[House Hearing, 110 Congress]
[From the U.S. Government Publishing Office]



 
  FEDERAL FINANCIAL STATEMENTS FOR FISCAL YEAR 2006: FISCAL OUTLOOK, 
                 MANAGEMENT WEAKNESSES AND CONSEQUENCES
=======================================================================



                                HEARING

                               before the

                 SUBCOMMITTEE ON GOVERNMENT MANAGEMENT,
                     ORGANIZATION, AND PROCUREMENT

                                 of the

                         COMMITTEE ON OVERSIGHT
                         AND GOVERNMENT REFORM

                        HOUSE OF REPRESENTATIVES

                       ONE HUNDRED TENTH CONGRESS

                             FIRST SESSION

                               __________

                             MARCH 20, 2007

                               __________

                           Serial No. 110-15

                               __________

Printed for the use of the Committee on Oversight and Government Reform


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



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              COMMITTEE ON OVERSIGHT AND GOVERNMENT REFORM

                 HENRY A. WAXMAN, California, Chairman
TOM LANTOS, California               TOM DAVIS, Virginia
EDOLPHUS TOWNS, New York             DAN BURTON, Indiana
PAUL E. KANJORSKI, Pennsylvania      CHRISTOPHER SHAYS, Connecticut
CAROLYN B. MALONEY, New York         JOHN M. McHUGH, New York
ELIJAH E. CUMMINGS, Maryland         JOHN L. MICA, Florida
DENNIS J. KUCINICH, Ohio             MARK E. SOUDER, Indiana
DANNY K. DAVIS, Illinois             TODD RUSSELL PLATTS, Pennsylvania
JOHN F. TIERNEY, Massachusetts       CHRIS CANNON, Utah
WM. LACY CLAY, Missouri              JOHN J. DUNCAN, Jr., Tennessee
DIANE E. WATSON, California          MICHAEL R. TURNER, Ohio
STEPHEN F. LYNCH, Massachusetts      DARRELL E. ISSA, California
BRIAN HIGGINS, New York              KENNY MARCHANT, Texas
JOHN A. YARMUTH, Kentucky            LYNN A. WESTMORELAND, Georgia
BRUCE L. BRALEY, Iowa                PATRICK T. McHENRY, North Carolina
ELEANOR HOLMES NORTON, District of   VIRGINIA FOXX, North Carolina
    Columbia                         BRIAN P. BILBRAY, California
BETTY McCOLLUM, Minnesota            BILL SALI, Idaho
JIM COOPER, Tennessee                ------ ------
CHRIS VAN HOLLEN, Maryland
PAUL W. HODES, New Hampshire
CHRISTOPHER S. MURPHY, Connecticut
JOHN P. SARBANES, Maryland
PETER WELCH, Vermont

                     Phil Schiliro, Chief of Staff
                      Phil Barnett, Staff Director
                       Earley Green, Chief Clerk
                  David Marin, Minority Staff Director

  Subcommittee on Government Management, Organization, and Procurement

                   EDOLPHUS TOWNS, New York, Chairman
PAUL E. KANJORSKI, Pennsylvania      BRIAN P. BILBRAY, California
CHRISTOPHER S. MURPHY, Connecticut   TODD RUSSELL PLATTS, Pennsylvania,
PETER WELCH, Vermont                 JOHN J. DUNCAN, Jr., Tennessee
CAROLYN B. MALONEY, New York
                    Michael McCarthy, Staff Director


                            C O N T E N T S

                              ----------                              
                                                                   Page
Hearing held on March 20, 2007...................................     1
Statement of:
    Campbell, James T., Acting Chief Financial Officer, U.S. 
      Department of Energy; William Maharay, Deputy Inspector 
      General of Audit Services, U.S. Department of Energy; David 
      Norquist, Chief Financial Officer, U.S. Department of 
      Homeland Security; and James L. Taylor, Deputy Inspector 
      General, U.S. Department of Homeland Security..............    65
        Campbell, James T........................................    65
        Maharay, William.........................................    73
        Norquist, David..........................................    83
        Taylor, James L..........................................    91
    Walker, David M., Comptroller General of the United States, 
      Government Accountability Office; and Linda Combs, 
      Controller, Office of Management and Budget, Executive 
      Office of the President....................................     4
        Combs, Linda.............................................    47
        Walker, David M..........................................     4
Letters, statements, etc., submitted for the record by:
    Campbell, James T., Acting Chief Financial Officer, U.S. 
      Department of Energy, prepared statement of................    69
    Combs, Linda, Controller, Office of Management and Budget, 
      Executive Office of the President, prepared statement of...    49
    Maharay, William, Deputy Inspector General of Audit Services, 
      U.S. Department of Energy, prepared statement of...........    75
    Norquist, David, Chief Financial Officer, U.S. Department of 
      Homeland Security:
        Followup questions and responses.........................   113
        Prepared statement of....................................    85
    Taylor, James L., Deputy Inspector General, U.S. Department 
      of Homeland Security, prepared statement of................    94
    Walker, David M., Comptroller General of the United States, 
      Government Accountability Office, prepared statement of....     6


  FEDERAL FINANCIAL STATEMENTS FOR FISCAL YEAR 2006: FISCAL OUTLOOK, 
                 MANAGEMENT WEAKNESSES AND CONSEQUENCES

                              ----------                              


                        TUESDAY, MARCH 20, 2007

                  House of Representatives,
            Subcommittee on Government Management, 
                     Organization, and Procurement,
              Committee on Oversight and Government Reform,
                                                    Washington, DC.
    The subcommittee met, pursuant to notice, at 2:55 p.m. in 
room 2154, Rayburn House Office Building, Hon. Edolphus Towns 
(chairman of the subcommittee) presiding.
    Present: Representatives Towns, Murphy, Welch, Platts, and 
Bilbray.
    Staff present: Michael McCarthy, staff director; Rick 
Blake, professional staff member; Velvet Johnson, counsel; 
Cecelia Morton, clerk; Kristina Husar and Alex Cooper, minority 
professional staff members; and Larry Brady, minority senior 
investigator and policy advisor.
    Mr. Towns. The subcommittee will come to order.
    Welcome to today's hearing on the Federal Government's 
fiscal year 2006 consolidated financial statement. This hearing 
addresses a very important issue for the Congress and the 
Oversight Committee. As stewards of taxpayers' dollars, we owe 
American citizens no less than full transparency and 
accountability over the Federal Government's operations and 
fiscal condition. We need to be certain that Federal assets are 
protected from loss or misuse. It is imperative that we fully 
understand the cost of the Government's operations and the 
implications of our financial commitments.
    I am pleased that the Government is continuing to make 
progress on improving financial management. For the second 
consecutive year, every major Federal agency issued their 
audited financial statements within 45 days of the end of the 
fiscal year. Of the 24 CFO agencies, 19 received a clean audit 
opinion. In addition, OMB reported improper payments were 
reduced by $9 billion over the past 2 years.
    However, as in previous years, the 2006 audit demonstrates 
that, although many agencies have improved their financial 
management practices, there is still much work to be done.
    This marks the 10th consecutive year that GAO was unable to 
render an opinion on the Government's consolidated financial 
statements. This situation is due to longstanding financial 
management issues at the Department of Defense, the 
Government's inability to reconcile accounting between 
agencies, and the Government's ineffective process for 
preparing its financial statements.
    Good financial management is more than just a paperwork 
exercise. Weak financial management can directly impact 
Government operations and security.
    Last year financial problems at the Defense Security 
Service caused that agency to abruptly stop processing security 
clearances for Government contractor employees. Because of 
this, thousands of employees were at risk of losing their jobs 
because their clearances were expiring and contractors had to 
increase salaries to retain employees with clearances, costs 
that were eventually passed along to the taxpayers.
    Similarly, problems with finances at the Federal Protective 
Services are threatening the security of our Federal buildings. 
Government departments failed to properly reimburse FPS for 
guarding the buildings, which caused FPS to delay payments to 
contract guards and pay millions of dollars in interest. Now, 
FPS is cutting back the number of officers and security 
coverages at Federal buildings, and it can be traced back to 
breakdowns in the financial accounting and funds transfer 
between departments.
    Today's hearing will look at the progress that has been 
made in improving financial management and the challenges that 
remain. We will examine the problems that some agencies have 
experienced to see how to solve them and how other agencies can 
avoid the same problems. Specifically, we will explore problems 
with installing new financial systems, and with 
interdepartmental accounting, and we will look at the bigger 
picture of how the Government measures its long-term assets and 
obligations.
    I look forward to hearing from our witnesses and gaining 
their perspectives for making our Government a more effective 
and accountable institution.
    I now yield to Mr. Platts on the minority side.
    Mr. Platts. Thank you, Mr. Chairman. I would just like to 
say, one, thank you for holding the hearing and continuing the 
important work of this committee and oversight responsibilities 
with our Federal Government's financial management practices 
and the well-being of our finances, and in advance thank our 
witnesses, both this and the following panel, for their day-in 
and day-out work on this very important issue that, as you and 
I have joked, I think, in the past that we were going to have 
our witnesses admit to steroid use, because if we did we would 
have the room filled with cameras, as it should be, because the 
financial well-being of our Nation and the impact on the daily 
lives of our citizens is, to me, one of the most important 
issues here in Washington. Certainly those who are going to 
testify before us today understand that. Again, I appreciate 
their great work.
    I do apologize. Because of trying to be in several places 
at once, I will be here for the opening statements and then try 
to return for the Q and A and the second panel.
    Thank you, Mr. Chairman.
    Mr. Towns. Thank you very much.
    Congressman Murphy.
    Mr. Murphy. Thank you, Mr. Chairman.
    Often the repeated phrase that Government should work more 
like a business doesn't exactly prove an apt analogy, but when 
it comes to issues of financial management, when it comes to 
making sure that we have good audited financial statements, it 
certainly is an apt analogy, and I am very thankful to the 
chairman again for being able to be a member of this 
subcommittee, a new member of this subcommittee.
    I thank the witnesses for being here to shed some light on 
a very important issue to the new constituents in my District 
who care deeply about how their taxes are spent by this 
Government, and taxpayers across the country.
    Thank you, Mr. Chairman.
    Mr. Towns. Thank you very much.
    At this time I yield to the ranking member of the 
subcommittee for his opening statement, Mr. Bilbray of 
California.
    Mr. Bilbray. Mr. Chairman, I apologize for my tardiness.
    I appreciate the witnesses here today. Mr. Chairman, I just 
appreciate the ability to participate in this hearing. As 
somebody who spent 18 years in local government, from being a 
mayor to a chairman of a county of 3 million, I am obviously 
very interested in that huge leap between the theory of how we 
want to spend our money and the reality of what really does 
happen with those funds.
    With no other ado, Mr. Chairman, I yield back and thank you 
again for the participation.
    Mr. Towns. Thank you.
    I yield to Mr. Welch.
    Mr. Welch. I want to thank you for holding this hearing. I 
look forward to serving with you on this subcommittee. My 
colleague, Mr. Murphy, said better than I can say everything I 
would have said, so I am going to ask to have his remarks re-
recorded in my name. [Laughter.]
    Mr. Towns. You are going to do very well on this 
subcommittee.
    Thank you very much.
    Actually, the first panel, of course, is already at the 
table. It is our longstanding policy, as you know, to swear the 
witnesses in.
    [Witnesses sworn.]
    Mr. Towns. Let the record reflect they have spoken in the 
affirmative.
    Our first panel features two leaders in advancing Federal 
financial management and promoting Government accountability. 
David Walker is the Comptroller General of the United States 
and leads the Government Accountability Office, the 
investigative and auditing agency for the U.S. Congress. Mr. 
Walker is a certified public accountant and has extensive 
executive level experience in both Government and private 
industry financial management.
    Linda Combs is the Controller in the Office of Management 
and Budget in the Executive Office of the President. As 
Controller, Dr. Combs oversees Government-wide financial 
management policies and requirements. She also has extensive 
experience in Federal financial management and has served as a 
leader in several Federal agencies.
    Your entire statement is in the record, and I will ask that 
each witness summarize your testimony in the time provided, 
and, of course, that is 5 minutes.
    Please proceed, Mr. Walker.

