    [House Hearing, 111 Congress]
    [From the U.S. Government Publishing Office]

                       REVIEW OF THE INDEPENDENT AUDIT OF
                    THE LABOR DEPARTMENT'S FISCAL YEAR 2010
                       CONSOLIDATED FINANCIAL STATEMENTS

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

                                    HEARING

                                   before the

                            SUBCOMMITTEE ON HEALTH,
                         EMPLOYMENT, LABOR AND PENSIONS

                                  COMMITTEE ON
                              EDUCATION AND LABOR

                         U.S. House of Representatives

                         ONE HUNDRED ELEVENTH CONGRESS

                                 SECOND SESSION

                                   __________

                HEARING HELD IN WASHINGTON, DC, DECEMBER 7, 2010

                                   __________

                               Serial No. 111-77

                                   __________

          Printed for the use of the Committee on Education and Labor

                           Available on the Internet:
          http://www.gpoaccess.gov/congress/house/education/index.html
                        COMMITTEE ON EDUCATION AND LABOR

                      GEORGE MILLER, California, Chairman

    Dale E. Kildee, Michigan, Vice       John Kline, Minnesota,
        Chairman                           Senior Republican Member
    Donald M. Payne, New Jersey          Thomas E. Petri, Wisconsin
    Robert E. Andrews, New Jersey        Howard P. ``Buck'' McKeon,
    Robert C. ``Bobby'' Scott, Virginia      California
    Lynn C. Woolsey, California          Peter Hoekstra, Michigan
    Ruben Hinojosa, Texas                Michael N. Castle, Delaware
    Carolyn McCarthy, New York           Vernon J. Ehlers, Michigan
    John F. Tierney, Massachusetts       Judy Biggert, Illinois
    Dennis J. Kucinich, Ohio             Todd Russell Platts, Pennsylvania
    David Wu, Oregon                     Joe Wilson, South Carolina
    Rush D. Holt, New Jersey             Cathy McMorris Rodgers, Washington
    Susan A. Davis, California           Tom Price, Georgia
    Raul M. Grijalva, Arizona            Rob Bishop, Utah
    Timothy H. Bishop, New York          Brett Guthrie, Kentucky
    Joe Sestak, Pennsylvania             Bill Cassidy, Louisiana
    David Loebsack, Iowa                 Tom McClintock, California
    Mazie Hirono, Hawaii                 Duncan Hunter, California
    Jason Altmire, Pennsylvania          David P. Roe, Tennessee
    Phil Hare, Illinois                  Glenn Thompson, Pennsylvania
    Yvette D. Clarke, New York           [Vacant]
    Joe Courtney, Connecticut
    Carol Shea-Porter, New Hampshire
    Marcia L. Fudge, Ohio
    Jared Polis, Colorado
    Paul Tonko, New York
    Pedro R. Pierluisi, Puerto Rico
    Gregorio Kilili Camacho Sablan,
        Northern Mariana Islands
    Dina Titus, Nevada
    Judy Chu, California

                         Mark Zuckerman, Staff Director
                    Barrett Karr, Republican Staff Director

             SUBCOMMITTEE ON HEALTH, EMPLOYMENT, LABOR AND PENSIONS

                    ROBERT E. ANDREWS, New Jersey, Chairman

    David Wu, Oregon                     Tom Price, Geogia,
    Phil Hare, Illinois                    Ranking Minority Member
    John F. Tierney, Massachusetts       John Kline, Minnesota
    Dennis J. Kucinich, Ohio             Howard P. ``Buck'' McKeon,
    Marcia L. Fudge, Ohio                    California
    Dale E. Kildee, Michigan             Joe Wilson, South Carolina
    Carolyn McCarthy, New York           Brett Guthrie, Kentucky
    Rush D. Holt, New Jersey             Tom McClintock, California
    Joe Sestak, Pennsylvania             Duncan Hunter, California
    David Loebsack, Iowa                 David P. Roe, Tennessee
    Yvette D. Clarke, New York
    Joe Courtney, Connecticut
                                C O N T E N T S

