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





    THE FINANCIAL REPORT OF THE U.S. GOVERNMENT FOR FISCAL YEAR 2004

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

                                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

                               __________

                            FEBRUARY 9, 2005

                               __________

                            Serial No. 109-3

                               __________

       Printed for the use of the Committee on Government Reform


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


                                 ______

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                     COMMITTEE ON GOVERNMENT REFORM

                     TOM DAVIS, Virginia, Chairman
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
KATHERINE HARRIS, Florida            LINDA T. SANCHEZ, California
DARRELL E. ISSA, California          C.A. DUTCH RUPPERSBERGER, Maryland
GINNY BROWN-WAITE, Florida           BRIAN HIGGINS, New York
JON C. PORTER, Nevada                ELEANOR HOLMES NORTON, District of 
KENNY MARCHANT, Texas                    Columbia
LYNN A. WESTMORELAND, Georgia                    ------
PATRICK T. McHENRY, North Carolina   BERNARD SANDERS, Vermont 
CHARLES W. DENT, Pennsylvania            (Independent)
VIRGINIA FOXX, North Carolina

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

   Subcommittee on Government Management, Finance, and Accountability

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

                               Ex Officio
                      HENRY A. WAXMAN, California

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


                            C O N T E N T S

                              ----------                              
                                                                   Page
Hearing held on February 9, 2005.................................     1
Statement of:
    Hammond, Donald V., Fiscal Assistant Secretary, Department of 
      the Treasury...............................................    71
    Martin, Jack, Chief Financial Officer, U.S. Department of 
      Education..................................................    62
    Walker, David M., Comptroller General, U.S. Government 
      Accountability Office......................................     8
Letters, statements, etc., submitted for the record by:
    Hammond, Donald V., Fiscal Assistant Secretary, Department of 
      the Treasury, prepared statement of........................    74
    Martin, Jack, Chief Financial Officer, U.S. Department of 
      Education, prepared statement of...........................    66
    Platts, Hon. Todd Russell, a Representative in Congress from 
      the State of Pennsylvania, prepared statement of...........     3
    Porter, Hon. Jon C., a Representative in Congress from the 
      State of Nevada, prepared statement of.....................   101
    Towns, Hon. Edolphus, a Representative in Congress from the 
      State of New York, prepared statement of...................     5
    Walker, David M., Comptroller General, U.S. Government 
      Accountability Office:
        Information concerning credit program costs..............    87
        Prepared statement of....................................    12

 
    THE FINANCIAL REPORT OF THE U.S. GOVERNMENT FOR FISCAL YEAR 2004

                              ----------                              


                      WEDNESDAY, FEBRUARY 9, 2005

                  House of Representatives,
Subcommittee on Government Management, Finance, and 
                                    Accountability,
                            Committee on Government Reform,
                                                    Washington, DC.
    The subcommittee met, pursuant to notice, at 2:04 p.m., in 
room 2247, Rayburn House Office Building, Hon. Todd Russell 
Platts (chairman of the subcommittee) presiding.
    Present: Representatives Platts, Towns, Dent, Marchant, 
Westmoreland, Duncan, and Foxx.
    Staff present: Mike Hettinger, staff director; Dan Daly, 
counsel; Tabetha Mueller, professional staff member; Jessica 
Friedman, legislative assistant; Nathaniel Berry, clerk; Adam 
Bordes, minority professional staff member; and Jean Gosa, 
minority assistant clerk.
    Mr. Platts. A quorum being present, this hearing of the 
Committee on Government Reform will come to order.
    As we begin the 109th session, it is great to be serving 
again with my ranking member, Mr. Towns from New York, as well 
as our other colleagues on the majority and minority side. I 
look forward to an active and productive 2-year session as we 
go forward from this hearing of the committee today.
    As stewards of taxpayer dollars, we owe our citizens no 
less than full accountability. At the very least, we need to 
ensure that assets are protected from loss or misuse. Ideally, 
we need to ensure that every dollar is spent wisely and for its 
intended purpose. We should also understand fully the cost of 
the Government's operations and the implications of our 
financial commitments.
    To fulfill these important responsibilities, Congress began 
requiring that the Federal Government would produce audited 
financial statements beginning in fiscal year 1997. The 2004 
financial report of the United States and accompanying audit 
performed by the Government Accountability Office were released 
on December 15th of last year. This deadline represents an 
important milestone. It is a huge improvement over the days not 
too long ago when agencies took nearly 6 months to close their 
books. Timely financial information is necessary for 
responsible budget decisions, and in times of fiscal 
constraint, as many Federal agencies are required to do more 
with less, real time financial data becomes a critically 
important tool.
    For the 8th straight year, unfortunately, GAO was unable to 
provide assurance as to the reliability of the information that 
underlies the Federal Government's financial statements. As has 
been the case year after year, GAO reported significant 
material deficiencies. Additionally, this year a new issue came 
to light that warrants consideration. Eleven agencies restated 
their financial information for the previous fiscal year. 
Frequent restatements can undermine the credibility of our 
financial reports.
    During this hearing we will discuss the possible reasons 
for these restatements and ways that we can improve the process 
going forward to ensure that information is reliable as well as 
timely.
    Perhaps the most important benefit of the audit process is 
learning how to correct systemic weaknesses. We have seen 
improvement since the inception of the Government-wide audit in 
1997, but until we can be assured that the reporting 
information is reliable and GAO can issue a clean opinion, we 
will not benefit from the full value of this report.
    The Government Reform Committee has a responsibility to 
ensure sound financial management through appropriate 
oversight, and this hearing will establish the basis for our 
work in the 109th Congress.
    Our witnesses today will provide the subcommittee with 
insight on the audit findings of the consolidated financial 
statements and discuss areas that need improvement.
    Today we are pleased to have the Honorable David Walker, 
Comptroller General of the United States; the Honorable Jack 
Martin, who will represent the Office of Federal Financial 
Management at the Office of Management and Budget, and who is 
CFO at the Department of Education; and Donald Hammond, Fiscal 
Assistant Secretary at the Department of Treasury. We will 
certainly look forward to the testimony of each of our 
witnesses.
    [The prepared statement of Hon. Todd Russell Platts 
follows:]

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    Mr. Platts. I now yield to our ranking member, the 
gentleman from New York, for the purpose of making an opening 
statement. Mr. Towns.
    Mr. Towns. Thank you, Mr. Chairman.
    Let me begin by saying I really thank you for your 
leadership. I look forward to working with you to make 
Government more responsible. It is good to be back here with 
you.
    I look forward to continuing our good work on improving the 
performance and efficiency of the agencies and programs that so 
many Americans depend on every day. While I am pleased to see 
that the agency community is continuing to make progress in 
meeting their imposed deadlines for annual auditing 
requirements, these results seem to indicate that efforts to 
achieve a clean Government-wide audit are stagnant.
    As in previous years, a vast majority of agencies are 
meeting their goals of achieving an unqualified audit opinion, 
leaving us to focus our attention on a select few. 
Nevertheless, there is noteworthy decline in the number of 
agencies receiving clean audits when compared to last year's 
results. For fiscal year 2004, only 18 out of 23 agencies 
received a clean audit opinion, down from the 20 agencies 
receiving clean audits for fiscal year 2003.
    Furthermore, we are witnessing a sharp increase in the 
number of agencies restating their results from the previous 
year. According to GAO, there are 11 agencies that offered 
restatements for fiscal year 2003 compared to only 4 agencies 
during the previous cycle.
    While the underlying reason for these restatements remains 
unclear, it certainly merits our scrutiny. Publicly traded 
entities that restated its prior results would face harsh 
scrutiny from the FCC and its investors, so why shouldn't our 
agencies be scrutinized the same way by Congress and the 
taxpayers?
    Perhaps it is too early to tell if our efforts to improve 
agency financial management over the past decade have been 
adequate or if the system and practices for managing our 
Federal agencies are faltering. That said, the 2004 statements 
remain troubling to me and merit a thorough review from the 
Government Accountability Office.
    There is no question that the road to sound financial 
management and program efficiency within our Government runs 
through the achievement of a clean Government-wide audit; thus, 
it is imperative for us to continue with adequate oversight of 
agency efforts if we are ever to bring our Government's chronic 
budget deficit and debt burden under control.
    I look forward to hearing from the witnesses and gaining 
their perspectives for making our Government a more effective 
and accountable institution.
    On that note, Mr. Chairman, I yield back.
    Mr. Platts. Thank you, Mr. Towns.
    [The prepared statement of Hon. Edolphus Towns follows:]

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    Mr. Platts. Thank you for your kind words. Again, I look 
forward to working with you. We have taken a great team 
approach in the past 2 years. It worked so well. I was 
delighted that we got to stay in the same chairs that we are in 
as chairman and ranking member.
    Mr. Towns. Mr. Chairman, I must admit I agree with 
everything you said but that.
    Mr. Platts. We will proceed to our witnesses. We appreciate 
all three of you and your staff for your preparation for 
today's hearing and your appearance here today. As is a 
practice, if I could ask our witnesses to stand and any staff 
who will be assisting them, as well, to take the oath with 
them.
    [Witnesses sworn.]
    Mr. Platts. Thank you. The clerk will note that all 
witnesses affirmed the oath.
    We appreciate the written testimonies and we will proceed. 
We are going to use a rough framework of about 8 minutes each. 
We won't be real close to that, but if we are able to we will 
have more time for questions and more of that give-and-take.
    Mr. Walker, we are going to start with you. In advance--I 
think you said 6 years and 3 months in your position--I thank 
you for your service and your true and clear dedication to the 
fiscal integrity of the operations of the Federal Government. 
That name change is appropriate. The Federal Government is 
accountable to the people of our great Nation.
    If you would like to proceed?