   STATEMENTS OF DAVID M. WALKER, COMPTROLLER GENERAL OF THE 
  UNITED STATES, GOVERNMENT ACCOUNTABILITY OFFICE; AND LINDA 
 COMBS, CONTROLLER, OFFICE OF MANAGEMENT AND BUDGET, EXECUTIVE 
                    OFFICE OF THE PRESIDENT

                  STATEMENT OF DAVID M. WALKER

    Mr. Walker. Chairman Towns, members of the subcommittee, it 
is a pleasure to be here today to report on the U.S. 
Government's consolidated financial statements for the years 
2006 and 2005.
    Since enactment of key financial reforms in the 1990's, the 
Federal Government has made substantial progress in improving 
financial management activities and practices; however, the 
Federal Government still has a long way to go in order to 
address several principal challenges to fully realizing strong 
Federal financial management.
    As you mentioned, Mr. Chairman, for the 10th consecutive 
year, certain material weaknesses in financial reporting and 
other limitations in the scope of our work resulted in 
conditions that prevented the GAO from being able to provide 
the Congress and the American people with an opinion as to 
whether the consolidated financial statements of their 
Government was fairly stated in conformity with generally 
accepted accounting principles.
    Furthermore, we also reported that the Federal Government 
did not maintain effective internal control over financial 
reporting and compliance with certain significant laws and 
regulations.
    For the third consecutive year the GAO included an emphasis 
paragraph in our audit report noting that our current fiscal 
path is unsustainable and that tough choices by the President 
and the Congress are necessary in order to restore our Nation's 
long-term fiscal sustainability.
    Currently, our Nation's financial condition is worse than 
advertised. From a broad financial management perspective, the 
Federal Government's deteriorating long-range financial 
condition and fiscal imbalance are matters of increasing 
concern. The fiscal year 2006 financial report disclosed that, 
despite a reported increase in revenues for fiscal year 2006 of 
about $255 billion, the Federal Government's cost exceeded its 
revenues by $450 billion, the net operating cost.
    Furthermore, the total of reported liabilities, 
contingencies, and unfunded commitments for things like Social 
Security and Medicare rose from about $20 trillion in 2000 to 
about $50 trillion in 2006. That is a 147 percent increase in 6 
short years.
    To put things in perspective, $50 trillion amounts to 
$440,000 per American household, and median household income in 
America is less than $50,000.
    Table two on page 6 of my testimony I would commend to you, 
because that takes these huge numbers and puts it in terms that 
I think you and others can fully appreciate.
    At some point we are going to have to start making some 
tough choices in order to put us in a more prudent and 
sustainable path. That will include, among other things, 
increasing transparency and enhancing the relevancy of key 
financial, performance, and budget reporting; reinstituting and 
strengthening budget controls; strengthening oversight of 
programs and activities; and re-engineering, reprioritizing the 
entire base of the Federal Government.
    The Federal Government restated certain of its fiscal year 
2005 consolidated financial statements as part of this year 
financial reports to correct certain errors. Since fiscal year 
2004, we, at GAO, have reported our concerns about restatements 
to Federal agencies' previously issued financial statements. 
Frequent restatements to correct errors can serve to undermine 
public trust and confidence in both the entity and the 
responsible parties. As has been the case for 9 previous fiscal 
years, the Federal Government did not maintain an effective 
system on total controls.
    But on the positive side of the ledger, for fiscal year 
2006, 24 of 24 CFO Act agencies reported within 45 days, and 19 
of 24 CFO Act agencies were able to obtain a clean opinion on 
their consolidated financial statements, up considerably from 
where we were a few short years ago.
    The three primary impediments to an opinion on the 
financial statements are: the Department of Defense, 
intergovernmental activity, and preparing the consolidated 
financial statements.
    In summary, the Federal Government's financial management 
is much improved since the CFO Act and FMMIA were enacted in 
the 1990's, but we still have a ways to go, and the tail on the 
dog is the Department of Defense.
    Thank you, Mr. Chairman. I would be happy to answer any 
questions you might have.
    [The prepared statement of Mr. Walker follows:]
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    Mr. Towns. Thank you very much, Mr. Walker.
    Dr. Combs.