                                  ----------
                                                                       Page

    Hearing held on December 7, 2010.................................     1

    Statement of Members:
        Andrews, Hon. Robert E., Chairman, Subcommittee on Health,
          Employment, Labor and Pensions.............................     1
            Additional submission: independent auditors' report......    22
        Roe, Hon. Phil, Republican member, Subcommittee on Health,
          Employment, Labor and Pensions.............................     2
            Prepared statement of....................................     3

    Statement of Witnesses:
        Lewis, Elliot P., Assistant Inspector General for Audit,
          Office of Inspector General, U.S. Department of Labor......     5
            Prepared statement of....................................     7
        Taylor, James L., Chief Financial Officer, U.S. Department of
          Labor......................................................    10
            Prepared statement of....................................    13

                       REVIEW OF THE INDEPENDENT AUDIT OF
                    THE LABOR DEPARTMENT'S FISCAL YEAR 2010
                       CONSOLIDATED FINANCIAL STATEMENTS

                                  ----------

                           Tuesday, December 7, 2010

                         U.S. House of Representatives

             Subcommittee on Health, Employment, Labor and Pensions

                        Committee on Education and Labor

                                 Washington, DC

                                  ----------

        The subcommittee met, pursuant to call, at 2:00 p.m., in
    room 2175, Rayburn House Office Building, Hon. Robert Andrews
    [chairman of the subcommittee] presiding.
        Present: Representatives Andrews, Tierney, Kucinich, Fudge,
    Kildee, and Roe.
        Staff Present: Aaron Albright, Press Secretary; Ali Al
    Falahi, Staff Assistant, Tylease Alli, Hearing Clerk; Jose
    Garza, Deputy General Counsel; David Hartzler, Systems
    Administrator; Ryan Holden, Senior Investigator; Broderick
    Johnson, Staff Assistant; Sadie Marshall, Chief Clerk; Melissa
    Salmanowitz, Press Secretary; James Schroll, Junior Legislative
    Associate, Labor; Michele Varnhagen, Labor Policy Director;
    Matt Walker, Policy Advisor, Subcommittee on Health,
    Employment, Labor and Pensions; Michael Zola, Chief
    Investigative Counsel; Kirk Boyle, Minority General Counsel; Ed
    Gilroy, Minority Director of Workforce Policy; Ryan Kearney,
    Minority Legislative Assistant; Brian Newell, Minority Press
    Secretary; Molly McLaughlin Salmi, Minority Deputy Director of
    Workforce Policy; Ken Serafin, Minority Workforce Policy
    Counsel; and Linda Stevens, Minority Chief Clerk/Assistant to
    the General Counsel.
        Chairman Andrews. Ladies and gentlemen, the subcommittee
    will come to order. Good afternoon. I would like to thank my
    colleagues for attending and our colleagues from the United
    States Department of Labor and the IG's Office for being with
    us. This hearing has a very narrow purpose, but it is one that
    is very important. Under House rule 11, clause 2, subclause O,
    when a department under our jurisdiction is unable to have its
    audit completed for a given fiscal year, the House rules
    require us to call a hearing to figure out exactly why that is.
        And that is the purpose of today's hearing. I think it is
    an excellent example of transparency, and although it rarely
    happens, I am glad it is in our rules and I am very glad Mr.
    Lewis and Mr. Taylor are with us today.
        A quorum being present, the hearing of the committee will
    come to order. I would note for the record that the chairman
    will yield time for the purpose of asking questions, unless the
    person asking for time makes a specific request otherwise.
        Here is the history of our situation here. In 2008, the
    prior administration recognized that the financial accounting
    system of the Department of Labor was unduly cumbersome and
    needed to be modernized. And so a process began and a contract
    was awarded to modernize that system. It took a while to get
    things rolling. My understanding is the system went live in
    January of 2010. By the end of the 2010 fiscal year, which
    would have been September 30th of 2010, when it was time to
    audit the 2010 fiscal year for the Department, the documents
    and materials necessary for the IG's contractor to conduct that
    audit were not available, and that was because of
    implementation delays in the new financial accounting system.
        So the question that is before the subcommittee today is,
    what was the cause of that delay, number one? And number two,
    are we in a position where that is to be fixed? It is my
    understanding in being briefed for the hearing that the answer
