.
    Dr. Combs, in your position, you have some unique 
perspective, having been CFO in two agencies and now as 
Controller. How do you see your role in interacting with those 
agency CFOs in the environment that you are able to kind of 
establish the culture out there?
    And then what is your read of the major department agencies 
of the environment for the individual agency CFOs who are 
trying to really get their financial houses in order?
    Ms. Combs. Well, I'm very, very proud to serve with the 
cadre of CFOs that I serve with and have served with in the CFO 
role. I think we have some very hard working, determined, and 
committed managers out there who have taken very strong 
leadership roles in each of their respective departments and 
agencies.
    One of the things that I look back on that I think has 
helped us tremendously in the CFO Act of 1990 was turning 
financial management into a leadership role. It brought it out 
of the back room, as Jeff reminded us a bit earlier, and 
brought it to the front table. And I think of all the things 
that the CFOs have to work with, the top leadership in their 
own respective departments and agencies and having that top-
level support has given all of us an opportunity to do the 
right thing and to establish the right processes and know that 
we are going to be respected for who we are and what we do in 
each and every one of those departments.
    I have been extremely fortunate to always have the senior 
leadership behind me. The commitments that I have been able to 
make and the things that I have been able to personally do have 
all been sustained by upper-level leadership. I think you have 
to have that in each and every one of these departments.
    Mr. Platts. Without needing to know specifics of a certain 
Secretary or department in mind, are there instances in the 
time you have been Controller that you have seen or are aware 
of where a certain department or agency is just not responding 
well to what OMB expects of them from a financial management 
point; that you or any of your predecessors in going to 
Director Bolten, or whoever the Director of OMB is, that the 
financial management issue kind of comes up to the top level at 
OMB and then to the top level in whatever department or 
agencies to the Secretary? So rather than your working with a 
CFO without success, does it then get up kind of to the top 
boxes of the department in OMB?
    Ms. Combs. Well, I am certain that could happen if it 
needed to happen. There is no question in my mind that not only 
do I have that availability to make that happen through my 
Director or through the Deputy Director, if I needed to utilize 
that mechanism I could and would do that. Fortunately, as I 
said earlier, I have a very wonderful cadre of CFOs that have 
previously been my peers and who are now either ascending into 
a new CFO role, because we do have some new CFOs, that I have 
been able to establish a very good working relationship with. 
And because I have been there and have done this job in so many 
different departments, I think a lot of people rely and depend 
on my consultation early in the process, and that's what I 
want. I want to be a colleague as well as an energizer and 
someone who does indeed hold them accountable when they need to 
be held accountable.
    I think the issues that I have seen thus far relative to 
departments that have needed some special help, we talked about 
the three departments that in essence regained their clean 
opinion this year. Obviously, they lost it last year. Those 
were three departments that we came in with and tried to work 
collegially with them to say, ``have you done this, have you 
done this?'' And there are certain things that you do as a day-
to-day management requirement in these departments and agencies 
that make all the difference in the world relative to quarterly 
statements, and, consequently, your audited opinion for the 
year.
    So I think it's important to know that top level leadership 
is behind you and you can utilize it. It's important for your 
peers and the departments and agencies to know that. And quite 
often, because of the President's management agenda, everybody 
is speaking off the same page, so it doesn't matter if the 
Deputy Secretaries are meeting or if the Secretaries are 
meeting, which occasionally the President might say to them, 
how are you doing in your financial management, and they always 
know that might be a possibility.
    So having the President's management agenda is a wonderful 
tool at all levels. There is no level that is immune from being 
asked, how are you doing on financial management, and I think 
that is a great tool, and one we utilize very effectively.
    Mr. Platts. And I think the importance of that senior 
leadership cannot be understated, I think it's one of the 
aspects of President Bush's administration that this issue has 
not really been, in a broad sense, highlighted as it should be. 