    STATEMENT OF DAVID M. WALKER, COMPTROLLER GENERAL, U.S. 
                GOVERNMENT ACCOUNTABILITY OFFICE

    Mr. Walker. Thank you, Mr. Chairman and Mr. Towns. I 
appreciate my statement being entered into the record in its 
entirety, and therefore I will try to summarize the highlights 
and the lowlights for this subcommittee.
    I am pleased to be here again to be able to talk about the 
results of the U.S. Government's consolidated financial 
statement audit for the fiscal year ended 2004. I would like to 
thank this subcommittee for continuing its tradition of holding 
annual hearings. I think it is very, very important that you do 
that, and I would note that because of your interest and 
efforts I think it has helped to make faster progress. I do 
think we have made progress over the last several years in a 
number of different ways. I think that has to be acknowledged.
    As you mentioned, Mr. Chairman, one of the aspects of the 
good news is that for the first time in its history the Federal 
Government issued its annual report, which included audited 
financial statements, on December 15, 2004, clearly a much 
expedited schedule from what has been the case in the past. I 
think that is clearly a positive action that we should all be 
pleased with and proud of.
    At the same point in time, for the same basic reasons as we 
have for the last 7 years, the Government Accountability Office 
has not been able to express an opinion on the consolidated 
financial statements for three primary reasons.
    No. 1, the Department of Defense. The Department of Defense 
is the tail on the dog. We will not be able to express an 
opinion on the consolidated financial statements, in my view, 
until the Department of Defense gets its act together.
    There are two other reasons: one, because of certain intra-
governmental transactions; and, second, because of certain 
activities dealing with actually preparing the consolidated 
financial statements. My personal view is we will solve those 
issues well in advance of solving the challenges associated 
with the Department of Defense, which I am happy to get into 
during the question and answer period.
    While it is good news that we achieved this record 
reporting date, one area of concern that you mentioned is the 
fact that there was a significant increase in the number of 
restatements of prior year agency financial statements. These 
statements primarily relate to the reconciliation of the budget 
results with the financial statement results, which is a fairly 
new statement and one that people, I think, are still trying to 
get comfortable with. But the fact of the matter is that when 
you have restatements of financial statements, that is a very 
serious matter and would be taken very seriously in the private 
sector.
    The fact of the matter is that it is important that we not 
trade improved timeliness for decreased reliability. I believe 
over time we won't do that, and I think it serves to reinforce 
the importance of making sure that agencies have the right 
types of systems and effective controls in order to be able to 
get this done in a timely and reliable manner. That is 
critically important, not just to be able to generate audited 
financial statements at the end of the year, but in order to be 
able to have timely, accurate, and useful information to be 
able to make informed management decisions on a day-by-day 
basis.
    I would also note, as you are aware, that the principals of 
the Joint Financial Management Improvement Program, the three 
primary ones dealing with financial management matters being 
the Secretary of the Treasury, the Director of OMB, and myself 
as Comptroller General of the United States, agreed several 
years ago that success in financial management was not merely a 
clean opinion on the financial statements, but you also had to 
be able to achieve no material control weaknesses, no major 
compliance problems, and have systems that provided timely, 
accurate, useful information to make informed decisions on a 
day-to-day basis.
    Based on that criteria, only 4 of 24 major departments and 
agencies meet that test, up from 3 last year. As the chart 
shows, 18 of the major 24 Federal agencies received clean 
opinions this year, the same as last year. But keep in mind 
this: when somebody has restated their financial statements, 
that means they didn't deserve a clean opinion in the prior 
year and they shouldn't be stating, ``We got a clean opinion 
last year and we got a clean opinion this year,'' because by 
definition if their financial statements were restated, other 
than for a change in accounting principle, it means they should 
not have received a clean opinion in the prior year.
    In fact, one of the things that we are looking at is to 
determine what, if any, modifications should be made to 
generally accepted governmental auditing standards to make sure 
the auditors point out what the effect of that restatement 
would have been had they known about it in the prior year. I 
think it is also something that OMB needs to consider in 
determining the criteria for when you get to green in the 
financial management area, because if you have restatements 
something is wrong. We need to make sure that people are held 
accountable when they have that type of situation happen.
    If I can, in the balance of my time I just want to 
reinforce with this subcommittee something that I have been 
talking to many committees of the Congress about on both ends 
of the Hill, and that is if you look at the consolidated 
financial statements of the U.S. Government you will find that 
since the beginning of the republic in 1789 we have run up a 
net negative position of about $7.7 trillion. Worked out a 
little differently, right now total debt is about $7.6 
trillion, another way of looking at it.
    But if you look at these financial statements and also the 
management discussion analysis section, the footnotes, etc., 
you will find there are a lot of other very big numbers in 
there, many of which are not on the balance sheet of the U.S. 
Government. For example, you will find that we have made 
significant promises through Social Security, through Medicare, 
and other programs that, in current dollar terms, represent 
huge mismatches between what we have promised and what 
dedicated revenues are there to be able to deliver on those 
promises.
    In fact, if you were to take current liabilities and add on 
top of that the present value dollar difference between what we 
have been promised and what dedicated revenues are there in the 
form of payroll taxes or premiums or whatever else to deliver 
on those promises, then our current burden is about $43 
trillion and rising every day. That is about $350,000 for every 
full-time worker. It is $145,000 per American. The total 
estimated net worth of all individuals in the United States 
combined, including Bill Gates, is $47 trillion, and yet we are 
already committed to $43 trillion.
    That reinforces the point that we need to continue to 
provide enhanced transparency through our annual financial 
reporting as to where we are and where we are headed.
    By the way, these bonds that are in the so-called ``trust 
funds,'' you won't find them as a liability on the balance 
sheet of the U.S. Government. The reason being, under current 
accounting and reporting treatment the right hand owes the left 
hand; yet, nonetheless, we took the people's money, we spent 
the people's money in operating expenses, we replaced it with 
an IOU, and I think we need to reconsider the accounting 
treatment for that and other areas, as well.
    Last, we are on an unsustainable long-term fiscal path. Due 
to known demographic trends and rising health care costs, we 
face a sea of mounting red ink. We are not going to be able to 
grow our way out of this problem. It is going to be critically 
important that we engage in a fundamental baseline review of 
discretionary spending, mandatory spending, entitlement 
programs, and tax policy. It may take up to a generation to be 
able to deal with this gap, but the sooner we get started the 
better.
    For the benefit of this committee, on February 16th, before 
a full committee hearing of Senate Homeland Security and 
Governmental Affairs, GAO will release an unprecedented 21st 
Century Challenges report which will summarize where we are and 
where we are headed. This report will raise a number of key 
questions that need to be asked--and hopefully answered--about 
the base of existing Government programs, policies, functions, 
and activities, and offer some possible alternatives for a way 
forward, because our country, our children, and our 
grandchildren are counting on us to deal with this problem. And 
in order to deal with it we need timely, accurate, useful 
financial reporting and we also need performance reporting that 
is results based so we can understand what is working and what 
is not working and where we are generating a return on 
investment and where we need to reconsider our current position 
and plan.
    Thank you, Mr. Chairman.
    Mr. Platts. Thank you, Mr. Walker.
    [The prepared statement of Mr. Walker follows:]

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    Mr. Platts. You hit on the things that we want to focus on: 
timely, transparent, reliable, useful information that will 
benefit all aspects of the Federal Government as we try to 
achieve those goals that we are all after.
    Next we have Mr. Jack Martin, CFO of the Department of 
Education. As you are hitting your third anniversary at the 
Department coming up here later this month, we appreciate your 
service and also again thank you for your service in the past 
as a U.S. Marine and your service in uniform.

    STATEMENT OF JACK MARTIN, CHIEF FINANCIAL OFFICER, U.S. 
                    DEPARTMENT OF EDUCATION

    Mr. Martin. Thank you, Mr. Chairman and members of the 
committee.
    As the Chief Financial Officer at the Department of 
Education I am very pleased to be here today to provide some 
perspective on the Federal financial reporting process for 
fiscal year 2004. I look forward to sharing with you some 
observations on the Government Accountability Office's report 
on the financial report of the U.S. Government, as well as the 
significant progress made by Federal agencies during the past 
fiscal year.
    During this past fiscal year the Federal Government 
achieved a significant milestone in the area of Federal 
financial reporting. For fiscal year 2004, 22 of 24 major 
agencies issued audited financial statements in their 
performance and accountability reports just 45 days after the 
end of the fiscal year. Prior to this year, agencies generally 
took up to 5 months to produce these same reports.
    Complying with an administration requirement that took 
effect this past year, agencies have now significantly reduced 
the reporting delay that had been typical in the past. As a 
member of the CFO Council, where I have had the opportunity to 
work with other agency CFOs and their deputies, I can tell you 
the entire CFO community is pleased and proud to have played a 
role in this major accomplishment.
    The Department of Education was 1 of the 22 agencies that 
met the 45-day reporting deadline in fiscal year 2004. In fact, 
Education met this accelerated deadline for the second year in 
a row, since we issued our 2003 in mid-November the previous 
year, a year ahead of the requirement. Our success was 
certainly not attained overnight; rather, the work done over 
the previous fiscal years, with careful planning and efficient 
execution, enabled us to reach this milestone.
    The financial reporting efforts at the agency level enabled 
the Department of Treasury to issue the governmentwide 
financial report on December 15th for the first time. In 
previous years, the Government-wide financial report was 
typically not issued until March.
    With the accelerated reporting deadline taking effect this 
past year, agencies faced a 1-year fiscal period in which there 
was less time to prepare audited financial statements compared 
to previous years. Despite this shorter reporting timeframe, a 
comparable number of CFO Act agencies received unqualified 
audit opinions on their financial statements in fiscal year 
2004 as in the prior year. Of the 24 major Federal agencies, 18 
received unqualified audit opinions in fiscal year 2004. This 
result in the face of a more rigorous audit schedule is 
especially noteworthy since greater financial discipline and 
reliance on internal controls was needed to successfully meet 
the 45-day reporting timeframe. Accelerated schedule demanded 
good planning and timely reconciliations, and we are pleased 
with these efforts.
    For fiscal year 2004 I am pleased to report that the 
Department of Education was 1 of 18 agencies that received an 
unqualified audit opinion. Education has received an 
unqualified opinion for the last 3 fiscal years, and we look 
forward to continuing our fiscal vigilance in the coming years.
    Some have questioned the accelerated reporting requirement, 
asserting that the earlier date may result in poor-quality 
data. From our perspective at Education, this is certainly not 
the case. Education has met the accelerated deadline for the 
past 2 years, receiving unqualified audit opinions each time. 
An unqualified opinion we have received has required a more 
rigorous financial reporting and audit schedule compared to the 
previous fiscal years.
    Further, the early reporting date has allowed our 
department and others the benefit of having financial 
information throughout the year on which daily management 
decisions can be made on a routine basis. The accelerated 
reporting requirement has driven process and control 
improvements that have laid a foundation for management reports 
such as Education's Fast Facts report.
    Fast Facts is a monthly reporting tool that highlights key 
financial and performance data in a consolidated and user-
friendly format. Managers at the Department use Fast Facts to 
monitor performance and derive improved results in a variety of 
areas including grants administration, financial matrix, and 
educational outcomes.
    In the Government-wide financial report, GAO identified 
three main impediments to rendering an opinion: financial 
management problems at the Department of Defense, ineffective 
processes for preparing the consolidated financial statements, 
and deficiencies in accounting for intra-governmental 
transactions.
    These three items were reported by GAO as material 
weaknesses in its report. All these issues are complex, long-
term challenges and will take sustained efforts to resolve. DOD 
is addressing specific weaknesses and progress is being made. 
It is important to recognize that longstanding issues in a 
department that has over 300 sub-entities are not easily fixed. 
In some cases, eliminating DOD material weaknesses depends on 
the implementation of new financial management systems. In 
other cases, material weaknesses require an incremental 
approach to transforming business processes, which involves 
focusing on one component at a time or one financial statement 
line item at a time.
    For fiscal year 2004 the auditors determined that three 
significant financial statement items at the DOD-wide level--
appropriations received, investments, and Federal Employment 
Compensation Act liabilities--passed audit scrutiny. In 
addition, six components, up from five the previous year, 
earned an unqualified opinion on the fiscal year 2004 financial 
statement.
    During this fiscal year 2004 reporting cycle, significant 
progress was made in implementing a new process for preparing 
the financial report. The new process facilitates a stronger, 
more direct link to agency financial statements, something that 
has been a concern of GAO. While the new process was successful 
in producing Government-wide financial statements within the 
new accelerated reporting timeframe, there are issues that need 
to be refined and improved during fiscal year 2005. The CFO 
Council looks forward to working with OMB, Treasury, and the 
other agencies to improve this process.
    It is my understanding that the inability to balance 
significant amounts of intra-governmental transactions is being 
addressed on several fronts by OMB and Treasury. Process 
enhancements such as more-frequent reporting and 
reconciliations and new tools like the intra-governmental 
reporting and analysis system will support the efforts to 
eliminate reporting errors. These new analytical tools have 
helped to better focus corrective actions.
    In December 2004, OMB issued the revised Circular A-123, 
Management's Responsibility for Internal Control. Circular A-
123 defines management's responsibility for maintaining 
effective internal control and requires management to adhere to 
broadly accepted internal control standards and undertake a 
strengthened process when assessing internal control 
effectiveness. The strengthened assessment process is similar 
to the process that public corporations must follow under the 
financial reforms of the Sarbanes-Oxley Act of 2002.
    The policies contained in Circular A-123 further emphasize 
a foundation of disciplined accounting processes and good 
internal control for providing timely and reliable information 
and demonstrating financial accountability.
    Eleven agencies restated their fiscal year 2003 financial 
statements when issuing their fiscal year 2004 reports. These 
restatements relate to a period prior to the implementation of 
the November 15th accelerated reporting requirement. Overall, 
the restatements reflect the greater scrutiny and attention the 
financial reporting process has received in recent years. 
Process and control improvements resulting from accelerating 
reporting and material weakness monitoring under the PMA 
scorecard, as well as recent revisions to OMB Circular A-123 
emphasizing internal control over financial reporting, will 
likely serve to reduce restatements in the future.
    One of my goals as CFO is to produce more timely and 
reliable financial information and to use this information in a 
daily decisionmaking to reduce costs and better manage 
programs. These efforts are currently tracked by OMB as part of 
the improved financial performance initiative of the 
President's management agenda.
    I am pleased to report that the Department of Education has 
been in green status in the improved financial performance 
initiative for just over a year. Education was the fourth 
Federal agency and the first Cabinet agency to reach this 
milestone, and several other agencies have joined us since 
then. Today a total of eight Federal agencies have received a 
green score on the PMA improved financial performance 
scorecard. With the recent additions of the Departments of 
Commerce and State, eight agencies have an overall green status 
indicating that they have demonstrated they are using financial 
management information to manage their programs.
    I am further pleased to report that the Department of 
Education received three prestigious financial management 
awards during the last year: The President's Quality Award for 
Improved Financial Performance; a Certificate of Excellence in 
Accountability Reporting from the Association of Government 
Accountants; the Alexander Hamilton Award for Technology, the 
Silver Award from the magazine ``Treasury and Risk 
Management,'' an award that normally goes to private sector 
corporations.
    Conclusion: the outlook for the Federal Government to 
improve the quality and timeliness of financial reporting to 
the American citizen is positive. While many challenges remain, 
others that appeared similarly insurmountable just a few years 
ago are being solved.
    The Department of Education looks forward to working with 
OMB and the other agencies to improve Federal financial 
management in the months and years ahead.
    Thank you for listening. I am happy to answer your 
questions.
    Mr. Platts. Thank you, Mr. Martin.
    [The prepared statement of Mr. Martin follows:]