    to the second question is apparently yes; that when the 2011
    fiscal year ends on September 30, 2011, that the Department's
    records will be fully auditable, we are assuming. But that
    would be, again, subject to this rule in the future if there
    are any further questions.
        So again, the purpose of the hearing is to simply look at
    the question of why the materials necessary to complete the
    audit were not available to the inspector general's contractor
    for the 2010 fiscal year.
        And at this time, I would like to yield to my friend, the
    gentleman from Tennessee, Dr. Roe, for any opening statement he
    would like to make.
        Mr. Roe. Thank you, Mr. Chairman. Let me begin by thanking
    our distinguished panel for appearing today. As the notice
    announcing our hearing states, we will be reviewing an
    independent audit of the Labor Department's financial records.
    This is the Department with roughly a $16 billion budget, 30
    agencies, and more than 17,000 employees. A great deal of time
    and resources were invested in this audit, and for good reason.
    Addressing the country's fiscal challenges will not be possible
    until every dollar spent by the Federal Government is accounted
    for.
        Aside from our public responsibilities to be good stewards
    of our taxpayers' money, this year's audit is significant for
    several additional reasons. For starters, this will be the
    first time separate financial and performance audits are
    presented to Congress. I hope this will provide a more thorough
    examination of the Department of Labor's financial ledger, and
    we look forward to reviewing the performance audit early next
    year.
        This is also our first look at the Department's new
    financial management system. This new system was implemented at
    the beginning of the year to better streamline and enhance the
    accountability of the Department's finances, as stated by the
    chairman.
        We need to ask whether this has delivered the taxpayers the
    results that they deserve. The answer to our question may be
    connected to the final reason why this audit is so significant.
    For the first time in more than a dozen years, the Department
    failed to achieve a clean audit. KPMG, the independent firm
    tasked by the IG's Office with performing the audit, identified
    four material weaknesses in the Department's finances. Just one
    material weakness is significant to trigger a failing grade.
    Witnesses cite the audit included a lack of adequate controls
    over financial reporting and budgetary accounting, a failure to
    properly control access to financial and support systems, were
    these weaknesses a result of a failure of the new financial
    system or were they the result of a failure of the Department's
    leadership? Regardless of the cause, the result is still the
    same.
        We do not know if the Department's financial records are
    accurate, and this is unacceptable. When an organization
    replaces a system responsible for tracking tens of billions of
    dollars, errors are not uncommon. However, it is the
    responsibility of that organization's leadership to anticipate
    potential problems and put in place a plan that preserves
    transparency and accountability through the transition process.
    That responsibility is all more critical when dealing with
    taxpayer dollars. We need to learn what actions the Labor
    Department's management team has undertaken to fix these
    weaknesses and what it plans to do in the future to ensure that
    this does not happen again.
        These are important questions, and that is why I am
    disappointed an important voice in this discussion will not be
    heard today, the voice of KPMG. It is regrettable that members
    will be unable to hear from the technical experts who spent the
    past year looking over the books in the Department of Labor.
    Not only is this regrettable, it is a missed opportunity for
    the committee.
        As we speak, the Federal Government is borrowing roughly 40
    cents for every dollar it spends, and our national debt is
    quickly approaching $14 trillion. The American people have
    demanded we restore fiscal responsibility to the Federal
    Government. Each Federal agency must demonstrate sensible,
    efficient, and transparent management of the resources it has
    been entrusted with. That is the significance of our hearing
    today and the responsibility we must fulfill in the weeks and
    months ahead.
        I am looking forward to hearing from our witnesses and
    exploring matters in the future. And I will say, Mr. Chairman,
    that this is my seventh audit that I have been involved in, six
    as a city commissioner and a city mayor, and I never one time
    attended an audit where the auditors weren't there to answer
    questions. So with that, I will yield back the balance of my
    time.
        [The prepared statement of Mr. Roe follows:]