The administration really has been diligent and very determined 
in trying to have good financial management be instilled and 
lasting. And I think that's reflected--DOD has worked with 
Secretary England in a number of positions, with Navy, or as 
Navy. Now Deputy Secretary of DOD as well, that sent a very 
strong message and one that the new agency effort was being 
kind of rolled out said, ``Well, I've got to really learn more 
about it.'' But one thing that did give me good confidence was 
the fact that Deputy Secretary England was going to be there, 
personally involved, and that was both going to send a very 
important message out throughout the Department and would 
provide truly a very good leadership at that senior level.
    So the relationship--we've kind of been internally in the 
financial community, but when we're talking about the financial 
systems, we get into the Chief Information Officer and the 
interaction between CIO and CFO and how that impacts the 
system, the investments that are made.
    Could the two of you expand on your view of how that is 
occurring within agencies, and then specifically with OMB. 
What, if any, level of intensity or interaction between OMB and 
CIOs, where it is relating to financial management systems?
    Ms. Combs. I'll speak first within the agencies, because as 
a CFO in an agency, if you are adopting new financial 
management systems or any systems that you're working on, maybe 
it's some enhancements to your system, you really need a very 
strong partner in your CIO. And both of those positions report 
directly to the Secretaries or the heads of each of the 
agencies. So it's very, very important for the CFOs to 
understand the complete CIO level of involvement as well as 
you, the CIO, has an expanded level, looking at the entire 
enterprise, the financial management needs to be a part of 
that.
    And it has always served me very well as a CFO to work 
very, very closely with the CIO and developing any business 
plans--of course those are all presented each and every year 
through the CIO and through my counterpart, who deals with the 
CFOs at OMB. She and I have a very close working relationship 
as well as we're dealing with financial management matters and 
financial systems that relate to the CIOs in these departments 
and agencies as well.
    So I think the close working relationship is there, both at 
the OMB level, and it must be there at the departments and 
agencies for them to be successful.
    Mr. Platts. Mr. Steinhoff, what do you see as far as good 
or bad in departments and agencies?
    Mr. Steinhoff. I agree fully with what Linda Combs just 
said. You have to have a partnership. It has to go both ways. 
We're really looking here at business systems, business 
modernization. And there is a fine line between the CIO role, 
CFO role, program role. You have to have a partnership between 
all the parties moving toward a common goal of providing 
business support. That's really what the CFO is doing, 
providing strategic business information to top management, 
year-end reporting, stewardship-type of functions, paying 
bills, etc. And they are doing that on behalf of the programs 
that are there.
    So you have to have people in these roles who can work with 
other people, have the proper kind of interpersonal abilities, 
and can see things from multiple sides. You have to look at 
what the enterprise needs. And for those entities that are most 
successful, they will have developed these kinds of personal 
partnerships that Linda Combs spoke to.
    If it be that the CFO says I have these powers, I'm going 
to do this regardless of what you say, and the CIO says I 
control the system, I'm going to do X, Y and Z, and then the 
program manager on the other side says well, I want it another 
way, there has to be a partnership and there has to be a very 
clear plan in a department that deals with its range of 
business systems of which the accounting or financial is part 
of it.
    Mr. Platts. Is there any department that you're seeing 
where that type of relationship is not occurring, that 
interaction, that partnership, that concerns you?
    Mr. Steinhoff. It's not something that I could really 
address across government. I can say that in the experiences 
I've had in DOD they seem to be trying to establish that 
partnership between these various units. There are problems and 
their systems are huge, but I can't really speak to any--I can 
get back to you if we have issued any reports out of our IT 
team that's spoken to that.
    I'm sure from just a common sense view there probably are 
some that don't work well together, but those are the kind of 
things that the head of the agency, head of the department 
should be aware of. And the head of the department should make 
sure that's really what their job is, they and the deputy, to 
make sure these business partners are working together. Because 
if they're not working together you will suboptimize the 
results, and you will find yourself in the same position year 
after year.
    Ms. Combs. And I will just add to that. I think if Jeff and 
I probably went back and looked at the lessons learned from 
some of the failed areas, we probably would find that at least 
one of the top three areas were considered to be some of the 
causes for it.
    Mr. Platts. That partnership broke down and didn't occur?
    Ms. Combs. Correct.