                    STATEMENT OF LINDA COMBS

    Ms. Combs. Thank you, Congressman Towns, Congressman 
Bilbray and other distinguished members of the subcommittee. I 
thank you for providing us an opportunity to be with you today 
to discuss with you OMB's vision for strengthening Federal 
financial management in the coming years.
    Improving financial management is one of this 
administration's top management priorities. With the launch of 
the President's management agenda in 2001, the President issued 
a call to action for Federal managers to achieve a series of 
critical financial management goals that, if attained, would 
help American citizens gauge whether the people's money is 
being properly accounted for and wisely spent, increase 
transparency into the fiscal health of the Federal Government, 
and provide reliable financial information to be used by 
Federal leaders so they can mange their day-to-day operations 
of their Government and ours more efficiently.
    I am pleased to report that the Federal financial community 
is positioned to meet those challenges. We have, indeed, 
achieved significant forward progress on all the key indicators 
of the President's management agenda, and specifically, as you 
and Mr. Walker have just pointed out, 19 major agencies that 
represent 75 percent of all Federal outlays achieved a clean 
audit opinion last year. The number of auditor reported 
material weaknesses has reduced approximately 15 percent from 
just the past year. And, for the second consecutive year, as 
has already been pointed out, every major Federal agency issued 
their audited financial statement within 45 days of the 
previous year. Just to put that in a tiny bit of perspective 
for us, it was taking as long as 5 months to complete financial 
reports in 2001. Improper payments has declined to $36.3 
billion from $45.1 billion in 2004, so in those 2 short years 
we have taken improper payment improvements down by $9 billion. 
We have disposed of more than $4.2 billion in excess real 
property since 2004.
    It is now incumbent upon the Federal financial community to 
build on this foundation of progress so that we are prepared to 
address the fiscal challenges that lie ahead. Federal managers 
must continue to mobilize resources, rededicate efforts, and 
strengthen our accounting practices. We have to implement 
stronger internal controls, issue financial reports more 
timely, eliminate instances of error and waste, and use 
financial data on a day-to-day basis to manage cost. Also, we 
must approach these management improvement activities with an 
eye toward balancing the cost of our efforts against the 
benefits that they ultimately derive for the taxpayer.
    As we set out to achieve new and better levels of financial 
performance and do so in a cost-effective manner, it is 
critical that the Federal community orient itself around a 
common set of priorities and a clear and consistent road map 
for improvement. Therefore, pursuant to the CFO Act of 1990, my 
office, the Office of Federal Financial Management within OMB, 
issues an annual plan to Congress that highlights our key 
financial management goals, how we measure them, our expected 
performance over the next 5 years, and the steps we will take 
to ensure their success.
    To achieve these important objectives described in our 
report, the Federal financial community has undertaken a series 
of reforms intended to strengthen key areas of financial 
management. These activities include improving and/or 
strengthening areas such as internal controls, financial 
systems, payment accuracy, real property management, grants 
management, financial reporting of the Government, as a whole.
    Our recently issued annual report describes in great detail 
our planned actions in these areas and how we are going to 
measure our progress over time. The Federal financial community 
undertakes a myriad of day-to-day activities, as well, so that 
we can comply with the CFO Act of 1990.
    We believe in transparency and we believe that the CFO 
Council, along with the President's Council on Integrity and 
Efficiency, which is comprised of our IGs throughout 
Government, is currently joining forces to improve both the 
cost effectiveness of how we go about producing our audited 
financial statements and how we present this information so 
that it is understandable and so that excessive costs are not 
taken to drain on agency resources.
    Every tax dollar is far too precious for us not to make 
well-informed decisions. This administration looks forward to 
continuing our partnership with Congress, with GAO to address 
these specific problems that we have. We have a long way to go. 
We need to be stronger. We need to be smarter. And we need to, 
indeed, have more sustainable accountability.
    We will build on our successes.
    Thank you for your continuing support and effort. I look 
forward to answering your questions.
    [The prepared statement of Ms. Combs follows:]
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    Mr. Towns. Thank you very much.
    Let me thank both of you for your testimony.
    Let me begin, Mr. Walker, with you. You know, DOD always 
appears to be the problem. Is there any reasonable possibility 
of DOD getting a clean audit in the next few years?
    Mr. Walker. I would sure like, Chairman Towns, for the 
Department of Defense to be able to achieve a clean audit 
opinion before I leave office, which is October 25, 2013, but I 
wouldn't bet a lot of money on it. I believe that their current 
approach to trying to improve their financial management 
systems and controls and their plan to try to achieve, you 
know, an audit opinion is vastly superior to their prior one, 
but I think most likely we are going to be at a point where 
there are several major entities within the Department of 
Defense will be in a position to have a clean audit opinion 
before the end of my term, and possibly several line items 
across the agency. We are going to try to make sure that more 
than that gets done, but I am not that optimistic as of this 
point.
    Mr. Towns. What about the new DOD plan for better financial 
management? Will that help?
    Mr. Walker. The so-called FIAR plan, F-I-A-R----
    Mr. Towns. Yes.
    Mr. Walker [continuing]. I believe it is clearly superior 
to their past plan. As you may recall, their past plan called 
for them to have a clean audit opinion for the entire 
Department of Defense by fiscal year 2007. It was totally 
unrealistic. Their new plan takes the entities that they hope 
to be able to achieve an opinion on and the line items that 
cross the different silos within the Department of Defense and 
talks about making progress on an installment basis toward 
ultimately achieving an opinion on the overall Department. 
Clearly superior but, frankly, they are really just getting 
started within the last year or so.
    Mr. Towns. Do you want to comment on that?
    Ms. Combs. I would totally agree with what Mr. Walker has 
had to say about that. I would just add that I think also the 
effort that is underway, in terms of their A-123, their 
administrative order 123, internal controls effort, will 
probably help to accelerate some of the difficulties that they 
have had in the past. They are working very, very hard to try 
to correct deficiencies.
    Mr. Towns. All right.
    Mr. Walker, you paint a very sobering portrait of the long-
term fiscal outlook for the Federal Government. I want to ask 
you about private sector liabilities and whether they are 
accounted for.
    As you know, when the Federal Government had to spend 
hundreds of millions of dollars to bail out failing savings and 
loans in the 1980's, it created a real financial shock. Today 
the Federal Government acts as a guarantor for a lot of private 
debt by law for things like student loans, pension benefits, 
publicly chartered companies like Fannie Mae. Are these 
potential liabilities accounted for in the Government's balance 
sheet? And how do we know if the Federal Government is properly 
managing the risk for these private sector liabilities? How do 
we know?
    Mr. Walker. Well, first, as you note, Chairman Towns, on 
one hand you have traditional liabilities, which would be for 
things like debt held by the public, which would be for 
unfunded pension and health care to military and civilians that 
are Government employees. You have certain commitments and 
contingencies. For example, to the extent that the Government, 
you know, might guarantee certain debt, to the extent that the 
Government might step up if certain entities fail, then those 
are various contingencies. And then we have certain unfunded 
commitments, the difference between what we have promised with 
Social Security and Medicare and the dedicated payroll tax 
revenues and premiums that we have available to meet those 
promises.
    The answer is: if it is a firm commitment of the U.S. 
Government, if we have identified the likely event, if it is 
probable that it will occur, and if we can estimate within a 
reasonable degree of certainty the amounts of money involved, 
then under that circumstance it would be booked as a liability. 
Unless and until all three of those conditions exist, it would 
not be.
    Let me give you an example. The Pension Benefit Guarantee 
Corporation is a U.S. Government corporation. Technically, the 
United States is not liable for its obligations. Technically 
the PBGC can borrow, I believe, up to $100 million. Its assets, 
however, are far less than its liabilities. It is in the hole 
about $20 billion. There is not a liability on the Government's 
financial statements for the PBGC, but we do disclose that 
contingency. We do note that it is under-funded by about $20 
billion and what the nature and extent of the Government's 
obligations might be with regard to that.
    Mr. Towns. Right. Thank you very much.
    I yield to the ranking member, Congressman Bilbray.
    Mr. Bilbray. Thank you.
    Mr. Walker, I want to just tell you I am very impressed 
with your commitment to fiscal sanity. I know there is not a 
lot of fans for you around this Hill, but I want you to know 
that you have one here. I appreciate your straight talk on the 
issues.
    Department of Homeland Security has been put together by 
those of us in Congress trying to organize something, a whole 
lot of loose pieces that were thrown together under the crisis 
of 9/11, and is now struggling to try to be an organized 
strategy. Is there any light at the end of the tunnel that this 
agency is actually going to be able to function as hoped for, 
from the fiscal point of view?
    Mr. Walker. Yes. Absolutely. I think, frankly, DHS will 
probably get there before DOD will get there. The fundamental 
difference is the Department of Homeland Security represented 
22 different departments and agencies that had different 
cultures, different systems, different structures, and, 
frankly, until September 11, 2001, most of them weren't even 
focused on homeland security. Their missions were fundamentally 
changed.
    In contrast, take the Department of Defense, which was 
created in 1947. This is the 60th anniversary of the creation 
of the Department of Defense. They were all in the defense 
business. There weren't as many entities involved. Yet, here 60 
years later they are still in last place in financial 
management.
    So yes, we can be successful. We will be successful.
    Mr. Bilbray. I appreciate that. And, for the record, I 
opposed the Department of Defense. I think we ought to be up 
front and call it the Department of War, exactly what it is. I 
think that the political correctness changing terminologies, we 
spend more time talking about terminology rather than getting 
the job done.
    Department of War, Department of Defense, has there ever 
been a time in our history where they have been not the problem 
child with this kind of stuff? I am a history major. I go back 
and remember having issues such as Stewart raiding Union wagons 
and sending a telegram back saying you guys ought to all be 
thrown in prison because the mules aren't worth pulling the 
wagons because you guys are cutting deals on the purchase of 
equipment for the Army.
    Has there been any time that we can really show that the 
Army, the Navy, or--we won't mention the Marine Corps. We don't 
want to get in trouble here--but that the Department of War, 
Department of Defense has been a good player in this, or has it 
all historically been the problem that most of us perceive it 
to be?
    Mr. Walker. I am also a student of history and I also have 
responsibilities for auditor generals around the world, and so 
it is not just the United States but it is also looking at 
other countries. Defense Departments, War Departments, whatever 
you want to call it--by the way, we used to call it War in the 
past--have always been challenged from a financial and fiscal 
standpoint, and frankly in part because, in general, they are 
not held as accountable as other departments and agencies are.
    I will tell you that one of the things that I have done in 
recent years is I have looked to some of the other countries to 
find out what their experiences have been and they typically 
are about the last one to get their financial act together, the 
Department of Defense or War or whatever you want to call it in 
other countries, but most of them have.
    For example, the United Kingdom has been able to achieve a 
clean opinion on its financial statements for several years in 
a row. That was not the case until recent years. So they 
typically are a lag indicator and they have been a problem for 
a long time.
    Mr. Bilbray. Yes. Just an editorial note: they also at 
almost exactly at that time abandoned their carrier and their 
task force and their ability to project their military force 
overseas extensively, but that does have an overall impact.
    You know, Ms. Combs, OMB is talking about that they found 
over $45 billion in 2004 in improper payments. What do you 
think we can do to reduce those improper payments?
    Ms. Combs. Well, we are currently involved in a number of 
ways of reducing those improper payments already. One of the 
things that we used the President's management agenda score 
card for and we used the process of the score card is to hold 
agencies accountable for reductions in these key strategic 
areas that we know are going to make the biggest difference in 
how successful their entire financial operations are.
    One of the things that we are very, very pleased with is 
the improper payments initiative. I think the improper payments 
initiative starts out by looking at risk-susceptible programs, 
and in this way we are able to take the highest-risk programs 
in each of the departments and agencies and target those. So we 
used some strategic ways of looking at who has the highest 
levels of improper payments and what are some things we can do 
within each one of those programs within each department.
    We meet with those folks frequently. We have a lot of 
engagement with our departments and agencies from the financial 
management side of OMB. One of the things that we have found 
that helps in eliminating improper payments is extra 
verifications. I know Mr. Walker and I have talked about this. 
We were able to talk about it earlier today, how pleased we are 
with some of the various programs. HUD, for example, this year 
just got off the high-risk list for two of their programs that 
had been on the high-risk list since 1994. A lot of what goes 
on in getting agencies off that high-risk list and reducing 
improper payments is being sure that payments are going to the 
right individuals and that payments to individuals where they 
don't belong are removed. We find extra verification to be one 
of the key elements that we use in reducing improper payments.
    Mr. Bilbray. Thank you, Mr. Chairman. I know my time has 
expired. I would like a followup question whenever it is 
possible.
    Mr. Towns. Thank you very much.
    I now yield to the gentleman from Connecticut, Mr. Murphy.
    Mr. Murphy. Thank you, Mr. Chairman.
    I wanted to go back to the DOD for a moment. It is hard not 
to, given the amount of time this subcommittee and full 
committee has spent overseeing a lot of the funds spent through 
DOD and I think have raised awareness in the public over the 
money being spent through the DOD and State Department.
    Mr. Walker, help me maybe zero in on the issue a little 
bit. Are the issues within DOD system-wide, or are we talking 
about specific departments, agencies, pieces of DOD that raise 
greater issues than others?
    Mr. Walker. Some entities are better than others in DOD, 
but it is a department-wide problem. Just to put a little meat 
on the bones, the Department has about 2,000 legacy non-
integrated information systems that have financial and other 
management information in them that were created independently 
by the different services, by the different DOD offices that 
exist. They don't talk to each other. In many cases you have to 
enter a 16-digit code for each transaction. It has to be 
entered into multiple systems. That is just an example of the 
problem.
    One of the things that we are recommending is that, since 
DOD has 15 of 26 high-risk areas on GAO's high-risk list of 
which financial management is but one, we are recommending that 
the Department create a new chief management official, a level 
two official with a proven track record of success with a term 
appointment to focus full-time on these longstanding and 
systemic management problems.
    Mr. Murphy. The FAIR plan, does that address some of these 
questions of lack of interoperability?
    Mr. Walker. That plan, along with their business systems 
information plan, which is--you know, they have a business 
transformation unit that is focusing more on the information 
technology and the enterprise architecture. That, in 
conjunction with that plan, is trying to take a look at these 
systems.
    Mr. Murphy. Mr. Chairman, just one last question.
    Mr. Walker, I just want to point to one interesting piece 
within your written testimony where you made a comment and said 
that ``The managers within DOD lack access to the full range of 
information--'' this is directly from your statement--``to the 
full range of information needed to effectively manage day-to-
day operations.'' Just talk a little bit about what is behind 
that concern.
    Mr. Walker. Well, what is important to keep in mind is the 
objective here is not just to get a clean opinion on your 
financial statements, because all that says is that the numbers 
are fairly presented in all material respects.
    Mr. Murphy. Right.
    Mr. Walker. You could have all kinds of economy, 
efficiency, effectiveness problems and still get a clean 
opinion on your financial statements. Ultimately what has to 
happen is that you need systems and controls that will provide 
timely, accurate, and useful financial and management 
information to be able to make informed decisions day to day. 
They don't even have systems and controls that will allow them 
to be able to get an audit opinion once a year, much less 
systems and controls that will allow them to have information.
    For example, inventory. They don't know how much inventory 
they have, nor necessarily what condition it is in or where it 
is, which can cause them to continue to buy things where they 