            Prepared Statement of Hon. Phil Roe, Republican Member,
             Subcommittee on Health, Employment, Labor and Pensions

        Thank you Mr. Chairman. Let me begin by thanking our distinguished
    panel for appearing today.
        As the notice announcing our hearing states, we will be reviewing
    an independent audit of the Labor Department's financial records. This
    is a department with a roughly $16 billion budget, 30 agencies, and
    more than 17,000 employees. A great deal of time and resources were
    invested in this audit and for good reason: addressing the country's
    fiscal challenges will not be possible until every dollar spent by the
    federal government is accounted for.
        Aside from our public responsibility to be good stewards of the
    taxpayers' money, this year's audit is significant for several
    additional reasons. For starters, this will be the first time separate
    financial and performance audits are presented to Congress. I hope this
    will provide a more thorough examination of the Labor Department's
    financial ledger, and we look forward to reviewing the performance
    audit early next year.
        This is also our first look at the department's new financial
    management system. This new system was implemented at the beginning of
    the year to better streamline and enhance the accountability of the
    department's finances. We need to ask whether this has delivered the
    results taxpayers deserve.
        The answer to our question may be connected to the final reason why
    this audit is so significant. For the first time in more than a dozen
    years the department failed to achieve a clean audit. KPMG, the
    independent firm tasked by the Inspector General's office with
    performing the audit, identified four material weaknesses in the
    department's finances. Just one material weakness is sufficient to
    trigger a failing grade.
        Weaknesses cited in the audit include a lack of adequate controls
    over financial reporting and budgetary accounting, and a failure to
    properly control access to financial and support systems. Were these
    weaknesses the result of a failure in the new financial system? Or were
    they the result of a failure of the department's leadership? Regardless
    of the cause, the result is still the same: we do not know if the
    department's financial records are accurate. This is unacceptable.
        When an organization replaces a system responsible for tracking
    tens of billions of dollars, errors are not uncommon. However, it is
    the responsibility of the organization's leadership to anticipate
    potential problems and to put in place a plan that preserves
    transparency and accountability through the transition process. That
    responsibility is all the more critical when dealing with taxpayer
    dollars. We need to learn what actions the Labor Department's
    management team has undertaken to fix these weaknesses and what it
    plans to do in the future to ensure this doesn't happen again.
        These are important questions, and that is why I am disappointed an
    important voice in this discussion will not be heard today, the voice
    of KPMG. It is regrettable that members will be unable to hear from the
    technical experts who spent the past year looking over the books of the
    Department of Labor. Not only is it regrettable, it is a missed
    opportunity for the committee.
        As we speak, the federal government is borrowing roughly 40 cents
    for every dollar it spends and our national debt is quickly approaching
    $14 trillion. The American people have demanded we restore fiscal
    responsibility in the federal government. Each federal agency must
    demonstrate sensible, efficient, and transparent management of the
    resources it has been entrusted it with. That is the significance of
    our hearing today and the responsibility we must fulfill in the weeks
    and months ahead.
        I look forward to hearing from our witnesses and exploring these
    matters further. Thank you Mr. Chairman and I yield back.
                                     ______