    Mr. Platts. On DHS in specific, Dr. Combs, when we passed 
the Financial Accountability Act, DHS Financial Accountability 
Act, we tried to place greater emphasis on financial 
accountability to bring it in compliance with the CFO Act, to 
move forward so that this major agency is on the same plane as 
all the others.
    In your initial review of their end of the year 2005 
statement, do you see progress being made in DHS this year 
versus last year? And Mr. Steinhoff's highlighted what the 
challenge is as a new agency, 22 agencies come together 
inheriting multiple material weaknesses, it's a pretty 
staggering assignment, but do you see progress being made 
there?
    Ms. Combs. Well, I think the mere fact that they presented 
on time is certainly something to applaud them over.
    I think there is tremendous hard work going on, and we've 
talked about in the past some heroic efforts. I think that--
because of what Mr. Steinhoff had to say earlier about the way 
this department came together, that it is a major, major task 
to have come as far as they have actually come over the last 
couple of years for the very same reasons he referred to.
    I think that the progress is continuous, and I think that 
it will continue to be toward the positive.
    Mr. Platts. You mentioned about past heroic efforts and not 
just at DHS, but in your assessment with all of them making the 
45 days. I agree, it's a great step to get that information now 
and be able to review and act on it rather than waiting another 
several months. What is your read on how their role, the heroic 
effort played into the 24 agencies and departments in getting 
that done versus the quarterly statements happen to guard 
against that or negate the necessity of that type of heroic 
effort?
    Ms. Combs. I've talked with a number of CFOs over the 
course of the last couple of weeks, and I've also talked with 
some IGs as well to get their sense of whether or not they 
think things are better or, ``less heroic'' than they have been 
in the past, and I think 100 percent of those have indicated to 
me that it gets better and better every year, and that this 
year is better than last. But it is because of those monthly 
and quarterly statements, it's because of that discipline that 
has had to be interjected in each and every department each and 
every month along the way. And that discipline is serving us 
all well. And one of the ways that discipline continues to 
serve us there is that fewer and fewer heroic efforts are 
having to be engaged in at year end in order to get the clean 
audit.
    Mr. Platts. Mr. Steinhoff, your assessment on the heroic 
effort issue?
    Mr. Steinhoff. I would basically agree. I think that when 
we went from 5 months to 1\1/2\ months, that wasn't nibbling at 
the edges. And someone couldn't just throw five more people at 
it. They had to fundamentally change the processes that they 
used to prepare financial statements, they had to step back. It 
wasn't a matter of telling the auditor to work harder or 
faster, it was a matter of being able to project information 
forward, to prepare quarterly statements, and to organize 
materials. And we find every year in our audit of the IRS--we 
are the auditors of IRS--it's a very large audit. It's a very 
large entity. It's got a lot of complex issues that are 
involved there. They do have a lot of systems challenges, a lot 
of control challenges, but they made fundamental changes in 
their processes for preparing statements. They took the various 
business owners, people who have owned the inventory or 
whatever it might be, they forced them to the table to change 
their processes. So they were routinely doing certain things 
like reconciling each month, taking fiscal inventories if that 
was part of the job, it was built into what people would do day 
to day, and therefore it wouldn't be an add-on at the end of 
the year.
    We have found that the audit, the preparation has gone 
smoother in the last few years. Auditors will always find some 
transactions they question. There is always a degree of those. 
The question is, do they break the threshold for materiality? 
We find fewer and fewer errors, they correct the errors we 
find, but fewer and fewer, not material in any way, but fewer 
and fewer. They've improved at doing that. The fact that they 
had to accelerate, the fact that one time they had a business 
there like Charles Rossetti, they changed their personnel, that 
was extended, and they've got people that know what they're 
doing. And I have just seen a marketed improvement on their 
side, having been the auditor up close and personal for years 
and years. And I would say that is across the board.
    Is it difficult? Do they work real hard at it? Do they 
spend nights and weekends on it? Yes. Do the auditors spend 
nights and weekends on it? Yes, whether they be private sector 
or government auditors, so this is a big effort. I remember in 
the early years one of the agencies I think it took 14 months 
that 1 year and had something like 3,300 spread sheets, these 
big spread sheets. So they were taking vouchers and recording 
numbers on these sheets, and that's how they prepared the 
statements.