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    Mr. Platts. Your example of the Fast Facts is a perfect 
example of that--the internal controls and process, that you 
have responded to the accelerated deadline in getting that 
timeline information that your managers have to really act on. 
A great example for other agencies to follow.
    Next we have our Fiscal Assistant Secretary at the 
Department of the Treasury, Don Hammond.
    We appreciate your being with us. I think you and the 
Comptroller General started in your positions about the same 
time, so a good tag team as we here try to get our arms around 
the financial challenges of the Federal Government.
    Mr. Hammond. Thank you, Mr. Chairman.
    Mr. Platts. Actually, Mr. Hammond, before you start, I did 
want to recognize we have been joined by three other members of 
the subcommittee: Charlie Dent from Pennsylvania, who is on the 
subcommittee, and two other full committee members, Mr. 
Marchant from Texas, and Mr. Westmoreland from Georgia. We 
appreciate your participating here today. Go ahead, Don.

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

    Mr. Hammond. Thank you very much, Mr. Chairman, Ranking 
Member Towns, members of the committee. It is my privilege and 
pleasure to represent the Treasury Department today to discuss 
the state of reporting on the finances of the Federal 
Government. Your continued interest in this important subject 
is much appreciated.
    I would ask that my full statement be included in the 
record.
    Mr. Platts. Without objection.
    Mr. Hammond. Thank you.
    The financial report of the U.S. Government incorporating 
the consolidated Government-wide financial statements is 
designed to report on the financial condition of the Government 
using the accrual basis of accounting employed and understood 
worldwide for financial reporting. The report for fiscal year 
2004 was the eighth time that Treasury has prepared and issued 
this report. We have learned a lot over these past 8 years, and 
considerable progress has been made toward producing a timely, 
accurate, and useful financial report.
    Perhaps even more importantly, the efforts to provide 
effective financial reporting have led to significant 
improvements Government-wide in the underlying financial 
management practices and processes.
    We are pleased this year to have completed the fiscal year 
2004 report on December 15, meeting the objective the 
administration set out 3 years ago. Every agency met Treasury's 
November 18th deadline for data input into our new report 
preparation system. These were significant accomplishments, 
considering that we also concurrently launched a new 
consolidation process. I am extremely proud of the considerable 
effort that was expended across Government to make these 
results happen.
    The financial report has been an important addition to 
Federal financial reporting. The timely availability of this 
additional information can more fully inform the budget 
process. The standardized reporting framework promotes 
comparability and consistency in reporting across years, among 
agencies, and increasingly among countries.
    The report goes beyond simple reporting of results as it 
displays the effects of all significant assets, liabilities, 
stewardship responsibilities, and other commitments and 
responsibilities, including social insurance. While the 
appropriate accounting treatment in the future for these social 
insurance programs is a topic of discussion at the Federal 
Accounting Standards Advisory Board, the existing standard does 
provide for comprehensive disclosure.
    We think this year's financial report shows significant 
improvement from the first one we prepared for fiscal year 
1997. Many enhancements have been made over these past 8 years. 
Additional information has been added, the presentation 
improved over the years, increasing the usefulness of the 
report for the reader. Less visible but no less important, the 
discipline and rigor associated with the production of regular 
financial statements have resulted in improvements in basic 
financial operating activities. All of these improvements have 
helped us hone in on those areas that need further attention on 
and will be the focus of our activities this year.
    GAO's audit enhances the reports credibility and highlights 
areas for improvement. Through this rigorous and continuous 
process, we will improve our financial management environment 
and achieve more credibility in our financial reporting. Once 
we have achieved a level of credibility, we will have created 
the solid foundation for a better public understanding of the 
Government's finances.
    In order to pass audit scrutiny, we must address three 
major areas: serious management control issues at the 
Department of Defense, the Government's inability to properly 
eliminate transactions between agencies, and deficiencies in 
the report preparation process.
    Defense continues to make progress, but much work remains. 
They are such a significant portion of the total financial 
picture that it is extremely unlikely that improvement in the 
audit opinion will occur without significant further 
improvement in DOD reporting.
    Two new initiatives were included in the 2004 report 
process that were designed to reduce the out-of-balance 
conditions that exist between agency transactions with other 
agencies. While it is too early to assess these initiatives, 
preliminary results are, indeed, very encouraging. Our new 
report preparation system is a work in progress. We met our 
first phase objective for agencies to be able to fully utilize 
the data collection portion of the system to submit their 
financial statement data. We plan to complete the consolidating 
portion of the system in 2005, which will aid us in 
demonstrating consistency with the agency's financial 
statements and greatly streamline the preparation process. That 
being said, a comprehensive draft of the financial report was 
produced this year in less than 2 weeks.
    Accounting standards require some disclosures that are not 
currently included in the Government-wide financial report. For 
the fiscal year 2004 reporting cycle, we asked agencies for 
data that relate to these particular disclosures, and we are in 
the process of analyzing that data to determine its materiality 
to the statements.
    The Federal Accounting Standards Advisory Board has also 
launched a project to determine which of the currently required 
disclosures would not be necessary in a Government-wide 
financial report.
    We continue to make progress on the problems of imbalances 
in intra-governmental transactions and are devoting increased 
attention to help agencies fully reconcile these differences. 
Treasury's Financial Management Service has added a new tool to 
help agencies properly identify and record these intra-
governmental transactions. Treasury and OMB now require 
agencies to report and reconcile intra-government activity 
quarterly instead of just at the end of the year, which has led 
to significant reductions in differences in agency reporting.
    Supporting the accelerated reporting efforts have been our 
internal efforts to accelerate our reporting of monthly agency 
data to financial managers. The monthly Treasury statement, the 
public source of budgetary results, has been accelerated in 
issuance from the 17th work day to the 8th work day each month, 
facilitating agency efforts to verify and use the data in their 
reports.
    As I have mentioned in the past, we continue with our plans 
to improve the routine outlay and receipt process by replacing 
the current two-step classification process with a single 
classification. We have a pilot scheduled for this coming fall. 
If that goes as expected, we will be implementing this new 
feature in the coming years to the dramatic benefit of every 
single agency.
    In summary, we continue to make substantial progress in 
reaching our objective of effective financial reporting and 
sound financial management. Through the efforts to date, 
numerous issues have been identified, corrective actions 
instituted, and processes changed. Serious challenges remain 
before we reach our objective, but we understand our tasks and 
our commitment to resolving them is firm. Improved financial 
reporting leads to the ultimate benefit of effective financial 
management. As the stewards of taxpayer funds, our 
responsibility is to meet those highest standards of financial 
management.
    Thank you, Mr. Chairman. That concludes my prepared 
remarks. I will be happy to answer any questions the committee 
may have.
    Mr. Platts. Thank you, Mr. Hammond.
    [The prepared statement of Mr. Hammond follows:]