        Chairman Andrews. I thank the gentleman.
        I would note for the record that under the rules of the
    committee, the minority was certainly free to invite anyone as
    its witness. And my understanding is there was not a formal
    invitation extended to the KPMG witnesses; is that correct?
        Mr. Roe. I think there was, but I think they had a
    scheduling difficulty.
        Chairman Andrews. Well, I want the record to reflect that
    the majority in no way discouraged or is opposed to that
    witness being present. The witness simply isn't present.
    Pursuant to committee rule 7(c), all members may submit an
    opening statement in writing which will be made a part of the
    permanent record.
        At this time, I am going to begin by introducing the
    witnesses that we have with us today.
        Mr. Elliot P. Lewis is the assistant inspector general for
    audit of the Office of the Inspector General at the United
    States Department of Labor, and he is responsible for all
    audits within the Department. Prior to his appointment as AIGA,
    he served as the deputy assistant inspector general for audit.
    Mr. Lewis is a CPA in the State of South Carolina and received
    his B.S. from the University of South Carolina. Welcome, Mr.
    Lewis, to the committee.
        Mr. James L. Taylor was confirmed by the United States
    Senate as the chief financial officer for the Department of
    Labor on June 22, 2010. Prior to this position he served as
    deputy inspector general for the Department of Homeland
    Security, where he assisted the inspector general in managing
    over 600 auditors, inspectors and investigators. He received
    his B.A. from Old Dominion University and an M.P.A. from the
    University of Delaware. Welcome, Mr. Taylor. We are happy to
    have you with us.
        I think you are both veterans of Capitol Hill hearings and
    know that our practice is that your written statements, without
    objection, will be accepted as part of the written record. We
    would ask you to offer us a 5-minute summary of your written
    testimony, beginning with Mr. Lewis. At the conclusion of those
    summaries, we will go to questions from the members of the
    subcommittee.
        I am sure you know the light system; that green means go,
    yellow means speed up, unlike when you are driving a car, and
    red means come to a screeching halt. I know we certainly would
    want you to finish your comments.
        Mr. Lewis, we begin with you. Welcome to the subcommittee.

    STATEMENT OF ELLIOTT P. LEWIS, ASSISTANT INSPECTOR GENERAL FOR
        THE OFFICE OF AUDIT, OFFICE OF INSPECTOR GENERAL, U.S.
                          DEPARTMENT OF LABOR

        Mr. Lewis. Thank you, Mr. Chairman. Mr. Chairman and
    members of the subcommittee, thank you for the opportunity to
    discuss the audit of the U.S. Department of Labor's Fiscal Year
    2010 Consolidated Financial Statements. The independent public
    accounting firm, KPMG, conducted the audit under a contract
    with the Office of the Inspector General.
        My name is Elliot Lewis, and I am the assistant inspector
    general for audit at the Department of Labor. As you know, the
    OIG is an independent agency within the Department, and the
    views expressed in my testimony are based on the independent
    findings and recommendations of the audit work and are not
    intended to reflect the Department's position.
        The CFO Act requires the OIG to audit and report on the
    Department's consolidated financial statements. OMB requires
    the audit be completed by November 15th each year. To enable
    the auditors to meet this deadline, the Department must provide
    significant financial information and supporting documentation
    throughout the year. Therefore, an inability on the part of the
    Department to produce the necessary information in a timely
    manner affects the successful completion of the audit and
    results in a less than favorable opinion for the Department.
        As I will detail in my testimony, Mr. Chairman, for the
    most part it was the Department's inability to provide timely
    and accurate financial data that resulted in the Department
    receiving a disclaimer of opinion on its 2010 consolidated
    financial statements. The Department was unable to provide this
    data due to a host of system migration, integration and
    configuration problems that occurred when it implemented a new
    financial system. It is important to note that prior to this,
    the Department had received an unqualified opinion on its
    annual financial statements since 1997.
        In the mid-2000s the Department decided that its financial
    system, DOLAR$, was outdated and no longer able to efficiently
    and effectively meet the Department's financial management
    requirements. In July 2008, the Department contracted to obtain
    a new system, which it named the New Core Financial System, or
    New Core. The Department planned a 15-month implementation
    period that would conclude at the end of fiscal year 2009. Upon
    implementation in January 2010, the Department encountered many
    unforeseen complications that in some cases it is still working
    to address today.
        It is important to highlight the Department experienced
    much turnover in key leadership positions in the Office of the
    Chief Financial Officer during the time it was planning,
    developing, and implementing New Core. This included the
    retirement of its two top senior executives shortly after New
    Core was implemented.
        The OIG contracted with KPMG to create a pre-implementation
    audit of New Core prior to its original scheduled deployment in
    October 2009. During this audit we issued two alert memoranda
    to inform the Department of issues requiring immediate
    attention: training of staff prior to implementation of the new
    system and timely completion of transaction workbooks to be
    used to record financial activity occurring after DOLAR$ was
    shut down before New Core became available.
        The audit identified 11 implementation risks to future
    integrity and availability of the Department's financial data
    and recommended the Department take these risks into
    consideration when making its decision to implement New Core.
    The Department disagreed with many of our reported results and
    went forward with the implementation.
        Following implementation, our attention turned to preparing
    for the consolidated financial statement audit. We issued
    several more alert memoranda regarding our concerns that
    problems resulting from the transition to New Core were
    preventing the Department from providing KPMG with the
    necessary information to complete the audit. While the
    Department worked to meet its goal of producing auditable
    financial statements, it continued to experience difficulties
    and ultimately was unable to do so, resulting in the disclaimer
    of opinion.
        As stated in the audit report, the Department's ability to
    assure the accuracy and completeness of its financial statement
    balances and provide data necessary for audit testing was
    hindered by data migration, integration, reconciliation, and
    configuration issues. The audit report contained 24 specific
    recommendations related to findings that contributed to the
    disclaimer of opinion. The Department generally concurred with
    the recommendations and noted that many of them corresponded
    with corrective actions planned or already taken.
        Going forward, the most important financial management
    issue facing the Department is the need to correct the New Core
    implementation issues in order to either reissue corrected
    financial statements or provide accurate and complete
    information for the auditors to audit the opening balances for
    2011. The Department indicated that it plans to reissue its
    2010 consolidated financial statements in early 2011. The OIG
    will continue to monitor the Department's actions.
        There is much to be done, but the challenges are not
    insurmountable if appropriate resources are timely dedicated to
    the necessary corrective actions.
        Thank you, Mr. Chairman, for the opportunity to present the
    results of the audit. I would be pleased to answer any
    questions that you or other members of the subcommittee may
    have.
        Chairman Andrews. Mr. Lewis, thank you for your service and
    for your testimony.
        [The prepared statement of Mr. Lewis follows:]