    Mr. Platts. I'm glad they didn't come and have to present 
all that before the committee.
    Mr. Steinhoff. Well, they were in this room, I actually saw 
it. And people were sitting there for 14 months doing that. You 
just don't see that.
    There are a lot of real challenges and a lot of hard work, 
and there are numbers that must be derived through statistical 
samples or special analyses which you would like to routinely 
come from the system, but if they work toward that--in theory, 
the ultimate is you push the button, your numbers come out, and 
you would just have the normal things you have to accrue. I 
think they're all moving in that direction, and they certainly 
understand what to do. When they first started, they didn't 
each know how to prepare these things or what to do.
    Mr. Platts. We will have one heck of a celebration when we 
get all the departments, agencies to be able to push the button 
and have them just appear. It will really be something to 
continue working for because if we get to that with any 
department, agency, that really is going to get what we're 
after--that day-to-day, reliable substantive information with 
which to make informed decisions.
    As we go forward, and with the A-123 requirements, you 
talked about in the short term, there is likely to be some 
additional weaknesses uncovered because we're kind of digging a 
little deeper, a little more thoroughly. In the short term we 
will have some additional weaknesses which in the end will have 
long-term benefits. In light of that prediction or belief, 
which I think is probably a fair one, do you think that in 
those six we should anticipate some entities that have clean 
opinions now not getting a clean opinion next year because of 
the more substantive review that the new internal control 
requirements will place on them?
    Ms. Combs. Absolutely not. I expect that we will continue 
to improve the number of clean opinions. I expect that A-123 
and the certifications that are done in June are indeed going 
to uncover some things, but I do believe that they will uncover 
some things that are not as difficult to correct as some of the 
things that we already know about.
    I think that one of the things that we have seen over the 
past, if you look at the material weaknesses and you analyze 
the material weaknesses in each and every department, these are 
very long-term, pervasive, repeat material weaknesses. And 
while there may be new material weaknesses that are presented, 
there may be evidence that some of the internal controls that 
are not in place that should be put in place. I envision while 
they may be deeper, they may be indeed easier to correct. That 
is my hope, my anticipation. Because as you and I have talked 
before, we will be closer to where we want to be in terms of 
financial management in each and every department when we have 
all the program managers and all the financial managers looking 
at material weaknesses and reportable conditions just like they 
were the same and correcting them on a day-by-day, month-by-
month basis, understanding what they are and understanding what 
it means to correct them.
    So I think that my anticipation at this point is we're 
going to push forward, we're going to use this opportunity with 
A-123 that we have to ferret out additional things that need to 
be corrected, and expect and hold accountable departments and 
entities in making them happen and making them happen quickly.
    Mr. Platts. And I think maybe it is a fair statement to 
say, in that belief it was going to happen is what you have 
seen at IRS, is that exact type of identification, correction 
and positive results.
    Mr. Steinhoff. Yes. I think fixing something that you find 
to be wrong, holding someone accountable. Some things in the 
past are hung out there for years that could have been 
relatively simply resolved, and it's having a basic policy 
perhaps that we expect these things resolved in 3 months or 2 
months, whatever it is, and holding someone accountable for 
doing that. It needn't result in a loss of a clean opinion. If 
you have done the work in an arduous manner, you should find 
your problems before year end.
    Looking at some of the problems this past year, there were 
things that were found toward the end of the audit or end of 
the period sometimes found by management. They didn't know 
about a certain something. So it's getting on it quickly, it's 
recognizing when you've got a long-term, deeply rooted problem, 
what it takes to do that and get on top of that and hold 
someone accountable, but not having hundreds and hundreds of 
open weaknesses, hundreds and hundreds of audit recommendations 
and requiring management to take responsibility.
    One of the very important things in the revision to A-123 
is it really revitalizes what was in the 1982 act, and that is 
that management is responsible for this, it's a fundamental 
responsibility. And there is nothing wrong with finding a 
control problem. The problem is if one doesn't then fix it. It 
should be rewarded for finding it and rewarded for fixing it 
and punished if they don't fix it.