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    Mr. Platts. We are going to go to the Q and A, and we will 
begin with about 5 minutes for each Member and have as many 
rounds. Good news or perhaps bad news--meaning we will have 
more time for a Q and A--is our next series of votes apparently 
won't be until about 5 p.m. now, so we don't have that crunch 
coming up at 3 p.m. we thought we may have.
    There are a number of issues I want to get into. I think I 
will start where all of you have touched on up front, the issue 
of the timeframe. While we are pleased to have the information 
in a more time-sensitive manner, the November 15th and then 
December 15th for the consolidated statements, the issue of the 
pros and cons of that. The one that seems to be an example is 
the HUD situation where HUD's auditor put their pencils down 
November 15th. The Department expressed that they believe they 
would have gotten a clean opinion if the auditor could have 
finished the audit and not stopped then. One result of that is 
HUD will have to re-audit their 2004 statement when we come 
back next year and there is another expense here.
    Should there be more flexibility? While we are pushing for 
this time, should we have some more flexibility built into that 
date of November 15th? I will throw that out to all three of 
you.
    Mr. Hammond. I would be happy to start.
    Mr. Platts. Sure.
    Mr. Hammond. I think once you establish deadlines such as 
these, the objective should be to hold firm to them. Our 
experience has found that, while there is a difficult 
transition to getting to the accelerated reporting, once you 
achieve them the benefits of consistently making those dates or 
even further acceleration voluntarily before that really 
benefits the agency.
    I will give you one practical example of a benefit. Getting 
the management letter report from the auditor in a timely 
fashion early in the fiscal year allows the agency to be able 
to address those issues within the current year, as opposed to 
if they were reporting in March, not getting that feedback 
until midway through the fiscal year or beyond and then, in 
essence, being a whole year behind cycle in being able to fix 
those identified areas.
    Mr. Platts. So focusing more on things that the Department 
of Education has done internally to make sure you meet that 
deadline, as opposed to knowing you may have some window of 
flexibility if you support those internal changes to meet the 
deadline?
    Mr. Hammond. Absolutely.
    Mr. Platts. Yes. Mr. Walker or Mr. Martin?
    Mr. Martin. I think that we need to stay with the November 
15 reporting date. I think the over-arching goal should be for 
us to get timely financial information so that our managers can 
use this information to make decisions throughout the year and 
at year end. Receiving a clean audit 5 or 6 months after the 
end of the fiscal year, it is great to say you have a clean 
audit opinion, but it really doesn't do anything to manage the 
Federal dollars that we collect from our taxpayers. So I think 
we need to stay with that date. I think that the agencies that 
have difficulties making the date once they improve their 
internal control structure and perhaps start their audit in 
February or March as opposed to June or July, I think they will 
be able to make it.
    Mr. Platts. OK. Mr. Walker.
    Mr. Walker. Two points. One, I see nothing wrong with the 
November 15 date. The fact of the matter is that people have to 
end up having the right processes, systems, and controls in 
place no matter what the date is, especially if it is an 
accelerated date. They also need to start the audits earlier 
rather than what they have been doing in past years.
    The second aspect is whether or not, you have the date of 
November 15, whether there might be a circumstance in which you 
might allow a particular agency on a business case-by-case 
basis, a little bit of extra time if it would make any 
difference on the opinion they might otherwise receive.
    So my view is that you ought to stick with November 15, but 
that shouldn't preclude the ability of OMB, if it so desires, 
to provide a little bit more flexibility on a case-by-case 
basis where a little bit more time might make a difference, and 
they have the ability to do that now. That is a policy 
decision.
    Mr. Platts. The issue that may be related to this next year 
when we see the audits--that was a big issue this time. We 
dropped from 20 clean opinions to 18, but if we add in the 
restatements and we knock out 7--we actually drop down to, I 
think, 10 maybe clean opinions, maybe about 13 or so; 18 minus 
11 is 7; we have 7. Let me get my math right here. So we drop 
down to seven. So in appearance we actually went up 
dramatically if we say they were not clean last year and this 
year we have 18. We really won't know that, because how many 
restatements will we see next year.
    But that broad issue of restatements, I mean, clearly the 
fact that 11 departments had restatements tells us there is 
something wrong with what we saw from last year.
    If we want to start with what you think the major cause of 
that number of restatements and how do we avoid that next time 
around?
    Mr. Walker. I would speculate two things, and I would ask 
my co-panelists to add their remarks.
    First, it is my understanding that a disproportionate 
amount of the restatements have to do with the reconciliation 
of the budget to the financial statements, and that is a 
relatively new statement. Some people are still having some 
difficulty in trying to deal with it, so one would hope that 
this situation would improve with time.
    Second, not all agencies have the type of systems, 
processes, and controls in place to be able to deal with 
accelerated reporting dates as effectively as they should be 
able to.
    I would say those are probably the two biggest contributing 
factors, but I would also like to hear the opinion of my co-
panelists.
    Mr. Martin. Well, I believe that internal control material 
weaknesses contribute, the failure to reconcile accounts in a 
timely manner. Heroic efforts, as we have talked about, I 
think, at previous hearings, where the opinions are developed 
based on brute force, I think those lead to restatements. So to 
the extent that we can implement the financial management 
systems implemented, clean up our material weaknesses, which 
OMB has programs to monitor, then I think you will see the 
number of restatements declining.
    I don't think it is a trend, and I think that they will 
continue for a variety of reasons, but I don't think it is a 
trend and I think that as we can get our arms around internal 
control issues we will see a steady decline.
    Mr. Hammond. Just to add to that, I would agree with both 
my colleagues. I think it really does highlight an issue that 
is going to be one of continuing focus, which is the need to 
seamlessly manage both budgetary data as well as proprietary--
what we characterize as proprietary or financial accounting 
information, because to the extent that those restatements do 
stem from the budgetary area, it means that the controls 
leaping back and forth between those two sources of data need 
to be very solid.
    Mr. Platts. Thank you. We are going to move to the ranking 
member, but I want to recognize we have been joined by Mr. 
Duncan from Tennessee. Thanks for being with us.
    Mr. Duncan. Thank you very much, Mr. Chairman.
    Mr. Platts. Mr. Towns.
    Mr. Towns. Thank you very much, Mr. Chairman.
    Let me again welcome all the new members to the committee. 
I am looking forward to serving with you.
    Mr. Martin, let me begin with you. From your perspective, 
what reforms are actually necessary to improve the longstanding 
financial management problems across the executive branch? What 
is the status of the reforms currently in place?
    Mr. Martin. I think there are a number of initiatives 
taking place right now within OMB that are focusing on 
providing greater consistency between the various Federal 
agencies with respect to the systems that they use, and I think 
that long-term these OMB initiatives, not tomorrow, but long-
term I think we will see significant improvement across 
Government based on systems improvements, internal control 
improvements.
    I think back to where the Federal Government was 15 or 20 
years ago, I think most of us would never think we would be at 
a point now where most agencies are receiving clean opinions.
    Mr. Towns. Thank you.
    Mr. Hammond, can you update us on the developments and 
efforts underway of recovering improper payments referred to 
you for collection? Are there any hindrances or anything that 
we should do here to sort of assist you in being able to recoup 
that money?
    Mr. Hammond. Our efforts to collect the delinquent debt 
owed the Government, whatever its source, whether it is from 
improper payments or from credit-related programs, are really 
moving along very nicely, in part attributable to the wonderful 
leadership that has come from this subcommittee over the years.
    Last year we collected over $3 billion on behalf of the 
Federal Government through delinquent debt collection activity. 
That is a significant source of repayment, primarily coming 
from the offset of tax refunds. This year the President's 
budget has two legislative proposals contained in it that would 
help us to further enhance and refine our debt collection 
activities, and I would look to you all for your 
acknowledgement and support of those two important additions to 
our debt collection program.
    Mr. Walker. Mr. Towns, if I may add a point on that?
    Mr. Towns. Sure.
    Mr. Walker. There is one area that I don't believe Congress 
has addressed yet that I would put back on the table. Under the 
Prompt Payment Act, it is my understanding that if the Federal 
Government doesn't pay certain amounts within a certain 
timeframe they incur certain additional costs and penalties. At 
the same point in time, if the Federal Government happens to 
pay twice for a particular item, the individual who received 
duplicate payment not only does not have to notify the Federal 
Government, but, in fact, they never have to pay interest or 
penalty if down the road it is found out that a double payment 
occurred. I think we need to think about leveling that playing 
field in this area.
    Mr. Towns. Excellent point. I mean, especially when I think 
about the fact that you mentioned the $7.6 trillion and then 
the $43 trillion. I mean, I think that we need to do everything 
we can.
    Let me just go to you, Mr. Walker. In your view, what is 
GAO's continuing role in taking to accelerate progress in 
financial management reform and in developing short- and long-
term strategies for addressing problems that continue to 
prevent the U.S. Government from preparing auditable 
consolidated financial statements?
    Mr. Walker. There is no doubt in my mind that the key 
players are committed to making continued progress in this 
area. There is also no doubt in my mind that the key players 
are looking for substantive wins, not pyrrhic victories.
    The biggest concern that I have, quite frankly, Mr. Towns, 
is, of the three big areas that are preventing us from being 
able to express an opinion on the consolidated financial 
statements, the one I have by far the most concern about is the 
Department of Defense, and I am happy to come back to that if 
you want. That is the one that I still have very significant 
concerns about.
    Mr. Towns. Thank you, Mr. Walker.
    Mr. Martin, back to you. This year the Government 
celebrated their timeframe for the submission of financial 
statements from agencies to November 15th. Is this perhaps an 
over-aggressive schedule for agencies to meet? Could this be a 
fact in the decline of the number of agencies that received 
clean audits for the year?
    Mr. Martin. I think that the November 15 date is an 
appropriate date, an appropriate target for all agencies to 
meet. I think one element that we haven't talked about that I 
haven't read much about in terms of meeting that accelerated 
date is the importance of having all individuals in the agency 
or department onboard, working toward a common goal of meeting 
that date. That means not only the people in the CFO office, 
but the Inspector General, the auditors, the program people, 
everybody in the entire department. I think at the Department 
of Education that is pretty much how we get it. So it is not a 
solo run for myself and my staff. Everybody has to say, ``We 
are going to work together. If we have to work 14 to 16 hours a 
day for a period to make that deadline, that is what we are 
going to do. If we have to work weekends to make the deadlines, 
that is what we are going to do.''
    I received a commitment from our IG. We talked and we said, 
``We are going to do this. We are not going to cut any corners. 
We are going to cross T's and dot the I's. We are going to do 
it right and we are going to have our people work to make that 
goal.
    Mr. Towns. All right. Thank you very much.
    Thank you, Mr. Chairman. I have used up my time.
    Mr. Platts. OK. We will come back around. Thank you, Mr. 
Towns.
    Mr. Duncan.
    Mr. Duncan. Thank you very much, Mr. Chairman.
    Mr. Walker, a few months ago I heard a talk by Charley 