already have plenty of it.
    They also can have a circumstance which we have reported on 
where they are selling excess inventory for cents on the dollar 
when they are buying it for a dollar.
    Mr. Murphy. And obviously an inventory system, you know, if 
you are in the business world, is one of the first things you 
are going to invest in. On that example, what are the barriers 
in DOD to having a basic system of inventory cataloging?
    Mr. Walker. A lot of it has to do with outdated systems, 
information systems, all independent systems--everybody has got 
their own system--and ineffective controls. So that is 
illustrative of the problem that they have in many areas.
    Mr. Murphy. Good.
    Thank you, Mr. Chairman.
    Mr. Towns. Thank you very much.
    Let me just come back to you, Mr. Walker, and actually, you 
too, Dr. Combs. Each of you in your testimony mentioned 
possible changes to the way the Government measures and audits 
its assets and liabilities. We often hear questions about 
whether we measure the right things and whether the auditing 
method we use now matches the risk involved. Are we spending 
too much money auditing low-risk items and not paying enough 
attention to higher-risk items?
    Mr. Walker. Well, let me, if I can, Mr. Chairman, address 
two elements. One deals with financial reporting and the other 
deals with auditing. I think my statement talks about both.
    On financial reporting, I think we have to recognize that 
we are not a private sector business. We are a sovereign 
Nation. Therefore, we need to make sure that our financial 
reporting recognizes that reality and that we are providing 
financial information that is useful and relevant for the type 
of entity that we are.
    In some cases I think we need to think about whether or not 
a traditional balance sheet makes sense for the Federal 
Government. On the other hand, we need more fiscal 
sustainability in intergenerational equity reporting, which is 
not something you would see in the private sector, because if 
we don't end up mending our ways we are going to mortgage the 
future of our kids and grandkids something terrible. We need to 
recognize that and we need to show that.
    We also need more performance reporting. We don't have a 
stock price. The U.S. Government doesn't have a stock price. We 
don't have certain market proxies that can say how well we are 
doing. So we need key national indicators and indicators that 
can help us see how we are doing for a variety of reasons.
    Now on the audit, audits by definition are supposed to be 
focused on materiality. Materiality is both quantitative and 
qualitative. You are supposed to focus your energy and efforts 
based upon risk and based upon relevant materiality. So some of 
that is already considered in how you are going about the 
audit.
    I do, however, think it is relevant, including for the 
Department of Defense, to decide how many entities should they 
seek to obtain an audit opinion on, because the more entities 
you seek to obtain an audit opinion on, the more money it is 
going to cost you, and therefore I think they need to step back 
and say how many different entities should end up receiving an 
audit opinion so that we can go about this in a way that will 
achieve better transparency and accountability, but in a cost-
effective manner.
    Ms. Combs. You know, I think one of the reasons we selected 
the 45 day reporting time table was so that some day when we 
have a consolidated audit for the Federal Government we could 
do that within, let's say, 60 days, and that would be 
consistent with what the private sector offers.
    I think in order to think toward the future along those 
lines, I know Mr. Walker and I agree that we have to be very, 
very careful on how we use these reporting models, and we have 
to recognize that the Federal Government has some unique needs, 
and when we start consolidating agency and financial reporting 
by agency into a consolidated report, we need to be looking now 
at the current reporting model and to see if it really does 
provide for reliable, transparent, user friendly kind of 
financial statement.
    Mr. Walker and I were talking right before the hearing how 
we would very much like for the general public to know more and 
to use more of the financial information that we provide.
    Our office has fairly recently started what we call a 
smarter accountability work group. We are working with chief 
financial officers, along with members of the President's 
Council on Integrity and Efficiency, the IGs, and this work 
group is currently being charged with producing a white paper 
on strategic directions that we might look at to look at how we 
are actually doing our reporting. We look forward to sharing 
that with a greater financial community and seeing if there are 
some things that we can do that are, indeed, smarter and lead 
to stronger and sustainable accountability for the Federal 
Government.
    Mr. Towns. Thank you very much.
    Just before I yield to the ranking member, the Sarbanes-
Oxley Act required better internal controls and financial 
reporting for public companies. Have the requirements of 
Sarbanes-Oxley had any spill-over effect in the area of 
Government accounting?
    Mr. Walker. First, as you know, Mr. Chairman, Sarbanes-
Oxley applies to public companies. It doesn't apply to closely 
held companies, it doesn't apply to not-for-profit entities, 
and it certainly doesn't apply to the Federal Government, which 
is a lot more than a not-for-profit. We are losing money big 
time. So it doesn't apply.
    One of the things that the JFMIP--the Joint Financial 
Management Improvement Program Principles--have looked at--and 
I am chairman of that group. It is the Secretary of the 
Treasury, Director of OMB, Director of OPM, and myself as 
Comptroller General of the United States--we have looked at 
whether and to what extent some of the concepts of Sarbanes-
Oxley might make sense to apply to the Federal Government.
    In some cases the answer is yes, in some cases the answer 
is clearly no. In some cases, quite frankly, the Federal 
Government was already ahead of the private sector. For 
example, GAO has expressed opinions on the internal control 
systems and financial management on the entities that we audit 
well before Sarbanes-Oxley was passed. The independence 
requirements for auditors, we had already modernized our 
independence requirements before Sarbanes-Oxley was passed.
    But there are still issues that we need to look at at the 
principal level to determine whether or not they make sense for 
the Federal Government.
    Mr. Towns. OK. Thank you.
    I yield to the ranking member, Congressman Bilbray.
    Mr. Bilbray. Thank you.
    I am sure neither one of you are old enough to have been 
around back when the savings and loan assets were liquidated by 
the Trust, the Land Trust, but I will tell you one thing that 
really became obvious to somebody watching the people make 
money off of the liquidation of the savings and loan assets was 
that the American taxpayer didn't get their fair share out of 
that. I saw people that were friends of mine making millions 
and millions of dollars because the Federal Government 
basically liquidated assets at 10 cents on the dollar, and 
anybody that had enough money to be able to put together those 
packages walked away with huge assets.
    Why do I bring this up? I think that one of the biggest 
concerns I have is I may not see those who are actually being 
hurt, but I see money going or assets going to people who 
really shouldn't be getting those assets from the Federal 
Government. We don't talk too much about that. The guys, 
millionaires made big millions off of savings and loan debacle.
    Right now do we have any idea how much assets are going to 
illegal immigrants within this country right now?
    Mr. Walker. I don't have a number that I can give you, Mr. 
Bilbray. I will give you three examples of areas of concern 
that we have at GAO along the lines of what you are talking 
about.
    No. 1, I already mentioned where the Defense Department 
sells things for cents on the dollar when it is buying it for a 
dollar on a relative basis. Another example is we have huge 
excess facilities in the Federal Government. It is on our high-
risk list. We are going to need to rationalize that and we are 
going to need to sell off a lot of that. We need to make sure 
we learn from the lessons of the past and get a good deal for 
the taxpayers. The third example is the Federal Government 
owns, for the benefit of American citizens, a lot of mineral 
rights and a lot of lands. And in many cases we are not getting 
fair value for those mineral rights.
    Mr. Bilbray. Again, I echo that, too.
    Mr. Chairman, something to remember. I come from a Navy 
town, but for lands that the U.S. Government has bought, we not 
only have a right, we have a responsibility to put that back on 
the fair market and get a fair return for it and not just make 
an in-kind gift to whatever political subdivision is lined up 
to take it.
    You know, in San Diego we had some unique situations where 
the city had actually donated land for training facilities on 
the condition it be used for it, so that you should transfer 
back. But that is so rare that it is astonishing that you have 
huge tracts of land that are worth billions and billions of 
dollars. Monterey would be a good example. Don't tell Sam Farr 
I said this, but huge assets being thrown away over there.
    My concern, Ms. Combs, you were talking about 
identifications. You know, I am looking at some of my 
colleagues talking about giving amnesty to 12 million illegals, 
and I don't mean to hit on this, but it is estimated that will 
be about 60 million people that will be a $50 billion hit on 
our Treasury every year.
    Your mention about documentation and issues like that, was 
that referring only to contractors, or is that general for 
recipients across the board?
    Ms. Combs. No, sir. I was also referring to recipients. 
Most Federal benefit programs, as I understand it, are required 
by statute to verify the immigration status of non-citizens 
through SAVE, the Save Program, under the U.S. Citizenship and 
Immigration Services. I understand this to be a Web-based 
system that allows agencies to electronically verify 
immigration status against USCIS data bases to help ensure that 
only eligible non-citizens receive Federal, State, or local 
benefits.
    Now, I will say we also know that there are some benefit 
programs administered by State agencies, for example, that do 
permit individuals to self-declare their citizenship status.
    Mr. Bilbray. Ms. Combs, let me interrupt. We have 
contracts. We are giving grants to a group like Acorn that is 
actively recruiting people illegally in the country to get home 
loans based on the fact that they are under-served, under their 
grant. So a lot of these things I don't think that we are being 
really open about the fact that not only this is going on--and 
I appreciate the fact that you are saying let's recognize it--
we are, be it for political or some other reason, we are 
actively giving grants to groups that are openly, publicly 
telling the news media, yes, we are providing loans to these 
people. They are here. We don't care if they are illegal. We 
are going to provide these services to them.
    Go ahead, Mr. Walker.
    Mr. Walker. If I can, let me mention a couple of things.
    One, on the immigration challenge, two dimensions. From a 
practical standpoint, I don't think you are really going to get 
control of the immigration problem until we start enforcing our 
labor laws. The fact is that the average daily wage in Mexico 
for an unskilled worker is $4.50.
    Mr. Bilbray. Mr. Walker, I totally agree. That is why we 
have Silvestre Reyes' bill out there to make it simple so we 
can crack down on employers.
    Mr. Walker. Right. I mean, you know, if you don't do that 
you are not going to choke it off. But let me mention a couple 
other things.
    No. 1, Social Security and Medicare, I get questions a lot 
saying, gee, can't we solve Social Security and Medicare's 
problems by just opening up immigration, allowing more 
immigration? The answer is no, you can't come close to doing 
that.
    There is the key: when you are talking about immigration, 
you are talking about economic growth, and if you are talking 
about the fiscal impact on the Federal Government, just for 
that purpose, the key is what are the average skills and 
knowledge of the individuals involved. If the average skills 
and knowledge are above average for our country, it will be a 
net plus over time. If they are below average, it will be a net 
minus over time. That is what we need to understand, because in 
our economy we have to compete based on skills, knowledge, 
innovation, productivity, quality. We can't compete on wages.
    Mr. Bilbray. So in other words, if it was such a great deal 
for the economy and for the budget, you would be coming here 
and recommending that we, to create more poor people to help 
the economy, we would cut all our funding to these anti-poverty 
programs so we can generate our own domestic supply, rather 
than have to import.
    Mr. Walker. I will have to think about that, Mr. Bilbray.
    Mr. Bilbray. The point being is that entry level laborers 
do not pay the expense of the minimum standard that we allow 
everyone to live by in this country.
    Mr. Walker. And if you also look at the nature of Social 
Security and Medicare, by definition they provide more and take 
less from people who are less well off.
    Mr. Bilbray. Mr. Chairman, I only bring this up because 
California is at a crisis now to where even Governor 
Schwarzenegger, an immigrant, who wants to provide health care 
to illegal immigrant kids has said we have to cutoff welfare to 
the children of the people, U.S. citizens, at 5 years, cutoff 
welfare, because we can't afford to continue to pay people to 
stay here illegally just because their children were born here. 
I mean, this is Schwarzenegger saying the budget is forcing us 
to have to do things that we never thought we would ever live 
to do.
    Mr. Walker. Can I piggyback real quick, Mr. Chairman, on 
that? I apologize.
    You know, we have a lot of policies that are based on the 
past, and one of the policies that I think we need to 
reconsider is we have a policy that says that if you are born 
in the United States you are automatically a citizen. Now, when 
was that created? A long time ago when it was a long journey 
where one risked life and limb in order to come to the United 
States, and when we were seeking actively to try to populate 
this great continent. Yet, we still haven't looked to try to 
modernize that, and I think that is something that has to be on 
the table.
    There is a difference between a pathway to citizenship and 
a pathway to legal status.
    Mr. Bilbray. I appreciate it, Mr. Walker. Just to let you 
know, it was late 1940's that we allowed people who were not 
permanent resident aliens to get that automatic citizenship. 
Guest workers didn't qualify in those days.
    Mr. Towns. I am going to have to stop the citizenship 
debate and move to my colleague from Vermont.
    Mr. Welch. Thank you, Mr. Chairman.
    Mr. Walker, I want to ask about some accounting issues 
across Federal departments and also between different agencies 
within the same department. GAO, as you know, identified this 
as a material weakness, and on our second panel we are going to 
hear how that problem has been for DHS.
    From your perspective, what is the main problem that 
doesn't allow agencies to do what seems to be a straightforward 
thing; namely, match up their accounts? Is that a use of 
different accounting definitions, technology, poor 
communication? What's the deal?
    Mr. Walker. It is a combination of factors. Any time you 
deal with, you know, an inter-entity transaction, it means that 
both sides have to have their act together with regard to 
systems and controls.
    Mr. Welch. So do you and OMB have any recommendations for 
standardizing the transactions so that agencies can clear each 
other's accounts better?
    Mr. Walker. Well, you know, one of the things that I think 
we need to be thinking about is something that Brazil has 
already implemented, and that is Brazil had very similar 
problems to what we had, and they ended up going to a 
standardized financial management system with standard 
definitions and specifications with regard to information 
systems on financial management. I mean, my gut feeling is that 
if Brazil can do it, we can do it, although that is clearly a 
multi-year effort.
    Mr. Welch. Thank you.
    Mr. Towns. Thank you very much. No further questions. The 
first panel is actually being discharged at this time. Thank 
you very much for your testimony. We really appreciate your 
coming and sharing with us. We look forward to continuing to 
work with you.
    Mr. Walker. Thank you.
    Ms. Combs. Thank you, Mr. Chairman.
    Mr. Walker. If I can say for the record, Mr. Chairman, 
believe it or not, Mr. Bilbray, I have not had one complaint 
about stating the facts and speaking the truth on financial and 
fiscal issues and many, many compliments on both sides of the 
aisle. Thank you.
    Mr. Towns. No doubt about it. You tell it like it is, and I 
like that. We eventually will get the message. Sometimes, 
though, some people catch on a lot faster than others. 
Sometimes it takes some of us 2\1/2\ hours to watch 60 Minutes. 
But that doesn't mean we can't watch it; it just takes us 
longer.
    Mr. Bilbray. Actually, Mr. Walker, after the testimony 
today, we may give you an honorary membership in the 
Immigration Caucus. OK?
    Mr. Towns. I would like to welcome our second panel. As 
with the first panel, it is our committee policy that witnesses 
are sworn in, so please rise and raise your right hands.
    [Witnesses sworn.]
    Mr. Towns. Let the record reflect that they all answered in 
the affirmative.
    Let me briefly introduce each witness.
    James Campbell is Acting Chief Financial Officer for the 
Department of Energy. He is a Certified Public Accountant and 
has over 30 years of financial management experience in both 
the private sector and the Federal Government, with the last 28 
years in the Department of Energy in various financial 
management capacities.
    William Maharay is Deputy Inspector General for the Office 
of Audit Services at the Department of Energy. He has more than 
25 years with the Department, and he oversees the financial 
statement audit at the Department of Energy.
    David L. Norquist is Chief Financial Officer at the 
Department of Homeland Security. Mr. Norquist was leader in the 
financial management at the Department of Defense and served as 
a professional staff member here on Capitol Hill with the House 
Appropriations Committee.
    Mr. James Taylor is Deputy Inspector General at the 
Department of Homeland Security. He, too, has extensive 
experience as a Federal financial manager, and in his current 
position oversees financial auditing at DHS.
    Your entire statement, gentlemen, will be in the record. I 
would like to ask you to try to summarize within the period of 
5 minutes to allow time for our questions from the panel.
    Why don't we start with you, Mr. Campbell, and come right 
down the line.