    Mr. Platts. Agreed. And that approach is certainly what we 
all are after.
    The only two questions that somewhat relate to the 
personnel issue and continuity, one is we find that many 
agencies rely heavily on contractors to perform their financial 
statement production. And how does that impact the long-term 
ability or continuity of that department or agency using 
contractors to maintain and really have that knowledge base be 
there and retained year to year, long term to build on if it's 
contractors performing the work?
    Mr. Steinhoff. It's not the environment you want to find 
yourself in. You want to use a contractor if you think this is 
a body of work that you need it to be done once or twice, you 
don't have the skill mix; but you wouldn't want to be paying 
somebody every year to carry out your basic responsibility. 
There certainly are good reasons to use contractors, especially 
if you have a skills gap. But if you're totally dependent on a 
contractor to do just basic things and every year you're paying 
someone to come in and estimate what your inventory is worth or 
how much property you have, that's only a number for that 1 
day. It doesn't really give you the kind of information to 
manage day-to-day.
    I remember early on in our work at IRS they hired a 
contractor to come up with an estimate of their property, and 
we made it very clear to them that 1 day after the end of the 
fiscal year any number they had was not of any use, and they 
would have to spend that money again, and again, and again. And 
you ought to fix the basic system, you want your own people to 
be generating those numbers. And the fact that they were going 
to have to keep paying and paying and paying, you want to have 
your own capacity. But that is not to say that you can't make a 
business decision in certain areas that it might be more cost 
effective to use a contractor, but it shouldn't be to process 
transactions and what not.
    Mr. Platts. Dr. Combs.
    Ms. Combs. I think it really boils down to management 
accountability and management effectiveness. I think good 
managers and good leaders in any organization look across the 
entire enterprise and they see where the human capital needs 
are. And you either go out and buy the support you need, 
whether it's temporary or long term. You might make a long-term 
decision, as Jeff just mentioned, that is a particular cadre of 
individuals that maybe we can't attract into the Federal sector 
like we should. But it all comes back to the general management 
responsibility and having a leader, a manager look across the 
entire enterprise of an organization and decide what human 
capital needs there are. And if there are business reasons and 
good business reasons for using contractor support versus our 
own Federal cadre, then I think that needs to be explained by 
management, both to employees as well as the people that we 
support.
    Mr. Platts. Is my understanding correct that with the A-123 
work, that's heavy--or maybe not extensive, or mostly 
contractor done work?
    Ms. Combs. I am aware that there are some agencies and 
departments that are contracting some of that work out, but I 
am further aware and have been very clear with other CFOs that 
this is a management responsibility. This particular element, 
and certifying these internal controls is nothing that can be 
delegated, it's nothing that can be bought, this is clearly on 
the shoulders of management. You have to stand behind whatever 
work is done, whether it's done by contractors or whether it's 
done internally.
    Mr. Platts. OK. The related issues--you have touched on 
really both of getting the necessary human capital in place, 
especially in times when we're really trying to emphasize good 
financial management and really to set a good path for the 
future.
    And Mr. Steinhoff, in your written testimony, I'm going to 
just quote and I think you capture it well, ``building a world 
class financial work force will require a work force 
transformation strategy devised in partnership between CFOs and 
agency human resource departments working with OMB and the 
Office of Personnel Management.'' I would be interested if both 
of you, where are we recording that type of effort, that 
strategy and all the partners being on the same page to bring 
that together?
    Mr. Steinhoff. I think this is a huge challenge. We're in a 
technology age today, it's the very early stages of it. We have 
a Federal work force that has large numbers that are going to 
be retiring soon, and we have major opportunity to restructure 
at the same time. If you look at the financial management 
arena, the IT arena, both of which are heavily engaged in what 
a CFO would be doing, the competition for talent is intense. 