Cook, a very respected political analyst, and he made a very 
interesting statement. He said that people could relate to and 
get upset about $600 hammers and $900 toilet seats and things 
like that, but he said he had never seen a figure over $1 
billion that anybody could really comprehend. That made some 
sense to me.
    And then I read in this one article that I was given here. 
It says, ``Agencies reported $35.7 billion worth of improper 
payments in fiscal year 2003, according to the testimony of Mr. 
McCoy Williams of the GAO.'' And then I read a few days ago 
that the Defense Department couldn't account for about $9 
billion over in Iraq. I guess there are two or three questions 
there.
    First of all, how do we get people to understand how much a 
billion dollars is? I mean, everybody in this room should be 
shocked or horrified by that $35 billion worth of improper 
payments or the $9 billion that couldn't be accounted for in 
Iraq. We should be horrified by that, but we aren't.
    And then I guess second, how does that happen? How are we 
not able to account for $9 billion? I mean, maybe you could 
understand a much, much smaller figure, but we are talking 
about huge, huge sums here, just staggering amount.
    Mr. Walker. First, Mr. Duncan, the bad news is the $35 
trillion is $45 trillion for this year, and that is not all the 
numbers yet because not all the agencies have reported yet, but 
that is an accurate number for 2003.
    Mr. Duncan. You said trillion twice there.
    Mr. Walker. I am sorry. I am sorry, Mr. Duncan. I am 
dealing in trillions now. I apologize.
    Mr. Duncan. I thought my gosh.
    Mr. Walker. Let me clarify.
    Mr. Duncan. A trillion, a billion.
    Mr. Walker. The number for fiscal year 2003 for improper 
payments was about $35 billion or $36 billion. The number for 
fiscal year 2004 was about $45 billion, and that is not 
everything because not all agencies have reported.
    Second, you are correct that even when you deal with 
billions, much less than trillions, it is hard for people to 
relate to it. One of the challenges you have is to try to 
convert that number into something that people can relate to.
    You mentioned, for example, the Department of Defense. A 
billion dollars for the Department of Defense would fund 
roughly 10,000 Army troops. So for every billion we waste, we 
don't have the ability to fund 10,000 Army troops. So you have 
to take these numbers and convert it in terms that I think 
people can relate to. The $43 trillion number which I mentioned 
is about $350,000 per full-time worker when the average family 
income in the United States is $42,000. It compares to $47 
trillion, which is the total accumulated net worth of all 
Americans, including their home equity. So we need to put these 
numbers in terms that people can understand them.
    But we have large and growing structural deficits and we 
have to get serious now. We can't afford to waste anything, 
although waste will never be zero in the world's largest 
enterprise, which is the U.S. Government.
    Mr. Duncan. Well, it will never be zero, but we sure have 
to do a lot better than what we are doing or we are going to 
run into some terrible, terrible problems. I mean, we are 
already--you know, the Congress voted to raise the national 
debt to $8.5 trillion a few months ago. Now they tell us that 
the deficit for this year is going to be $427 billion, and it 
is going to be more than it was last year. It just keeps going.
    At any rate, do you know about this $9 billion that they 
were talking about a few days ago, how that happened?
    Mr. Walker. Mr. Duncan, GAO right now is doing work to get 
a handle on where the money went for the supplemental, because 
I have zero doubt that it was spent. I do however have serious 
concerns on what it was spent on. We haven't finished our work, 
but there are serious issues being raised. I believe it comes 
back to what I said before: the biggest problem agency in the 
Federal Government by far--nobody is even close--on financial 
management and accountability is the Department of Defense.
    Mr. Duncan. Well, when you finish that report I would like 
to see it. May I respectfully suggest, Mr. Chairman, that might 
be something that we need to have another hearing about.
    I especially like your suggestion that these complaints 
that get double payments, they should have to pay penalties and 
interest when that is discovered. You said they are not having 
to do that now, but I think that would be some good legislation 
that we could hopefully bring out of this subcommittee.
    Mr. Martin. Mr. Duncan, let me add to that.
    Mr. Duncan. Yes, either one of you.
    Mr. Martin. With the proper internal control structure and 
elimination of many of those material weaknesses that have been 
identified at DOD, we would know where that $9 million is.
    Mr. Duncan. No, billion.
    Mr. Martin. Billion. He wants to go one way and I will go 
the other way.
    Mr. Platts. Mr. Duncan, your point is very well taken. In 
fact, one of our priorities in our agenda for this session this 
year is coming back to the Federal Financial Management 
Improvement Act, which is really to focus on internal controls 
which will lead us to either improper payments or unaccountable 
payments, so we do plan on getting into that issue, and that 
most recent example is yet one more that will relate right on 
point.
    Mr. Duncan. You know, I mentioned the hammers and the 
toilet seats, but I remember several years ago people all over 
the country got upset over $500,000 they were going to spend on 
the Lawrence Welk Home in South Dakota, and then in your State 
there was an outhouse that the Interior Department built in 
some park, and I think they spent $260,000 on it or something 
like that, and everybody got upset about that. But we need to 
get upset about this $35.7 billion worth of improper payments 
and this $9 billion that was lost in Iraq. As Mr. Walker said, 
he said he has zero doubt that it was spent, but apparently 
spent improperly.
    Thank you very much.
    Mr. Platts. We definitely are going to be following up on 
that issue, and your interest and passion on the issue is 
welcomed with the subcommittee. We will look forward to working 
with you.
    I am going to pick up a little bit out of the order that I 
was looking at because I want to come back to the restatement 
issue, but on the improper payments, Mr. Walker, you touched on 
it, that the latest numbers are $45 billion with many agencies, 
and my understanding is the Department of Defense, some parts 
of the Department of Defense programs have done an improper 
payments assessment but not in total, given the size of that 
budget over there we expect to see.
    Do you or either of our guests, our panelists, have any 
guess of where you think we will end up? You know, the $45 
million is where we start at now for 2004, but I said when you 
used the word ``trillion,'' when we add DOD in completely we 
might be at trillion. We have heard numbers of $75 billion or 
$80 billion as maybe accurate. Any idea?
    Mr. Walker. Since the executive branch has the primary 
responsibility to be able to come up with those numbers, I will 
let one of my co-panelists answer that.
    Mr. Hammond. To try to attempt to answer your question, I 
think, from my understanding, I don't have the information to 
be able to estimate where it will go beyond that which is 
reported. I think clearly, as you are looking at where improper 
payments are likely to come from, what you want to look at is 
programs that have either entitlement design or certain forms 
of eligibility criteria, because they become prone to various 
forms of practice which may result in improper payments. And 
recognize that an improper payment may be a double payment. It 
may also be an under-payment.
    Mr. Platts. Mr. Martin.
    Mr. Martin. I think our difficulty is actually trying to 
identify improper payments. At the Department of Education we 
have initiated a couple of projects, data mining projects where 
we look at large programs attempting to identify data 
anomalies. But even with those exercises, I am not satisfied 
that we are really getting close to being able to identify 
accurately improper payments.
    So going down the road, what we are doing at Education 
right now is looking at techniques and procedures to try to get 
our arms around just what is the level of improper payments. 
Right now we don't know. I think it is an area where we are 
just getting started. It is going to require a lot of work 
going forward, and it is a real front-burner issue with OMB 
now. You know it is on the scorecard. So the short-term 
challenge for me, and I think for many other agencies, is to 
try to identify what that number is. We are just estimating, 
and I am not happy with the estimating techniques so far. I 
think we can do a much better job.
    Mr. Platts. I think of the $45 billion, maybe to have an 
accurate statement, my understanding is $40 billion is over-
payments and the other $5 billion is under, for a net loss of 
improper over-payments of $35 billion. But we want to not pay 
too much, but we also want to pay what we owe, and we are 
missing it in a substantial way.
    Mr. Martin, you are CFO of the Department of Education, but 
also on behalf of OMB and a message to OMB is the continued 
focus on the improper payments and that it just ties in to the 
broad issue of internal controls. If we have those internal 
controls we can get to the issue of these improper payments.
    I put in perspective Mr. Duncan's question how do we put 
these terms. When we did the Medicare bill in late 2003, the 
prescription drug plan, the estimates, I used the number of 
about $45 billion per year over 10 years, because we had 
numbers of 400. We had over $500 billion over 10 years, what 
the cost would be, including the transition years. But if you 
say $45 billion a year, we are talking $450 billion every 10 
years. The improper payments for 2004, $45 billion equals the 
entire cost of the new prescription drug plan for that year. 
That puts it in perspective for citizens to say yes, that is 
one heck of a lot of money when we talk about funding that 
entire program. To your fellow CFOs and to OMB in specific, 
that continued focus is important.
    Mr. Martin. Mr. Chairman, I want to say one other thing.
    Mr. Platts. Yes?
    Mr. Martin. Going back to our data mining project, I would 
say, you know, we talk about estimates, but in terms of actual 
erroneous payments where we paid a vendor, say, the wrong 
amount of money, I think what we identified was less than 
$100,000 where there were actual--out of millions, billions. So 
from that standpoint it is good, but still I say we have a lot 
of work to do.
    Mr. Platts. It is one of the I will say legacies of my 
predecessor, Chairman Steve Horn, on this subcommittee in 
pushing that legislation through in his final term here in 
Congress that I think long-term is going to really go a long 
way to cleaning up our financial house.
    I am going to yield to Mr. Towns if you have other 
questions.
    Mr. Towns. Thank you, Mr. Chairman.
    Mr. Walker, what impact does information security 
weaknesses have on Federal operations and safeguarding Federal 
assets? And why is it important for agencies to establish a 
comprehensive security management program? Can you provide us 
with any specific examples of an agency making progress in 
strengthening their internal controls for financial management 
systems, because this seems to be a problem.
    Mr. Walker. First, like anything in life, if you don't have 
a plan you are going nowhere fast and you are not going to be 
able to solve your problem, so it is important to be able to 
have a comprehensive and integrated plan in order to make 
progress. In the absence of having a plan and effectively 
implementing a plan, you have Government assets that are at 
risk of inadvertent or deliberate misuse or loss. You have 
financial information that could be modified or destroyed. You 
have sensitive information that could be inappropriately 
disclosed. And you have critical Government operations that 
could be subject to disruption. So there are a lot of 
significant adverse consequences, some of which can be 
quantified in dollar terms and some of which don't lend 
themselves to being qualified in dollar terms.
    Mr. Towns. I have also concerns actually relating to the 
lending and credit activities within many of our Federal 
agencies, particularly in light of your findings. Efficiencies 
in determining the costs of certain lending programs and the 
value of related loans--can you speak to the material problems 
facing the agency community and how to adequately determine 
credit programs' cost?
    Mr. Walker. I will mention something briefly, but I might 
have to provide something more for the record.
    The issue of credit cost is to properly analyzing that, 
properly accounting for that, is a matter of increasing 
concern, one in which we are continuing to do work on. It is 
one that we have done some reporting on in the past, and if it 
is OK with you, I would like to be able to provide something 
for the record on that.
    Mr. Platts. Without objection.
    Mr. Walker. Thank you.
    [The information referred to follows:]