    STATEMENTS OF JAMES T. CAMPBELL, ACTING CHIEF FINANCIAL 
  OFFICER, U.S. DEPARTMENT OF ENERGY; WILLIAM MAHARAY, DEPUTY 
INSPECTOR GENERAL OF AUDIT SERVICES, U.S. DEPARTMENT OF ENERGY; 
  DAVID NORQUIST, CHIEF FINANCIAL OFFICER, U.S. DEPARTMENT OF 
   HOMELAND SECURITY; AND JAMES L. TAYLOR, DEPUTY INSPECTOR 
         GENERAL, U.S. DEPARTMENT OF HOMELAND SECURITY

                 STATEMENT OF JAMES T. CAMPBELL

    Mr. Campbell. Thank you, Mr. Chairman and members of the 
subcommittee. I appreciate the opportunity to address you today 
to describe the progress we are making at the Department of 
Energy in overcoming the financial management challenges that 
have caused us to lose our unqualified audit opinion on the 
fiscal year 2005 and 2006 financial statements.
    We are working hard to restore our financial management 
credibility, and we expect this progress to be reflected in the 
audit of the fiscal year 2007 consolidated financial 
statements.
    I understand the subcommittee is interested in the events 
and conditions surrounding our fiscal year 2006 audit opinion, 
but I would not be forthright if I did not disclose the 
conditions that occurred in fiscal year 2005 that led to that 
2006 audit opinion.
    For the record, the Department received unqualified audit 
opinions on its financial statements for 6 consecutive years, 
from fiscal years 1999 through 2004. However, in fiscal year 
2005 the Department implemented two initiatives to achieve 
long-term benefits that profoundly altered the accounting 
operating environment.
    First, at the beginning of the fiscal year the Department 
consolidated and centralized its financial services operations 
to gain efficiencies that were identified through a competitive 
sourcing study that was run by the in-house team.
    Second, 6 months later we changed most of the Department's 
accounting processes and deployed a non-customized, federally 
certified commercial off-the-shelf financial system. In 
hindsight, the Department might have been better served by 
implementing these business transformations sequentially.
    Concurrent implementation presented short-term management 
challenges which prevented the Department from producing 
timely, auditable financial statements and, consequently, our 
auditors reported a material weakness in internal control 
related to financial control and reporting and issued a 
disclaimer of opinion on the fiscal year 2005 financial 
statements.
    This disclaimer led to the development and implementation 
of a 2-year plan for regaining our unqualified audit opinion. A 
2-year recovery was required since the disclaimer on the ending 
fiscal year 2005 balances automatically became a disclaimer on 
the fiscal year 2006 opening balances. Once the Department 
receives an unqualified opinion on its balance sheet, it will 
then have an audit-acceptable opening balance on which to base 
the opinion on the rest of the financial statements. The 
earliest this can be achieved is on the fiscal year 2007 
statements.
    The Department's senior leadership took the audit outcome 
very seriously. The Secretary and the Deputy Secretary made it 
perfectly clear that the financial problems we experienced were 
not solely owned by the Office of the Chief Financial Officer 
but rather by every element of the Department, and called on 
the entire senior leadership team to engage in solving this 
serious management challenge.
    In October 2005 the chief financial officer established a 
multi-disciplinary team of financial professionals from both 
headquarters and our field institutions to identify the root 
cause of these management challenges and to recommend a path 
for it. In December of that year, the team presented its 
results to the Deputy Secretary, and he accepted the 
recommendations without modification. In short, 30 issues were 
identified in 3 broad categories: people, processes, and 
technology. It was originally assumed that the root cause was 
the new accounting system, but the analysis revealed most 
problems were related to people and processes.
    The overriding recommendations centered on the need for 
clarifying financial management roles and responsibilities, 
redefining business processes to reflect the Department's new 
accounting environment, and gaining a greater understanding of 
the new system's functionality and reporting capabilities.
    From February to June 2006, the Office of Inspector General 
initiated a series of reviews to determine whether the 
Department's plan and completed corrective actions adequately 
addressed critical control weaknesses in the financial 
management and reporting process. While the reviews were 
substantially less in scope than the financial statement audit, 
they provided a clear indication for the Department's senior 
leadership of the progress on our remediation.
    Fiscal year 2006 was the first full year present with our 
new core financial system, and the many issues and challenges 
contained in our remediation plan commanded considerable 
attention and staff resources throughout the year. While the 
financial statement audit ORs were only engaged to issue an 
opinion on our 2006 balance sheet because of the aforementioned 
opening balance issues, the audit did cover the entire scope of 
our financial operations.
    The audit opinion on the balance sheet was upgraded from a 
disclaimer opinion to a qualified opinion, which is a major 
step closer to us achieving the goal of an unqualified opinion 
in 2007. The qualification was due to concerns relating to the 
Department's accounting and reporting for obligations and 
undelivered orders.
    As we progressed into 2006, the senior leadership continued 
to provide strong direction and support for addressing these 
issues preventing us from reaching our goals. A task force was 
established, a plan was developed and executed to correct the 
problems with obligations and undelivered orders. The planned 
actions included: correcting abnormal balances, clarifying 
procedures, and performing a comprehensive reconciliation of 
about 1,200 contracts comprising over 95 percent of our 
September 30, 2006, undelivered orders balance.
    This phase of the remediation is now complete. The auditors 
are currently retesting the ending fiscal year 2006 balances, 
and we are optimistic, based on the work we have performed, 
that this audit will confirm the propriety of our undelivered 
orders balance, clear the qualification on the ending fiscal 
year 2006 balances, setting the stage for regaining an 
unqualified audit opinion on all financial statements this 
fiscal year.
    In summary, implementing a core financial system, 
establishing and operating under a new chart of accounts, and 
reorganizing financial services operations are never easy 
undertakings. Doing them in the same fiscal year created a 
major management challenge for the Department. Decisions to 
implement these initiatives were made with the best of 
intentions, and, while we did not fully anticipate all the 
challenges that we encountered, the Department's response to 
these challenges has been aggressive, effective, and has 
positioned us for improved financial management.
    Successful completion of these actions would not have been 
possible without a strong partnership with the Office of 
Inspector General and without the outstanding dedication and 
professionalism of the entire CFO community.
    We look forward to regaining our unqualified audit opinion 
this fiscal year and restoring financial management credibility 
with our customers and our stakeholders.
    This concludes my opening statement, and I would be pleased 
to respond to any questions you or the subcommittee may have, 
sir.
    [The prepared statement of Mr. Campbell follows:]
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    Mr. Towns. Thank you very much, Mr. Campbell.