The students get top dollar when they get out of school, you 
have to aggressively compete for them, you have to be very 
agile in doing that. And frankly, you have to have a very 
strong human capital strategy. You have to be able to quickly 
respond to needs. And I know at GAO I feel very fortunate that 
we have a lot of these abilities. And I have attended forums in 
the executive branch and I think they face a real difficult 
challenge, challenge of being agile and being able to 
immediately hire somebody to go out and try to get the best 
people they can get when they're competing against the major 
consulting firms who are paying top dollar. We have to 
challenge people when they come into government. The average 
person today that enters the work force is not going to spend 
30 years or 40 years at the same job like yours truly did, 
they're going to move from job to job. I have kids in their 
20's, and I don't think they plan to stay one place for their 
whole career. But the government's going to have to be able to 
really compete in a tough, tough market. It presents a good 
opportunity, but I know that GAO can compete quite well. I'm 
not sure that some of the agencies are prepared to compete on 
the same basis.
    Mr. Platts. Are you seeing that type of--that recognition 
governmentwide and the strategy that you reference even in the 
initial stages?
    Mr. Steinhoff. I don't think in the financial management 
arena, based on just discussions I've had with CFOs, some of 
the forums that have been sponsored in the past where people 
have talked about human capital and they've shared the war 
stories about 8 months to hire someone, and you know, and they 
go down to colleges. I know I asked my kids all the time when 
they were in college, well, when the recruiters came down, you 
know, how was it. And there was sometimes a big difference 
between what was sent down to these colleges to recruit these 
kids. If you're going to be recruiting an accountant, you send 
a young accountant down, you don't send a personnelist down, 
you don't send a person down to pass out fliers, you don't give 
them a 45-page form to fill out with many of the questions not 
really applicable to them, and you don't spend months getting 
back to them on it. You have to do it immediately.
    We have a lot of summer interns in GAO, we are bringing in 
sharp people, they're seniors maybe going into their fifth year 
because most of the cutting students are in 5-year programs 
now. And we have them there, they're there for the summer, and 
we make a face to face offer at the end of the summer. We have 
a competitive wage we're paying them, and we are pursuing them 
the same way a CPA firm would be. And I think that's really 
what the executive branch is going to have to be in a position 
to do.
    One of the concerns that I always have whenever we have 
budgetary problems is some of the first things to go are what 
are called support functions in financial management. But as 
people retire, you have an opportunity, but you have to have a 
good plan for succession. You have to be grooming people for 
the future and you have to be willing to move quickly, you have 
to be agile.
    I will let Linda speak a little more about some of the 
authorities they have, but I felt in some of the forums I 
participated in that I was speaking about a whole different way 
of procuring services than some others were. And it's not easy 
for me because I'm competing against all the major accounting 
firms, I'm competing against all the consulting houses. The 
government has a lot to offer, and we have to have strategies 
both for the entry level, we also have to have strategies for 
those people that want to rebound in their career, they've been 
with a major firm for 5 or 6 years, they have sort of burnt 
that out in life, they want to move on. And you have to have 
very, very astute recruiting strategies there. And I'm not 
really sure if the CFO community--my sense is that is an area 
they need to work on, look at in the future on.
    Mr. Platts. Dr. Combs, I would be interested in your 
perspective, and especially what, if any, relations with Office 
of Personnel Management and how to develop that effort.
    Ms. Combs. I, too, am very concerned about our ability to 
attract and retain financial managers in the Federal 
Government. I think that the President's management agenda on 
human capital governmentwide has sensitized people to the fact 
that we have a particular need in the financial community to 
strengthen that particular area, as well as others. But Jeff 
mentioned the IT community. But CFO and IT are more and more 
difficult to attract and retain people because the outside 
salaries are so substantial and we can't even come close to 
those.
    But I think the other thing that I would commend GAO on and 
say that I think we have to buildupon the work that GAO has 
done over the last several years in their human capital effort. 
I think they're probably one of the stars that I have seen in--
certainly in the Washington arena, but certainly for a private 
sector organization as well. I think they've done some 
remarkable things relative to human capital efforts, and I 
think that certainly is a priority of the CFO Council.
    We have a sitting CFO from the corporate world to come to 
each one of our CFO Council meetings and talk with us about 
issues of common concern. They are always the first to bring up 
human capital, and we listen with intrigue to hear them talk 
about retention and attracting their share of well-trained 
financial managers. And I can't help but know, as I hear them 
talk about the training programs that they embark upon and the 
tremendous efforts that they undertake in these very large 
corporations to keep people on their payroll, they do an awful 
lot once they are able to attract people into their 
corporation.