    [GRAPHIC] [TIFF OMITTED] T9783.064
    
    Mr. Towns. Thank you very much.
    Let me just go to one other thing. Mr. Walker, when you 
testified before us last year I remember I commented on how we 
had leveled off in the number of clean audits given in 
comparison to the prior year. This year we seem to be reversing 
that course without taking into account the number of agencies 
that are restating prior audit results. Are there any broad-
based themes among the five agencies that received qualified or 
disclaimers on their audits? Can you tell us what specific 
actions may be taken in the short term to increase our numbers 
of clean audits among--forget about DOD. Forget about that.
    Mr. Walker. It is only about $100 billion, not counting the 
supplemental.
    Mr. Towns. If you can.
    Mr. Walker. Sure. I will be happy, Mr. Towns.
    First, to set the record straight, while there are 18 
agencies that received clean opinions in 2003, 11 of those were 
restated as a result of the 2004 financial reports, but of 
those 11, 4 didn't get a clean opinion last year, so in reality 
it is 11 rather than 7.
    Mr. Towns. Right. Exactly.
    Mr. Walker. Although for the record, 18 minus 11 is 7. And 
I will even certify that. But in any event, I think the common 
denominators are some of the things that we touched on earlier: 
not having effective systems and processes, not having 
appropriate controls, not being able to do work earlier in the 
year, not having the total team committed to getting things 
done within the appropriate milestones, and then some of the 
challenges that have been associated with reconciling budgetary 
results with the financial statement results. I believe those 
are the ones that are the primary challenges we need to 
continue to work on.
    Mr. Towns. Right. Thank you very much.
    Let me just ask you very quickly, Mr. Martin, it seems to 
me there are issues concerning the quality of audits received 
by agencies. Can you cite for us any particular concerns 
regarding the agency audit process you have noted during your 
tenure? Are there specific shortcomings or deficiencies within 
the agencies in order to meet the information requirements for 
auditors to complete their work?
    Mr. Martin. I think there are numerous impediments to the 
auditors completing their work. I guess on the Government-wide 
audit there are what we call ``scope limitations'' because the 
information on the financial statements was not provided to the 
auditors in a timely manner so that they didn't have the 
opportunity to review a final set of statements, for example.
    So there are issues with the auditors not being engaged in 
a timely manner. Say, for example, we at the Department of 
Education didn't get our books closed and our August statements 
done until October, then there is no way the auditors would 
have enough time to meet an November 15 deadline.
    So the agency has a responsibility to produce statements in 
a timely manner, which goes back to the issue of having good 
financial systems so you can generate statements monthly. If 
you can do that with the proper controls, then you can ask your 
auditors to come in and start their audit work in February or 
March. Or, as is the case in many corporations, the auditors 
never leave. They are there year-round. We essentially invited 
our auditors to come in year-round if they wanted to, if that 
would help us meet the November 15 date.
    Mr. Towns. All right.
    Thank you very much, Mr. Chairman. I see my time has 
expired.
    Mr. Platts. Thank you, Mr. Towns.
    I am going to come back to the restatement issue, which 
will lead me into internal controls and the quarterly 
reconciliation issue.
    Mr. Walker, in your written testimony you reference the 
range of restatements going from a few million dollars to $91 
billion, and I wasn't sure what your reference was there. You 
talk about restatements to CFO Act agencies for fiscal year 
2000 ranged from correcting two line items on one agency's 
balance sheet to numerous line items on several. The amounts 
range from several million dollars to over $91 billion. The $91 
billion, can you expand on that?
    Mr. Walker. Mr. Chairman, that $91 billion was the 
Department of Health and Human Services, and that was an 
adjustment that was necessary with regard to that statement of 
budgetary resources that I mentioned before.
    Mr. Platts. So that is one of those where hopefully we 
won't see--they are just getting transition to how to handle 
that reconciliation, that will be fewer and fewer need for 
restatements in the future as they get better experienced at 
that?
    Mr. Walker. That is our hope and expectation.
    Mr. Platts. OK. Thank you.
    We have talked a lot kind of internal control issue, and we 
were at the committee delighted with OMB's Circular A-123 
trying to strengthen internal controls. As you are aware, I 
sponsored the DHS financial accountability legislation where we 
are requiring an audit of their internal controls because of 
where they are starting at, 22 agencies with many material 
deficiencies, and trying to get it right up front rather than 
coming back down the road and correcting it, so requiring that 
audit. We did not include in that legislation that every CFO 
agency has to have an audit of internal controls.
    My question for the three of you would be: on the A-123 
circular, does it go far enough, in your opinions, or should we 
go further and be looking at audits of internal controls for 
all agencies, knowing that there is a substantial additional 
cost for that requirement?
    Mr. Martin. I guess I wouldn't recommend audits for all 
agencies. I think in some instances it might be appropriate, 
but a cost/benefit of doing that I think is not there. So I 
would say as a general proposition no, I wouldn't recommend it 
for all agencies.
    Mr. Platts. Do you believe that the circular requirements 
go far enough in establishing when you should go farther?
    Mr. Martin. Yes, sir, Mr. Chairman, I do.
    Mr. Platts. Mr. Walker or Mr. Hammond.
    Mr. Walker. This is an issue that I expect for the 
principals of the Joint Financial Management Improvement 
Program to deal with. One of the issues that is on our agenda 
is to look at the Sarbanes-Oxley Act, which applies to the 
private sector, and to be able to discuss whether and to what 
extent any of those provisions should be applied to the Federal 
Government.
    I would note for the record that while we are not required 
to do it, the GAO for years has voluntarily expressed an 
opinion on the system of internal accounting controls for the 
entities that we audit, not only the consolidated financial 
statements of the U.S. Government, but the IRS, the Bureau of 
Public Debt, the FDIC, and soon to be released the Securities 
and Exchange Commission for the first time.
    So I do think it is something the principals need to talk 
about. I think we have to think about where does it make sense 
and where does it not.
    Clearly, every Federal agency it doesn't make sense, and so 
I think we need to think about value and risk, cost/benefit, 
and hopefully we will make some progress on it.
    Mr. Platts. Mr. Walker, would you think that an agency like 
DOD, which has significant internal controls, it should be more 
likely a requirement, or is it an overwhelming task where they 
stand, where it wouldn't be effective at this point in time?
    Mr. Walker. Ultimately I believe that would be an agency 
where it would likely meet the criteria, where it would be 
something you would want to do; however, I think we have to 
keep in mind right now and for the foreseeable future it is 
likely that the DOD is going to end up issuing an annual 
statement, which it is allowed to do by law, which basically 
says they are unauditable.
    Clearly, they are going to have to focus on their systems, 
processes, and controls in order to be able to get in a 
position where they are auditable. But you wouldn't achieve 
much by telling them they have to obtain an opinion on their 
internal controls now because they can't even get an opinion on 
their financial statement.
    Mr. Platts. Right.
    Mr. Martin.
    Mr. Martin. I think you will find if you look at the OMB 
circular, what it really reflects is a very thoughtful approach 
to implementing Sarbanes-Oxley at a Federal level to get 
started. It allows for an incremental review and implementation 
based on the nature of the agency, and I think, Mr. Chairman, 
it gets to exactly the point you are after. It focuses 
attention where attention is needed and doesn't cast an overall 
blanket affecting everyone and spreading that cost.
    Mr. Platts. And takes that cost/benefit approach.
    Mr. Martin. Exactly.
    Mr. Platts. OK.
    Mr. Hammond. Mr. Chairman, it is highly likely that if one 
was to try to attempt to conduct an audit of the system of 
internal accounting controls for the Department of Defense that 
it would likely be an adverse opinion if you got an opinion at 
all.
    Mr. Platts. All right. And that issue, Mr. Walker, your 
staff is going to be with us next week for a hearing on this 
issue in greater detail, and it is something we are going to 
stay with because internal controls, I have come to believe--
now I am starting my third year as Chair--is so critical to 
everything we have talked about, and so the greater our focus 
on that. That is why, with the Federal Financial Management 
Improvement Act, we are kind of trying to revitalize that, 
focus on that, and hand-in-hand with the OMB circular, that we 
hopefully will make some progress.
    Mr. Hammond. I agree with you, Mr. Chairman. Internal 
controls are absolutely critical.
    Mr. Platts. On extension of restatement, I was trying to 
find in my notes--I marked up all your testimonies and have too 
many notes to find what I was looking for, but, Mr. Walker, I 
think it was in your testimony talking about reconciliation, or 
it might have been Mr. Hammond, and the number of agencies that 
are not reconciling quarterly as they are supposed to. Was that 
in your testimony?
    Mr. Hammond. I presented some figures, Mr. Chairman, on the 
nature of reconciliation having to do with the improvement in 
fund balance reconciliation over time, as well as what we have 
been learning from the reconciliation dealing with intra-
governmental activity. What we have learned there is that there 
are a significant number of agencies that are out of balance on 
intra-governmental activity, that number is getting smaller, 
and what has allowed it to get smaller is our ability to focus 
in on the specific items, understand the nature of the 
differences, give the agencies information that they can work 
with and work backward from.
    What we have learned is that the situation is probably 
worse than we thought when we started this, but it has gotten 
better in the last year and a half as we have been able to 
address it, which is a difficult place to be in but it is an 
interesting realization for us to understand how this 
information fits together and be able to work back to 
understand how to get rid of the difference.
    Mr. Platts. You helped me get ahead of what I wanted to get 
to, and it was actually in Mr. Walker's specific testimony, but 
it relates to the intra-governmental transfers, and that was 
one of the issues I was going to move to, the size of the 
problem there, but that we are making progress. As we have 
talked before, there is a belief that you have identified it 
now, what is driving it, and that a year from now we should see 
less problems within that area of intra-governmental transfers.
    Mr. Hammond. Yes. In fact, if I could split that problem 
into three pieces for an understanding, I think it is very 
helpful for me.
    One is there are certain proprietary accounts--for example, 
investments that one agency may have on the books of the 
Treasury Department. They are very discrete. It is an area once 
we isolated it we are able to find the differences, and for all 
practical purposes we have resolved all those remaining 
differences in those areas.
    We have a second set of activity which is the commercial 
type of activity that takes place between agencies. It is a 
little less discrete. This is buying and selling goods or 
services between an agency or paying rent or buying IT 
services.
    The difference there may stem from timing, it may stem from 
accounting methodology, but fundamentally the only way to fix 
that area is to get the agencies together to work up a common 
solution and a standardized approach to dealing with it. It is 
not the type of area that can be resolved unilaterally.
    And then the third area, which is the one that we really 
have to come to grips with, has to do with the transfers of 
spending authority between agencies. In essence, this is the 
whole way that the budgetary account system ties in behind the 
proprietary systems. That is a much more difficult task at this 
point, understanding how these flows be able to be matched up 
and eliminated between, in essence, the centralized source of 
those transfers as well as the agency that ultimately ends up 
using those.
    Mr. Platts. And the prognosis for all three? I mean, the 
first obviously we are in good shape. The second two is where 
we are still working.
    Mr. Hammond. The second one there is a considerable 
willingness on the part of the agencies to deal with this 
because it does reflect--it ties back. That is the nice thing 
about the subject we are dealing with is that everything is 
inter-related, and what agencies are discovering is that some 
of those restatements tend to the treatment of budgetary 
activity which tend to the controls over the way they do 
business between agencies, so there is a vested interest in 
understanding where that comes from and resolving it at the 
agency level.