                  STATEMENT OF WILLIAM MAHARAY

    Mr. Maharay. Mr. Chairman and members of the subcommittee, 
I am pleased to be here at your request to testify on issues 
associated with the 2005 and 2006 audits of the Department of 
Energy's financial statements. Over the years, the Office of 
Inspector General has conducted and overseen a number of 
reviews of the accounting and financial operations of the 
Department, addressing issues such as accounting information 
systems, financial statement reporting, and remediation 
efforts.
    Prior to 2005, as Mr. Campbell has indicated, the agency 
received unqualified audit opinions on its financial 
statements. This changed when the Department embarked on a mid-
year implementation of a new accounting system known as STARS. 
The Department undertook the system development effort during a 
time when it was also reorganizing its financial services 
organization. The reorganization resulted in the consolidation 
of financial recording and reporting processes previously 
performed at many separate locations. The centralization caused 
a significant loss of skilled personnel and changed the manner 
in which the Department's accounting system interfaced with its 
major contractors and ancillary systems.
    Because of concerns with completing these major initiatives 
simultaneously, my office performed two pre-implementation 
reviews of STARS. The first of these reviews identified a 
number of personnel and internal control issues that increased 
the likelihood the Department would not be prepared to launch a 
fully capable system as scheduled in October 2004. Based upon 
our review and other factors, the Department decided to delay 
implementation until mid-year April 2005.
    The second pre-implementation review completed by my office 
in January 2005 cautioned, ``the planned mid-year 
implementation of STARS poses special challenges that could 
impact successful deployment of the system.'' In particular, we 
noted: one, two separate accounting systems would have to be 
used to produce the consolidated financial systems; two, 
accelerated reporting schedule would provide only a limited 
time to correct implementation problems; and, three, the burden 
of auditing two separate systems would severely stress both 
accounting and auditing resources.
    The Department decided to move forward with the mid-year 
implementation in April 2005. Soon thereafter, our audit work 
revealed a significant number of issues in the new system and 
accounting operations. In particular, the audit identified 
issues with data conversion and with developing new accounting 
processes and reports. These problems detracted from the 
ability of the accounting staff to complete routine accounting 
reconciliations and impacted the ability of Department 
officials to monitor and control their budgets.
    Despite significant effort by senior leadership, financial 
managers, and staff, the Department was unable to correct many 
of these problems by year-end. Consequently, the independent 
public accounting firm employed by the Office of the Inspector 
General issued a disclaimer of opinion on the Department's 2005 
financial statements and reported a material weakness in 
financial management and reporting controls.
    A previously identified reportable condition on 
unclassified information and security systems continued from 
prior years.
    Given the extent and significance of the problems 
identified, we initiated a series of reviews in January 2006, 
to determine whether the Department's planned corrective action 
would address critical financial management weaknesses. Our 
review found problems with timing and completeness to plan 
corrective actions, recording of obligations, and completing 
key reconciliations.
    The Office of Chief Financial Officer agreed with our 
suggestion of realigning resources and refocused its efforts on 
financial management issues.
    When conducting our 2006 audit of the agency's balance 
sheet, we found the Department had made significant progress in 
addressing deficiencies that surfaced in the prior year. 
However, actions needed on a number of issues associated with 
obligations and undelivered orders had not been completed, 
leading to a material weakness in internal controls and a 
qualified opinion on the 2006 audit.
    Additionally, problems with unclassified system security 
continued, and a new reportable condition related to 
performance measure was identified.
    Since the issuance of our 2006 financial statement audit, 
we have coordinated with the Department and have begun another 
focused review on actions to remediate problems associated with 
obligation on undelivered orders. Should this effort be 
successful and no new material weaknesses emerge, the 
Department would be in a position to obtain an unqualified 
opinion on the 2007 audit.
    In summary, we believe that strong financial management is 
essential to the Department. Based upon our experience, the 
Department's senior leadership, to include both the Secretary 
and the Deputy Secretary, is committed to maintaining strong 
controls and has been fully invested in resolving weaknesses. 
We will continue to assist in that effort, as we have in the 
past, by devoting a significant portion of our resources to 
providing independent assessments of the accounting and 
financial management operation of the Department.
    Thank you, Mr. Chairman and members of the subcommittee. 
That concludes my statement.
    [The prepared statement of Mr. Maharay follows:]
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    Mr. Towns. Thank you very much.
    Mr. Norquist.

                  STATEMENT OF DAVID NORQUIST

    Mr. Norquist. Thank you, Chairman Towns, Ranking Member 
Bilbray, and members of the subcommittee for this opportunity 
to testify before you today on the results of the fiscal year 
2006 financial audit of the Department of Homeland Security.
    I also want to thank you for House Resolution 134. Your 
statement of support and recognition for the DHS work force is 
greatly appreciated.
    Regarding the audit, DHS received a disclaimer of opinion 
on its fiscal year 2005 and 2006 financial statement. Secretary 
Chertoff and I are committed to correcting this and to 
achieving the intended outcome of the Department of Homeland 
Security Financial Accountability Act. To this end, the 
Department has put into place corrective action plans to 
improve our financial management process and to address 
material weakness conditions such as those involving inter-
agency and inter-departmental balances.
    Looking back, substantial progress was achieved in our 2006 
financial statement audit. Two components, U.S. Customs and 
Border Protection and the Federal Law Enforcement Training 
Center, received favorable audit outcomes. CBP obtained an 
unqualified opinion on its financial statement, and FLETC 
obtained an unqualified opinion on its first ever balance sheet 
audit.
    Significant progress has also been made in reducing 
conditions that comprise the Department's material weakness 
structure. For example, most significantly, U.S. Immigration 
and Customs Enforcement eliminated five of its seven component 
level material weakness conditions.
    In 2005, our auditors had identified inter-agency and 
inter-departmental accounting as a material weakness condition. 
The Department made progress on this front in 2006, eliminating 
inter-agency balances as an auditor-identified weakness.
    We are proud of this progress, but much remains to be done. 
When I testified before this committee in September, I outlined 
a series of initiatives I intended to implement over the next 
year. I am pleased to report to you today that these efforts 
are well underway. I will focus on one that is of particular 
relevance to the audit.
    We discussed creating a Department-wide corrective action 
plan to address the material weaknesses. That is done. Mr. 
Chairman, I brought you a copy of it, as well. This is the 
Internal Control Over Financial Reporting Playbook that 
outlines our strategy and process to resolve material 
weaknesses and build management assurances. Many of our 
material weaknesses were inherited and they are longstanding 
challenges. These challenges will not be solved in a single 
step, but the ICOFR Playbook details the path forward through 
near and long-term fixes.
    But we are not stopping at simply fixing what the auditor 
finds. Our Playbook has two tracks. The first track includes 
corrective actions for weaknesses identified by the auditors, 
such as fund balance with Treasury or inter-governmental 
balances. But the Playbook also includes a second track, where 
we examine and test processes where no weakness was 
identified--this is often called the A-123 process--because our 
management needs to make affirmative assurances that the 
controls are effective, not simply noting that the auditors 
couldn't find anything.
    I appreciate the support we have received from our Office 
of the Inspector General as we developed the Playbook. Through 
performance audits, they have provided timely feedback on our 
corrective action plans, and I look forward to their continued 
independent advice and essential cooperation.
    DHS has made progress since our last hearing, and we are on 
track to make more progress this year, as well.
    I appreciate the support we have received from the 
Congress, and particularly this subcommittee. Thank you for 
your leadership and your continued support for the Department 
of Homeland Security.
    [The prepared statement of Mr. Norquist follows:]
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    Mr. Towns. Thank you very much, Mr. Norquist.
    Mr. Taylor.