    We had a loose federation of us CFOs embark upon bringing 
in some MBAs between their first and second year last summer, 
and I had done it when I was at EPA and DOT. And I think we had 
11 MBAs throughout government this past summer. They had never 
thought about working for the Federal Government, and would not 
have thought about it had I not gone and recruited on their 
campus. They had a tremendous eye opening as to what it was 
like to work in financial management in the Federal Government. 
It was a very, very positive experience. But I told them coming 
in I already apologize to you because I know when you get ready 
to graduate this coming June, I will not be able to attract you 
into the Federal Government because the salary I could offer 
you is so low compared to what you could get in the private 
sector. I will not be able to touch you. And that breaks my 
heart to know that is the way we have less vehicles than we 
need to work with in our human capital.
    You asked if I had done some work with OPM. Obviously there 
are some proposals underway right now, and the financial 
community is of course a part of some of those proposals, but I 
truly look forward to a day when I can say to those MBA 
candidates, you come see me next year, I want to have a shot at 
you as well. That's where we need to be.
    Mr. Platts. And some of that is outside of all of our 
control, and not just meaning salaries, but perspective of the 
employee that serving in public service is a high calling. And 
maybe it's money, but there is a way of giving back to the 
service that makes up for less money, that you're serving your 
country, whether it be in uniform in the military or civilian 
in a department or agency.
    Mr. Steinhoff. They have to see they're making a 
difference, they have be to challenged and motivated, they have 
to be given responsibilities that they feel are challenging. I 
think all those things are very, very key. And you have to 
then, once you have them, to point that finger raised on 
spending money and developing the people. You have a 
procurement community right now that's got an acquisition sort 
of professional that receives certain training and certain 
special funding. They should have that in the financial 
management community. I mean, do they have the money to train, 
to develop, to move people around? And again, it's retaining, 
it's attracting. And people are attracted, as you say, for a 
variety of reasons.
    Mr. Platts. I see it in my immediate office with our 
district offices and my D.C. office with summer interns. We 
always have six each summer that split the summer, half in the 
district, half down in D.C. and then throughout the school 
year. And one of the things we find, especially when they are 
in the district, is that making a difference as a college 
student, either junior or senior year going into, and when 
they're--because we very quickly throw them in the deep end. 
We're not interested in having someone around to make copies, 
we're interested in having them really understand what the work 
is all about, and very quickly, you know, swim--not sink, swim. 
But when they start to experience that they've made a 
difference in the life of a constituent, a veteran in getting 
their benefits or Social Security, whatever it may be, that 
feeling of accomplishment that they helped somebody, you know, 
that goes a long way.
    Ms. Combs. And in the financial community, when you give 
them projects that are in the billions of dollars of magnitude, 
that they would never probably work on in a lifetime in a 
corporation--or maybe not for 10 or 15 years in some of the 
major corporations--they really have their eyes opened. And 
many of them have indeed said what you just did. Well, yes, 
you're right, you can't attract me because of the money, but 
because I've seen what I've seen about public service and been 
able to look at the magnitude of responsibility I could have 
even as a summer employee, and they get to see some of these 
other capable senior managers in our work force as well, they 
can tell that they can truly make a difference.
    Mr. Platts. I have one final specific question, and it 
really is--again is pretty early, but the GSA disclaimer is one 
that seems, given a track record of great success, that jumps 
out. Is there an initial read that either or both of you have 
on what has transpired there to result in the disclaimer being 
required?
    Ms. Combs. We have not had a chance to review that 
completely yet. It's obviously a disappointment. I know that in 
talking with the CFO there, she was extremely disappointed. It 
came up, as Jeff talked about, toward the end as well. And 
very, very committed, though, to doing the right things to turn 
that around, and we're eager to help in any way we can.
    Mr. Platts. OK.
    Mr. Steinhoff. We really have not had a chance to look 
behind it. I think it is somewhat related to some systems 
changes they made, but we have not had an opportunity to go 
behind it.