    The third problem is actually a problem in need of a 
solution, and that is where we are going to spend some 
considerable time over the next few months. It is not one yet 
that we have been able to isolate what we think would be the 
answer for solving it. Once we do that, I suspect it is going 
to be pretty straightforward. But because of the nature of the 
way appropriations are created and moved, it is a little more 
technically challenging just to get our arms around it.
    Mr. Platts. As you move forward, we welcome that dialog as 
you try to identify that solution for that third aspect and how 
you are going to move forward with a solution once it is 
identified.
    Mr. Hammond. I would be happy to.
    Mr. Platts. My followup is to you, Mr. Hammond. Really it 
relates to Mr. Walker's testimony about the requirement of OMB 
and Treasury that the CFOs of 35 departments and agencies 
reconcile on a quarterly basis. What caught my attention was 
the statement that a substantial number of these agencies did 
not fully perform the required reconciliations for fiscal years 
2003 and 2004. With there being a Treasury requirement, I guess 
I have two questions. One, why didn't they? And what 
repercussions were there for not doing what they are required 
to do?
    Mr. Hammond. Those are excellent questions. The primary 
reason they didn't reconcile, as I understand it, stems from 
the fact that those transactions that were unable to be 
reconciled fall into that second category of activity: agency 
commercial activity between each other. That commercial 
activity is frequently done at a detailed sub-level and there 
is not sufficient information available easily between agencies 
to be able to match up that activity to be able to reconcile 
it. That is a solvable problem.
    Mr. Platts. How long have they been required to reconcile 
quarterly?
    Mr. Hammond. For about a year.
    Mr. Platts. So that is new. So it is fair to say this time 
around it is a newer requirement so they didn't have the detail 
they needed; but if a year from now they still can't reconcile 
because they don't have the detail required to reconcile, then 
there is a little more responsibility that they are not 
fulfilling?
    Mr. Hammond. Right. Exactly. And that would be a more 
fundamental problem, because what we do is we provide not only 
the tools and the information, but we also provide feedback. We 
prepare, in essence, a report card type of format of agency 
performance on our reporting requirements at the end of the 
year, which we then send back to the CFO of each of the 
agencies.
    So if you were to see a situation where it would constantly 
stay the same, that would be indicative of a need for further 
attention at the agency level, and I think both OMB and 
Treasury would be committed to try and followup on that.
    Mr. Platts. Thank you.
    Mr. Towns, did you have any other questions?
    Mr. Towns. Yes.
    Mr. Platts. Sure.
    Mr. Towns. This would be to you, Mr. Martin. I am trying to 
understand so we can be helpful along the way, and I really, 
really mean that. Maybe you can sort of help me through this 
process a little.
    Many agencies place extensive reliance, as I understand it, 
on contractor support to prepare the financial statement. I 
would think that would affect the agency's ability to build and 
sustain a long-term financial management capability. Don't they 
have to take bids and then, if the contractors don't do what--I 
mean, walk me through this process. I am trying to make certain 
I fully understand every aspect.
    Mr. Martin. I think what you will find at our department 
and probably throughout Government is that contractors are, 
especially in the IT area and the accounting area, that there 
is significant level of contractor participation, and what we 
are trying to do at the Department of Education essentially is 
to wean ourselves from this kind of contractor support.
    I looked at some of my senior CFO staff a couple of years 
ago and I said, ``Bring in the resumes. I want to see the 
resumes of the contractors and I want to see the resumes of our 
staff.'' Our people are just as good on paper, and in many 
instances better, than the contract staff. So I said to my 
folks, ``Why do we need contractors to do this work? Let me 
know how many contract hours we have, and starting now we are 
going to reduce the number of contract hours so we are not 
dependent on those people. You folks should be able to produce 
financial statements without significant contractor 
intervention.''
    Mr. Towns. So my concern is real?
    Mr. Martin. You are right on point.
    Mr. Towns. Thank you. Thank you very much.
    Thank you, Mr. Chairman.
    Mr. Platts. Thank you, Mr. Towns.
    As you were correcting the record for our accuracy on math, 
I referenced the FFMIA Act next week. We are actually doing the 
Federal Managers Financial Integrity Act next week, FMFIA. My 
staff director said we have talked openly about one of our 
efforts of the committee this year is reorganizing the dozen or 
15 different financial management acts of the last 20 years 
into a more cohesive and easily understood and implemented plan 
for all of our financial managers throughout the Federal 
Government. One benefit would be to get rid of all the acronyms 
so I don't get myself confused here.
    On that point, that reorganization effort, we are certainly 
going to look for insights and guidance from all three of you 
and your agencies and your experience as we look to try to 
bring all this together in a more efficient way.
    I want to turn. Mr. Walker, we have touched on, in a 
minimal sense but regularly throughout today's hearing, on the 
Department of Defense and that 600-pound gorilla out there that 
we need to deal with if we really want to get a clean opinion 
on the consolidated Federal Government statements. One of the 
issues there as chief management officer and your staff and 
your office has been working with the committee on how to 
approach that issue. I was wondering if you could give us your 
emphasis or arguments on the importance in moving in that 
direction. We talked a little bit before we started the 
hearing. And then if there is an update where GAO stands on 
maybe proposed legislation language, that would be great.
    Mr. Walker. First, based upon our latest update of GAO's 
high-risk report, which we issued in the last week of January 
of this year, DOD now has 14 of 25 high-risk areas; 8 are DOD 
only, and they also share the six Government-wide areas. That 
is two more than they had last year. And several of these have 
been on the list since the beginning.
    I have become convinced, along with my colleagues at GAO, 
that a number of things are going to have to happen in order 
for DOD to effectively deal with these high-risk areas, of 
which financial management is but one and it is related to a 
number of other ones, such as the modernization of their 
information systems, etc.
    One of the things that I believe is that if you go to the 
Department of Defense and you ask them who is in charge, who is 
responsible, who is accountable, who is qualified, who is 
resourced, and who is in the right position to be in charge of 
business transformation, I don't know that you would get an 
answer. Or if you did get an answer, you wouldn't get a 
consistent answer. That is a problem.
    We need to recognize the reality that it will take years to 
address DOD's high-risk areas, and it will take the sustained 
attention of a highly qualified individual with a proven track 
record of success in dealing with these types of issues over a 
sustained period of time.
    Our view is that one way to go about that is to create a 
new position. You could call it ``Chief Management Officer,'' 
or you could call it ``Chief Operating Officer.'' The words 
shouldn't matter, but it needs to be somebody at the Deputy 
Secretary level for management. A position that is not a 
substitute for but a complement to the current Deputy Secretary 
position. We need somebody with a proven track record of 
success in both the public sector and the private sector who 
woule focus on various fundamental business transformation 
efforts.
    We need to have somebody, I believe, who has a term 
appointment, e.g., 7 years, because history has shown that, 
irrespective of whether you are in the private sector, the 
public sector, or the not-for-profit sector, on average it 
takes 7 plus years to effectuate a needed transformation, and 
in the Government it takes longer because it is not used to 
changing as much, much less the Department of Defense with so 
many layers and levels and systems.
    We also ought to have a performance contract for that 
person. I am pleased to say that the Defense Business Board, 
which advises Secretary Rumsfeld and Deputy Secretary 
Wolfowitz, of which I am an ex officio member--and I will go to 
one of those meetings tonight and tomorrow--has recommended 
that the Department of Defense establish such a position.
    While the Department of Defense could theoretically do this 
administratively by taking one of their current allocations, 
you can't achieve certain things administratively. You can't 
necessarily achieve the type of stature, the term appointment 
that I believe is important, nor can you institutionalize the 
issue.
    There is no question in my mind that Secretary Rumsfeld on 
down is committed to trying to deal with this problem. There is 
absolutely no question in my mind on that. But, quite frankly, 
they have a lot of other things they are having to deal with 
and there are enough things going on day to day that each of 
the Under Secretaries and Assistant Secretaries and Service 
Secretaries have to deal with, and everybody is focused on 
their own silo or line item. We need somebody who is focused 
full time to make this happen.
    As far as the audit, while the DOD has a goal, they don't 
have a comprehensive, integrated, and credible plan with 
appropriate milestones and accountability mechanisms to achieve 
this goal. In orer to achieve a goal you need to have a plan, 
and they don't have one yet. They need one. And when they 
approach it, they are going to have to approach it in a 
matrixed fashion. They are going to have to work over time to 
try to get more entities that can get clean opinions and more 
line items that are cleaned up so that over time they will move 
to where they will get a qualified opinion, and hopefully 
before the end of my term a clean opinion.
    Mr. Platts. Before I continue I want to recognize we have 
been joined by our subcommittee vice chairlady, the gentlelady 
from North Carolina, Virginia Foxx. We are delighted to have 
you with us.
    Ms. Foxx. Thank you, Mr. Chairman. I am sorry there was a 
conflict and I am late.
    Mr. Platts. As a new member here, you will find that we are 
called upon to be in four spots at once on a regular basis, so 
we are delighted to have you be with us and look forward to 
working with you and with our ranking member, Mr. Towns, as we 
go forward.
    Mr. Walker, I want to followup on what you have already 
said. I share your belief. We have had great efforts. You look 
at Secretary Rumsfeld September 10, 2001, when he lays out his 
priorities, one of which that day is financial management at 
DOD, and the events of the next day understandably run the 
course here and dominated their challenges. I think that is one 
of the challenges for Deputy Secretary Wolfowitz. Their 
priority, as it needs to be, is fighting war and winning war. 
While they have a great intent and had some good people--Dov 
Zakheim and others--the fact of that turnover, the CFO, the 
Deputy CFO, the Deputy Under Secretary for Management, all 
those things have led--I think you said earlier, a well-
intended goal, but without a plan or ability to move forward to 
reach the goal.
    I look forward to working with you again, when CMO or 
whatever office or title we want to have. One of the things you 
mentioned, though, in creating it was doing it statutorily 
instead of administratively, which I agree with because of that 
permanence if you do it administratively. You can say we are 
going to do it for a 7-year term, but change of administrations 
one way or the other is going to be a change in 3-plus years 
from now, whether that continues if we do it statutorily.
    You also mentioned performance contract. Could you expand 
on what you envision there?
    Mr. Walker. Yes. A performance contract wouldn't require a 
statutory provision, but the concept being that this person 
would be responsible and accountable for making sure that 
comprehensive and integrated plan was developed, that there 
were key milestones, and that appropriate accountability 
mechanisms are in place. I think it would be appropriate to 
consider having some type of performance contract whereby the 
individual would be held accountable for achieving those key 
milestones, obviously with appropriate accountability for other 
parties that are contributing, as well. That should affect how 
much they get paid, and it also should affect their job 
security.
    Mr. Platts. I appreciate that because it kind of goes to my 
question about reconciliation issues. I asked what are the 
consequences. One of the challenges, I think, when we try to 
analogize Sarbanes-Oxley and other issues of the private sector 
to public sector is in my 2 years I have found that we often 
aren't doing what we are supposed to be doing, what statues 
require in the area of financial management. Where there is a 
carrot/stick aspect to that would be important.
    On the issue, update where you stand on proposed language. 
Still in the early----
    Mr. Walker. We are very close. We are happy to provide 
technical assistance to the committee in that regard.
    Mr. Platts. We greatly appreciate it and look forward to 