                   STATEMENT OF JAMES TAYLOR

    Mr. Taylor. Thank you, Chairman Towns, Mr. Bilbray, I am 
Jim Taylor. I am the Deputy IG at Homeland Security, and I 
appreciate the opportunity to discuss today the status of 
financial management at DHS and efforts to implement the 
Department of Homeland Security Financial Accountability Act.
    The Office of the Inspector General partners with the 
Secretary of Homeland Security and his executive staff to 
ensure that the Department accomplishes its mission in the most 
effective, efficient, and economic manner possible. Our goal is 
to provide independent, objective information and identify 
issues and opportunities for improvements in financial 
management and other areas.
    Strong financial management and accountability are 
essential to the achievement of DHS' mission. The 
Accountability Act recognizes this and has very specific 
requirements with respect to internal controls over financial 
reporting, by requiring the Secretary to include in DHS' 
performance and accountability report an assertion of internal 
control over financial reporting.
    DHS met this requirement in both 2005 and 2006, with the 
Secretary asserting that the Department was unable to provide 
reasonable assurance that internal control over financial 
reporting was effective.
    The act further requires the Secretary to include an audit 
opinion on the Department's internal controls over financial 
reporting in DHS' accountability report beginning in fiscal 
year 2006. The Department met this requirement, as well, with 
the Inspector General issuing a disclaimer opinion on the audit 
of the Department's internal control of financial reporting.
    To promote internal control improvements, the Office of the 
Inspector General has gone beyond simply issuing these 
opinions. Working closely with the CFO Office, we have 
conducted a series of performance audits that focus on the 
Department's corrective action plans to address internal 
control weaknesses. Our objective was to measure the 
Department's progress in preparing well-developed corrective 
action plans to support internal control improvements.
    We provided recommendations to the CFO to strengthen these 
plans as they were being developed. We will continue with this 
effort in 2007.
    For 2006, the financial management within the Department 
continued to falter, however. The department was, again, able 
to receive an opinion on its financial statements, and 10 
material weaknesses were recorded for the 3rd straight year. 
KPMG, under contract with the Office of the Inspector General, 
issued a disclaimer of opinion. The reasons for this disclaimer 
included management at the Coast Guard and TSA were unable to 
represent that their balance sheets, as of September 30, 2006, 
were fairly stated in conformity with U.S. generally accepted 
accounting principles. The office of the CFO, ICE, and FEMA 
were unable to support the accuracy of certain accounts, and 
the DHS' Office of Financial Management was unable to reconcile 
inter-governmental transactions and balances with other Federal 
trading partners totaling approximately $3.5 billion in 2006 
and $1.5 billion in 2005.
    The Department's 10 material weaknesses ranged from 
financial management oversight and reporting at the Department 
level to controls surrounding the recording of individual 
account balances within DHS bureaus.
    Our four performance audits reports issued between July 
2006, and February 2007, assessed the effectiveness of DHS' 
corrective action plans to address internal controls 
weaknesses. These audits focused on the corrective action plans 
at Department level, as well as at the Coast Guard and ICE, 
given their importance to the overall success of the 
Department.
    We identified weaknesses related to financial management 
oversight and financial reporting relating primarily to 
resource capabilities within the Office of the CFO at Coast 
Guard, whose activities impact virtually every one of DHS' 
material weaknesses. Our primary recommendations are for the 
Coast Guard to improve its corrective action plans by 
performing a thorough root cause analysis of weaknesses and 
develop a detailed list of tasks and milestones based upon this 
analysis.
    A positive development in 2006 was at the Immigration and 
Customs Enforcement. ICE began its corrective action planning 
process early and was able to close out 37 of 49 weaknesses 
identified during the 2005 financial statement audit, including 
material weaknesses relating to fund balance at Treasury. It is 
also evident that senior leadership at ICE are actively engaged 
in developing overall financial management strategy, corrective 
action plans, and developing systems to monitor overall 
internal control improvements.
    Additionally, ICE senior leadership has set a positive tone 
for financial management improvements and actively monitors 
progress. However, the Federal Protection Service and ICE have 
encountered problems during the financial management transition 
that they are still working to resolve. In addition to 
inadequate funding, poor administrative support for FPS has 
been a transition to DHS.
    In October 2006, it was reported the FPS was not paying 
invoices for its contract guard services nationwide in a timely 
manner resulted in a violation of the Prompt Payment Act, 
largely due to systems problems. Of the 25,557 invoices paid 
between October 1, 2004, and November 2005, 88 percent were not 
paid within 30 days, as required by the Prompt Payment Act. 
This resulted in over $1.2 million in interest penalties. This 
is largely due to problems of transition from the GSA financial 
management system to the ICE Federal financial management 
system.
    In conclusion, Mr. Chairman, we feel that there has 
recently been significant progress at DHS under the CFO's 
leadership, particularly in developing strategies and the 
Playbook with specific milestones to improve financial 
management throughout the Department. The CFO has initiated 
efforts to address staffing and skills limitations and 
identified a process to maintain senior management focus on 
achieving the milestones identified. However, the Department 
has not realized the fruits of these efforts to date, and it 
remains largely at the same place in terms of financial 
management as it was when it was first created, with financial 
systems and processes so in need of corrective actions that we 
cannot rely on the information they produce. It will take years 
of focused effort and committed resources to successfully 
address these issues.
    We intend to continue taking a corrective and engaged 
approach in collaboration with the CFO to monitor the financial 
management improvement efforts, and we look forward to working 
with the Department and the Secretary, as well as with 
Congress.
    Mr. Chairman, this concludes my prepared remarks. I would 
be happy to answer any questions you or the subcommittee may 
have. Thank you.
    [The prepared statement of Mr. Taylor follows:]
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    Mr. Towns. Thank you very much, Mr. Taylor.
    Let me begin. I pose this question to both DOE and DHS. 
After DOE received a disclaimer of opinion in its 2005 
financial statements, the Secretary and Deputy Secretary noted 
that the agency's financial problems were not solely related to 
the inefficiencies at the CFO level, but rather it resulted 
from the Department-wide inefficiencies. Would you both agree 
with that assessment? In other words, would you agree that a 
system-wide effort is necessary to direct the financial 
management?
    Mr. Campbell. Sir, I think, as I recall, the Secretary said 
that it was the responsibility of the entire leadership team to 
participate in the resolution of this significant management 
challenge that was presented as a result of audited financial 
statements, and we have been doing that religiously for the 
last year and a half. This is a subject at the Secretary's 
leadership meetings every other week in terms of briefing the 
senior leadership team on our progress.
    Part of the reason why this is a broader responsibility 
than just the CFOs is the resources across the Department of 
Energy report through the Assistant Secretarial organizations, 
and therefore there is a line responsibility from the Assistant 
Secretaries to those field offices and those resources, and, if 
you will, a dotted line from the CFO to the field CFOs.
    I think that the reason we have been as successful in 
making the progress we have is because everyone has 
participated in their various roles in our remediation efforts.
    Mr. Maharay. I don't disagree with a thing Mr. Campbell 
said, but let me give some background information. When we 
issued our disclaimer, we indicated that the reporting system 
the Department used to consolidate information was not 
sufficient to allow us to state the accounts were properly 
stated; however, historically the Department has had a strong 
financial management system, particularly using contractors 
reporting into the Department's system. Throughout our audit 
work those accounting system contractor systems reporting into 
the Department's general ledger system, we have found basically 
no problems with those.
    So it is basically a top level reporting problem that needs 
to be solved, and I believe the Department is presently doing 
that.
    Mr. Norquist. Mr. Chairman, I completely agree that this is 
not solely at the CFO level. In fact, if you attempt to only 
address it at that level you won't be successful.
    Our experience has been, for example, that ICE, which was 
very successful last year, Assistant Secretary Julie Myers, the 
head of the entire organization, took a very active leadership 
role, supported her CFO, but recognized that to eliminate the 
weaknesses she needed the participation of all of the different 
parts.
    Likewise, as we put together our corrective action plans, 
we reached out to have all the components put together. I mean, 
there are assets in here. It is not simply reporting financial 
transactions handled by a CFO. There is the value of assets, 
there is operations, supplies, things that are managed and run 
by other parts of the Department. It is, after all, the 
Department's financial statement, not simply the CFO's. So only 
by reaching out and including that broader organization and 
getting that strong senior leadership support can you be 
successful in this area, so I think you are exactly right on 
this.
    Mr. Taylor. Mr. Chairman, I have been on both sides of 
this. I spent most of my career on the CFO side at different 
departments and agencies. The places where you are most 
successful, the leadership is at the top. The CFO cannot 
succeed in making the changes required to get clean audit 
opinions, to implement financial systems, without the direct 
support and very vocal support of senior management, so I 
totally agree.
    Mr. Towns. Mr. Norquist, you mentioned the corrective 
action plan. What does that really entail?
    Mr. Norquist. The corrective action plan, to begin with an 
effective corrective action plan you go back to identify what 
is the root cause. One of the signs of an ineffective 
corrective action plan is they simply take the specific 
incident the auditor found and said we are going to fix that. 
So what we did to build it was we had workshops and we said 
what is the underlying reason. You know, it is like if you find 
that someone comes in and says there are bees in your attic and 
you just kill the 10 bees, you are not going to be surprised 
that they are back. You have to find the nest. You have to go 
after the root cause of the problem.
    So you go through that, and then you say what do we need to 
fix. Are there policies that are missing? Do people need to be 
hired and trained? Does the system not record the data at the 
right level? In order to be effective, the corrective action 
plan has to clearly lay out who is going to do what by when, 
and so you have milestones, you have accountable officials, and 
then behind it you have a senior leader who expects to know on 
a regular basis where you stand on that corrective action plan 
so they can help by holding people accountable.
    I think those are the key components. What we have is we 
have laid out our corrective action plan to address the 
material weaknesses identified by the auditors, laid out the 
milestones we intend to follow, as well as the actions we are 
going to take where they are beyond where the material 
weaknesses are to be able to satisfy that requirement for 
management assurance that the controls are effective.
    Mr. Towns. Thank you very much.
    I yield to Mr. Bilbray.
    Mr. Bilbray. Thank you, Mr. Chairman.
    Mr. Chairman, I think the one thing we can work together on 
this issue, and it is huge, but we can agree that this is a 
problem that has been around a long time. It seems like no 
matter what the party affiliation of the executive branch, it 
is a problem that we confront.
    Gentlemen, in all fairness, you know, as a former mayor I 
look at this and pretty well figure people would be going to 
jail in California with the kind of reports I have seen come 
down, but then, again, as a mayor I didn't have 500 prima 
donnas running around Capital Hill worried more about votes 
than balancing the budget, and we weren't exchanging the 
executive branch every few years just to keep the system 
moving.
    In all fairness, I think that the challenge really runs a 
lot deeper than any of us really understand. The Founding 
Fathers developed a separate and conflicting process, and now 
we start understanding more why they didn't want us to have a 
whole lot of money to shift around. I think it has become 
obvious.
    How long have you guys been with your departments?
    Mr. Campbell. I have been with the Department of Energy for 
29 years, sir.
    Mr. Maharay. For 28 years, sir.
    Mr. Norquist. I was confirmed in June of last year.
    Mr. Taylor. I have been Deputy IG at DHS for a year and a 
half. I spent 20 years at FEMA earlier in my career.
    Mr. Bilbray. OK. Well, you are on the borderline. You and 
Norquist get over. The rest of you are going to line up on the 
gallows.
    Mr. Norquist. In that case, I just got there, sir. 
[Laughter.]
    Mr. Bilbray. The issue really comes down to a little word 
that you use, and that is accountability. Raising degree of 
concern, raising the urgency, holding people accountable, that 
really does matter. I guess it really starts with us here on 
this subcommittee to get to the committee and take it to 
Congress. It matters. It damn well matters.
    I think that we all agree that we don't want to go around 
the world setting the rest of the world free and then enslaving 
our children to a debt. We don't want to ask our children to 
have to decide between feeding their children or throwing us 
out into the cold when we are senior citizens.
    How do we make the system more accountable, though, under 
the Civil Service structure that we have? What is the ability 
at your level or below you, let alone above you, to make people 
more accountable? Let's just say how do we initiate a 
sensitivity program to the fact that the budget really does 
matter and expenditure accountability really is an important 
thing?
    Mr. Norquist. I think there are a number of ways----
    Mr. Bilbray. The guy who doesn't have job security yet.
    Mr. Norquist. A couple of ways. The first is in performance 
standards. One of the effective things to do is put specific 
accomplishments in people's performance standards so when their 
job is up for review, when they are looking at what sort of 
bonus or whether rewards or compensations, it is specifically 
addressed. Did they, in fact, accomplish the goals that were 
laid out for them? I think that is absolutely essential.
    The other one is people have to be trained to understand 
what they are accountable for. In DHS, for example, one of the 
initiatives we started was a training program for every new 
hire there in financial management, so whether you are hired by 
ICE or CVP or the Coast Guard, we had a class this week--it was 
the first one--where we are going to take all those new hires 
in DC and we are training them this week, and one of the things 
we are covering is fiscal law and internal controls. Everyone 
out there who calls themselves a member of the financial 
community should recognize a potential Anti-Deficiency Act 
violation, should recognize a breakdown in controls, internal 
controls, and should understand it is up to them to stand up 
and flag it.
    Often the types of weaknesses you are after is because 
somebody who came in who was properly trained looks at a 
process and says this doesn't seem to match with what I was 
trained to do and raises the alarm. That is what we need to 
make sure. And by training the right folks that we have to look 
for that, we can increase our ability to enforce the rules and 
to make sure people are accountable for how they spend 
taxpayers' money.
    Mr. Bilbray. Does that accountability have the ability to 
go down through the system? I know the Commandant, we can nail 
the Commandant of the Coast Guard, but when it comes down to 
it, how far down can he then make accountability and is 
everyone down the line basically vulnerable to repercussions? 
Or is there a threshold we would reach at mid-management that 
the defense system, basically the Civil Service system, is 
protecting not just good, hard-working people, but also those 
that should be held accountable?
    Mr. Taylor. There is absolutely some of that, but there is 
the ability, if you have defined the requirements, to hold 
people accountable at much lower levels, rather than saying the 
accountability is only at the Commandant level or at the 
Secretarial level or the CFO level, that you have components 
and you have managers who need to accept responsibility for 
their piece of the activity.
    I think it goes beyond that, though, sir. I think that 
management has to recognize that financial management, itself, 
and managing the fiduciary, taking care of your fiduciary 
responsibilities is not a CFO function. It is a management 
function. Every manager who runs every program should be 
directly responsible and accountable. That is when things start 
changing.
    Mr. Bilbray. I appreciate that. You guys know where the 
term decimation came from?
    Mr. Norquist. No, sir.
    Mr. Maharay. No, sir.
    Mr. Bilbray. Anybody a history major?
    Mr. Norquist. Kill off 1 in 10? Is that it?
    Mr. Bilbray. That is it.
    Mr. Norquist. If they lose a battle?
    Mr. Bilbray. Actually, if they turn it around or if they 
didn't show bravery, if they did not do their job, 1 in 10 was 
chosen by lot and then the other 9 beat him to death. I am not 
proposing that for bureaucracy, but, looking at this debt, it 
may be one of those things. Rome had to do it to save 
themselves from the invasion by Hannibal.
    We may be wanting to save our grandchildren from the debt. 
I will just tell you that we really need to have a degree of 
urgency brought right down to the rank and file troops to 
understand they have a vested interest in this.
    In city government and county government you tend to start 
laying people off when you reach these kind of reports. We 
haven't done that at the Federal Government, and maybe that is 
one of those things we need to talk about is actually a fiscal 
decimation, 1 in 10 down the line.
    Thank you very much. On that bright subject, I will yield 
back.
    Mr. Towns. Let me talk about information security then. 
Last year we saw in the Department of Veteran Affairs where a 
laptop computer and hard drive containing sensitive data was 
stolen from an employee's home. Security is also a financial 
management issue, because you need to guarantee that your 
systems are protected against tampering and limit access to 
financial records. You know, from a financial management 
perspective, what steps have been taken to advance security, 
data security?
    Mr. Maharay. Let me talk from the Department of Energy's 
standpoint about what the Office of the Inspector General has 
reported on. We have identified information security as a 
continuing, reportable condition or weakness at the Department 
of Energy. We have found problems in terms of passwords being 
easily guessed, we found problems in terms of patchwork, in 
terms of security patchworks not being installed, we have found 
problems in terms of contingent planning and access.
    The Department is moving forward, from what we can see, in 
terms of strengthening its process, but it is a long way. As it 
implements enhanced controls, people get smarter and smarter on 
how to thwart those controls, so this is a continuing challenge 
for the Department of Energy.
    Mr. Campbell. I would agree with that.
    Mr. Norquist. I don't have the percentages, but I will 
provide them for the record, but our CIO Committee has done a 
strong job in improving the certification of our systems. We 
also have regular meetings where I and the CIO for the 
Department will get together with the components' CFO and CIO 
and discuss the audit findings, what their corrective actions 
are. The Under Secretary for Management attends and helps 
emphasize the importance of resolving this.
    One of the points that Mr. Walker raised and I think is 
correct, as well, here is that we have to be aware of the 
differences between ourselves and the private sector. Well, the 
auditors may latch on to the ability of whether or not you have 
a weakness to somebody affecting your financial statement, no 
one is going to doctor our financial statements so they can 
sell our stock short on the market.
    That is not why they are going to try and break in. So we 
shouldn't just fix a weakness with that label on it, because, 
while that is a symptom of the problem, that is not the 
underlying root cause and that is not the weakness we are 
trying to prevent. We are trying to prevent fraud, we are 
trying to prevent waste, prevent abuse. There are other systems 
they would want to get to.
    So the solution has to address the overall control and the 
different systems they can get to, not simply the ones the 
auditor found, so we are making that a priority as we go 
through these, to make sure we are getting to the root cause 
and addressing the potential implications of any weakness in 
addressing those.
    I will provide you the percentage for the record, but our 
CIO has made a strong emphasis on this area and in 
strengthening system security.
    [The information referred to follows:]
    [GRAPHIC] [TIFF OMITTED] 37001.080
    