    In that case they--as I recall they got a clean opinion on 
certain statements and disclaimer on others, so they have a 
mixed kind of opinion for 2005.
    Mr. Platts. We're kind of anxious to see how that does play 
out and what we have learned from that because of that, that 
we're going to move forward in an increasingly positive way and 
not regress, and they have been an agency as a great example of 
good work, that continues.
    One final more general question, and that is we've talked 
early this year, and we're continuing to work on I guess behind 
the scenes on the kind of consolidation, looking at the CFO Act 
and the various related financial management pieces of 
legislation that have been adopted over the last 20 or so years 
and how they need to be updated and better coordinated.
    Is there a benefit for us going forward with that effort to 
eliminate redundancies? As we're challenging financial managers 
in lots of ways, is it worth the effort that we're putting 
forth and will need to continue to put forth to undertake a 
major consolidation effort that in the end benefit those 
managers out there day in and day out to have that 
consolidation occur?
    Ms. Combs. I think any way that we can better define what 
success looks like to managers in a more streamlined fashion, 
the way that we continue to look at financial management 
throughout government, if we can pull together some things that 
make sense to work together, even in the internal controls 
efforts, we continue to encourage people to look across their 
entire enterprise and look at things they already have in 
place, things that are already being looked at, take those and 
adopt those. Don't layer on something on top of this, this is 
not a layering on process, this is a utilization of what is 
already there and helping management to come to grips and to 
agreement with the idea that this is a management 
accountability, and I'm the one certifying this using their own 
judgment. So those are the kind of I think things I think that 
help managers a lot to know that they have the authority to do 
that, and to rely on their own good judgment and their own good 
processes that are in place.
    Mr. Steinhoff. I think it's also a good idea to do that 
now. We need to harmonize certain things, we need to clarify 
certain things, consolidate certain reporting. Some things are 
now being done that meet the intent of these acts, but they're 
in a different form. And we need to make that legitimate. We no 
longer really need to have a separate Federal Manager's 
Integrity Act report if you make it part of the PAR. We don't 
need to have some of the things that we presently have.
    So a lot of harmonization, perhaps updating certain things 
to address what's been more refined practices. We can deal with 
some of the investment issues, place more clearly some of the 
things that would be, in fact, expected. I think there is a 
good opportunity for a committee report that would lay out and 
provide a record of where the Congress is today of where 
they're expecting this to be, some of the things we've spoken 
about today. There can even be some human capital proposals in 
there that deal with training, development, etc. So we look 
forward to working with you all on it.
    And I think it's a good opportunity to kind of step back. 
All these acts interrelate in some way, and it's not too hard 
for those who have been involved for a long time to see how 
they interrelate, but I could certainly see someone coming on 
the scene new looking at all these laws and all these acronyms 
and what not and not recognizing that gee, it's not this and 
that, it's really this broader concept. You don't see some of 
the things we spoke about today in Black and White in some of 
those bills.
    Mr. Platts. Well, as Dr. Combs was saying about a young 
graduate coming out and the opportunity to work on billion 
dollars projects, that is the other side. I was thinking of 
also coming out and saying you have the CFO Act, you have 
FMFIA, you have--being a little overwhelmed, because as we kept 
layering as opposed to bring it in in a cohesive fashion--we 
are working on that type of report and welcome the continued 
insights of our offices and staff. And again, part of that same 
team effort that we're all after at the end of the day, that 
same goal.
    We are very grateful for your testimony here today, and 
especially day in and day out the work of you and your staffs 
on what I continue to believe is one of our most important 
responsibilities, as we like to reference to, accounting for 
the people's money was laid out in Article I of the 
Constitution, and I think appropriately so. And it's a little 
different times today in 2005 than in the 1700's, but the 
importance and the right of the public to know what their money 
is being used for is just as important today as it was then. So 
your efforts are very commendable and appreciated.
    We will keep the record open, if there is anything you need 
to followup with us for 2 weeks, and we will look forward to 
our continued interactions with you.
    Mr. Steinhoff. Thank you very much.
    Mr. Platts. This hearing stands adjourned.
    [Whereupon, at 4:25 p.m., the subcommittee was adjourned.]