moving forward on that issue with you, because it is something 
that for DOD in particular, and as I have said when we have had 
NASA here and DOD, helping them to clean up their financial 
house is going to allow them to focus more efficiently and 
effectively on their primary missions, whether it be going to 
space with NASA or, you know, the efforts of defending our 
Nation at DOD.
    Virginia, did you have anything, any questions?
    Ms. Foxx. Not at this time, Mr. Chairman.
    Mr. Platts. Not at this time? OK.
    I want to come back to one other issue, Mr. Walker, you 
touched on, and I know you probably spent a fair amount of time 
maybe at the Budget Committee today. When we talk about that 
$43 trillion of liabilities that are out there, we could 
probably spend days on all of them. Social Security though is 
one that is on the front burner, and a lot of discussions in 
your testimony. You also gave to us a copy of your statement, 
which I appreciated receiving, your address a week or two ago 
with State and local governments and some of the challenges out 
there. You referenced that you want to go into more detail in 
your question and answer period, and I obviously wasn't there 
for that.
    When I read your testimony and the need for changes, some 
of the ideas that are out there such as the wage index for 
initial calculation of benefits, you know, the cap on the 
payroll tax at roughly $90,000, the idea of personal accounts, 
could you touch on those as you read what ones we should focus 
on most, or combination of, or you think is going to allow us 
specifically for Social Security to get on the right track?
    Mr. Walker. As you know, Mr. Chairman, GAO has done quite a 
bit of work in this area already. I expect that we will be 
doing some more. We have come up with criteria that we believe 
any Social Security reform proposal should be evaluated based 
on in order to make sure that it is a level playing field and a 
fair and balanced analysis.
    As you know, I used to be a trustee of Social Security and 
Medicare from 1990 through 1995, so I am pretty deep on these 
issues.
    One of the things that you referred to me before that I 
noted in my speech at the National Press Club last week was I 
really believe that, while Social Security does not face 
immediate crisis, it does face a large and growing financing 
problem that is getting bigger every day, and it would be 
prudent to address sooner rather than later. I think one reason 
is because Social Security is only $3.7 trillion of our $43 
trillion challenge.
    The other thing that I mentioned was I believe that 
Congress has an opportunity, working with the President, who 
obviously would have to sign the bill, to exceed the 
expectations of every generation of Americans in doing Social 
Security reform. You don't have that opportunity in Medicare. 
You do have that opportunity in Social Secretary.
    The reason I say that is if you take individuals at a 
certain age or older--the President has suggested 55, but that 
may or may not be the right age--and you say those individuals 
will not be affected in any way, shape, or form, they will get 
the current deal, and those are the ones who are most concerned 
because they don't have time to make adjustments.
    If you then take people younger than whatever age you 
select--for example, Baby Boomers, Generation X, Generation Y--
you could make progressively greater changes, whether it be on 
the replacement rates, the retirement ages, the indexing 
formulas, whatever, but progressively greater changes the 
younger you are but phased in over a number of years, you can 
end up giving everybody more than they think they are going to 
get--not necessarily more than has been promised, but more than 
they think they are going to get.
    For example, my father, who is retired, is going to get 
every dime. I am assuming there is going to be some hair cut to 
my benefits. My children are assuming there is going to be a 
bigger hair cut. The fact of the matter is that if we act soon 
there is an opportunity to make more modest changes than 
otherwise will have to be made, and hopefully it will give us 
some credibility and some confidence to start dealing with some 
of the bigger challenges that are going to be a lot tougher to 
deal with, are going to take many years, and where you are not 
going to exceed the expectations of potentially any generation. 
The prima facie example of that is Medicare.
    Mr. Platts. And your point of building credibility is one 
that I think is so important, because these issues politically 
have been that third rail--Social Security, Medicare there now 
as well. If we are able to take on the issue--and Mr. Hammond 
referenced earlier the third category of intra-governmental. A 
problem in need of a solution goes to Social Security. We 
should all agree that it is a problem. The question is: what is 
the solution and how do we go about implementing it? If we can 
get to that discussion, it is a lot more likely to be a policy 
focus instead of partisan focused, as it is currently. But if 
we do right on Social Security, then we will have that trust of 
the people so when we take on Medicare and that huge unfunded 
liability, that we can do it in a way that will do as best we 
can by everybody in a fair and honest fashion.
    I use my own family, the debate between 2042, which is in 
the consolidated financial statements, versus 2052 in CBO. I 
said my daughter is 5. She doesn't get retired until at least 
2067. Either date, we have a problem. And I have got a Mom who 
is 71 who is already there. So I am looking at it from a sense 
of protecting those there and doing right by those who are 
many, many decades away from getting there.
    Your frankness on this issue, not just in the past month 
but for many years, is--I am sure you have felt like you are 
crying out and no one was listening. Well, finally we have a 
President and I hope House and Senate that are closely 
listening to the message you have been conveying and 
documenting so effectively and are going to act.
    I think President Bush has said--and I had the pleasure of 
being with him yesterday, about 15 of us House Members--in the 
end people respect if you are willing to take on problems and 
actually present solutions and are willing to act to solve 
problems, as opposed to just passing them on, which is, as you 
have well told us, what we have been doing for years.
    Ms. Foxx.
    Ms. Foxx. Yes. Mr. Walker, I appreciate very much what the 
chairman was just saying. Not having had the privilege to have 
heard you before, I wonder if you are saying you wouldn't 
characterize it as a crisis. That seems to be what the popular 
press picks up in a lot of cases is that it is no crisis, 
therefore we don't need to deal with it. The chairman is 
indicating that you have tried in times past to indicate to 
people that there is a real problem.
    Do you have any other suggestions? Or you may want to tell 
me this later if you have already said it in the meeting. How 
do you get people's attention. If you don't want to call it a 
crisis, then how do you get people's attention that if nothing 
is done it soon will become a crisis?
    Again, I don't need you to go into great detail, but it is 
obvious you have given it some thought.
    Mr. Walker. The first thing is before you can solve a 
problem there has to be broad-based consensus that there is a 
problem that needs to be solved, and there also has to be at 
least majority agreement that--I mean on both sides of the 
aisle, a majority of total members and of the population 
hopefully--that believe that it is prudent to act sooner rather 
than later.
    I would be happy to provide you and your office my 
testimony before the House Budget Committee--I will give you 
one today. It lays out a number of reasons why it is prudent 
that we act sooner rather than later.
    The biggest reason is you can look at it micro or macro. On 
a micro level, the sooner you act the less dramatic the changes 
have to be, the more time you have to phase it in, because time 
is currently working against us. The problem is getting bigger 
every day because of known demographic trends.
    From a macro standpoint, this is a small downpayment on the 
work that has to be done. It is $3.7 trillion out of $43 
trillion. We need to start solving some of these long-range 
imbalances. With Social Security you have the potential to 
exceed the expectation of all generations of Americans, that 
sounds like to me it could be a win.
    I think part of the problem is there has been too much 
focus on individual elements of a possible proposal like, for 
example, individual accounts. I mean, individual accounts may 
or may not be part of a comprehensive solution to Social 
Security, but even if they are, they are only going to be a 
piece of a package and other things have to happen in order to 
assure the solvency and sustainability of the system.
    I have been very concerned because there is no doubt in my 
mind I believe that a clear and compelling case can be made 
that it is prudent to act now. At the same point in time, we 
are not off on a very good foot because it is too partisan, it 
is too ideological, and it is too focused on individual 
elements of a potential reform package rather than reaching the 
first objective. The first objective is to obtain agreement 
that we have a problem. It is a large and growing problem. We 
need to solve it, and it is prudent to solve it sooner rather 
than later. Once we are there, then we can talk about how best 
to go about that, what are the possible elements and related 
tradeoffs, what are the pros and cons.
    I honestly believe, based on my experience as a trustee, 
and being on two Social Security Reform Commissions in the 
past, having been involved in national town hall meetings 
around the country on these issues in the past, that the 
American people are a lot smarter than many give them credit. I 
give them a lot of credit. I am sure you all do, too. They are 
very smart. You give them the facts. You speak the truth. They 
will empower you to act.
    Mr. Platts. And that education process, what the problem is 
today is a critically important first step, because I describe 
it as a problem that we need to address. If we don't, it will 
be a crisis for when we reach that 2018 or 2042, whatever year 
in the future it will become a crisis if we don't address the 
problem we have today.
    Mr. Walker. That is true, and part of the problem is that 
many times Government historically has not addressed issues 
until a crisis is upon us, which is fundamentally imprudent 
given these known demographic trends and our long-range 
imbalances.
    Let me give you an example real quickly and I will move out 
of this. In 1983, when the Greenspan Commission was created, we 
were within weeks of not sending out the checks on time. Now, 
believe me, that would be a crisis. There would be a big 
signal.
    Mr. Platts. You wouldn't want to be in our District offices 
when that happens.
    Ms. Foxx. Right.
    Mr. Walker. I would say there would be consequences. But 
the fact of the matter is today's equivalent of 1983 is 2042. 
But it would be fundamentally imprudent to wait until 2042, not 
just because of Social Security; because of the much broader 
fiscal imbalance challenge that we face.
    Mr. Platts. Yes. I want to just conclude. In your 
testimony, Mr. Walker, to put a plug in something we are 
working on, a number of places in your written testimony you 
talk about the way we are reporting not adequately showing the 
results that agencies are getting for the taxpayer dollars and 
the importance of program review and ongoing process at the 
Department of Education and Treasury and with our legislation, 
our PAR Act legislation that we moved last fall out of the full 
committee. We didn't have time to get it on the House floor 
schedule before the end, but I have talked to Chairman Davis 
and we will likely move it in March in the full committee. It 
is something that we are trying to help, again, from a 
statutory standpoint, put some permanence into what the 
administration is doing, I think, a wonderful job going through 
the part process of trying to be more results oriented and not 
just, ``You have X dollars and spent X dollars appropriately,'' 
but, ``Did you achieve any results for the American people when 
you spent X dollars?'' Our legislation is going to try to help 
push that in a statutory sense.
    I want to thank the three of you again for your several 
hours here today with us and your preparation and your day-in 
and day-out work. We look forward very much to continuing our 
interactions with each of you and your offices as we move 
forward over these coming 2 years.
    Mr. Walker. If I can, Mr. Chairman----
    Mr. Platts. Sure.
    Mr. Walker [continuing]. I would like to thank you again 
for holding this hearing and making it an annual occurrence. 
Second, I would like to thank all the very capable GAO staff 
who worked on this year's financial statement audit, because 
without their efforts it just wouldn't happen.
    Thank you.
    Mr. Platts. As I left the capital on December 15th, my 
daily commute back to my home in York, I thought I heard a big 
sigh of relief out of GAO that it was all done and submitted. 
We know that is quite a herculean effort that goes into that 
audit process.
    We have a couple of things, I guess. We are going to keep 
the record open for 2 weeks that you are going to followup 
with, Mr. Towns, any information you want to submit.
    I want to recognize staff from both sides, as well, who 
help make these things run smoothly.
    This hearing stands adjourned.
    [Whereupon, at 3:57 p.m., the subcommittee was adjourned.]
    [The prepared statement of Hon. Jon C. Porter follows:]

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