    Mr. Towns. Any additional steps?
    Mr. Maharay. Additional steps? There is a process in terms 
of the IT security called C and A, creditation and 
accountability. This is a systematic process by which you go 
and you evaluate your IT systems, and we have found 
deficiencies in the way the Department of Energy has 
implemented, and I suspect that all agencies need to go through 
the systematic process to enhance its IT security.
    Mr. Towns. Any other comments?
    Mr. Taylor. Yes, Mr. Chairman. At DHS our Inspector General 
considers information security so seriously that we have an 
office under the Assistant IG just for IT audits, so we have 35 
people. Their only function is to do IT reviews within the 
Department.
    Information technology is a material weakness throughout 
the Department, not just for financial management, but across 
the board. We do think that certification and accreditation 
process at DHS has taken strides forward and we think they are 
making progress, but to date we think there is a lot of 
vulnerability within the Department that we need to address.
    Mr. Campbell. I would just add that the certification and 
accreditation process that we have employed in our CFO systems 
has been strong. We have put in a tremendous amount of work to 
make sure that those systems are secure, and we have reported 
to our CIO that we have completed all of that effort as it 
relates to the CFO systems.
    Mr. Towns. What steps can be taken by the Department to 
reduce the amount of interest that the Government pays on 
delinquent payments?
    Mr. Campbell. Let me try first. Actually, our experience 
there has been pretty good. We are pretty close to what OMB's 
metric is, which is 98 percent of payments on time. With every 
metric we have to be careful to make sure that, in achieving 
the metric, we haven't spent more money to get payments made on 
time than the benefit of getting payments made on time. That 
said, I think the answer is more effective systems, more 
effective approval of invoices by the contracting officers. It 
is an area where we struggled initially when we implemented our 
new system, and we have made monumental improvement from that 
point forward. So I think it is a combination of good systems 
and a good system of approvals and good coordination back and 
forth between the contracting organizations and the financial 
management organizations and program organizations.
    Mr. Towns. Any other comments?
    Mr. Norquist. One of the things that is happening during 
that time window is the contracting officer technical 
representative is validating, before you make the payment, that 
the Government did, in fact, get the services that it ordered 
in order to make sure that we are only paying the contractor 
what they are entitled to.
    So part of making sure you are not late on the payment is 
having a well-defined process that moves efficiently so that 
you don't want to end up telling the contracting officer to 
hurry it up, because their job is to protect the taxpayer. That 
is an important internal control. You want to give them enough 
time to do it, but have an efficient enough process that once 
they are done you can still make the payment on time. So it is 
a balance you are trying to strike, and the only way to 
effectively do that is try and automate or make a more 
standardized process.
    You will see, when an organization goes through change, 
they will frequently have a problem in this area because they 
won't want to make a payment necessarily improperly if they can 
avoid it, and they take more of an interest payment penalty. 
When they have the process down, you should see that decline, 
you should see the timeliness of the payments improve and the 
penalties decline, as well.
    Mr. Bilbray. But don't we have a problem with Homeland 
Security of not being reimbursed by our own people?
    Mr. Norquist. There was some challenge. I believe this 
related to----
    Mr. Bilbray. Security.
    Mr. Norquist [continuing]. The Federal Protective Service, 
which works on a reimbursable basis.
    Mr. Bilbray. Yes.
    Mr. Norquist. So it depends on payments from others. If 
they don't have the documentation that the other organization 
has ordered and paid for the service, they can't easily go 
ahead and make payment. I don't know that they were late on 
making payments to DHS. I am not familiar with----
    Mr. Bilbray. I heard they were late and that was causing 
them to be then having to pay interest, and it was all 
basically within our internal operations, though I know you 
guys are all separate. But the problem was that Homeland 
Security wasn't getting paid by the other guys for services 
provided, and then have to basically hang out, pay interest 
based on the fact that somebody else wasn't reimbursing them 
for the services provided.
    Mr. Norquist. I am not familiar with that, Mr. Chairman. 
What I do know is that when they changed the business process, 
trying to make sure you have all the documentation to validate, 
yes, we reserved the service, yes, this is in accordance with 
the contract, and yes, the customer has the money, they moved 
slower than we would like them to. They have improved that.
    They have taken steps, for example, centralized the receipt 
of contractor invoices so all the bills coming in for payment 
come in to one control place, which makes it much more 
efficient in paying them, and to handle things electronically 
rather than moving stacks of paper. So I know ICE is working to 
make progress and to centralize those things, but the 
transition was a challenge.
    I think one of the things you will find from the testimony 
is organizations going through changes, reorganizations, new 
financial systems, run into a challenge, and it is the matter 
of addressing and implementing corrective actions to fix those 
that right the ship. But those are always a point of risk, and 
so you have to be attentive when you have an organization 
either being transferred or going through a change, to look for 
these types of problems.
    Mr. Bilbray. I appreciate your effort to save trees.
    Mr. Towns. Thank you very much.
    Let me thank all the witnesses for coming today and sharing 
with us. We appreciate that.
    At this point this subcommittee is adjourned.
    [Whereupon, at 4:35 p.m., the subcommittee was adjourned.]

                                 
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