    Prepared Statement of Elliot P. Lewis, Assistant Inspector General for
          Audit, Office of Inspector General, U.S. Department of Labor

        Mr. Chairman and Members of the Subcommittee, thank you for the
    opportunity to discuss the audit of the U.S. Department of Labor's
    Fiscal Year (FY) 2010 Consolidated Financial Statements. The
    independent public accounting firm KPMG LLP conducted the audit under a
    contract with the Office of Inspector General (OIG). My name is Elliot
    Lewis and I am the Assistant Inspector General for Audit for the
    Department of Labor. As you know, the OIG is an independent agency
    within the Department of Labor, and the views expressed in my testimony
    are based on the independent findings and recommendations of the audit
    work and are not intended to reflect the Department's position.
    Background
        The Chief Financial Officers Act of 1990, P.L. 101-576, requires
    the OIG to audit and report on the Department's consolidated financial
    statements in accordance with generally accepted auditing standards,
    Government Auditing Standards, and OMB guidance. OMB requires that the
    audit be completed by November 15 of each year. This audit is of such
    complexity that, in order to meet this deadline and complete all steps
    necessary to render an opinion on the Consolidated Financial
    Statements, the Department must provide significant financial
    information and supporting documentation throughout the year.
    Therefore, an inability on the part of the Department to produce the
    necessary information in a timely manner affects the successful
    completion of the audit and results in a less than favorable opinion
    for the Department.
        As I will detail in my testimony, Mr. Chairman, for the most part,
    it was the Department's inability to provide timely and accurate
    financial data that resulted in the Department receiving a Disclaimer
    of Opinion on its FY 2010 Consolidated Financial Statements. This was
    the result of a host of system migration, integration, and
    configuration problems that occurred when the Department implemented a
    new financial management system. It is important to note that prior to
    this, the Department had received an unqualified opinion on its annual
    consolidated financial statements since 1997.
        By way of background, Mr. Chairman, audits of the Department's
    financial statements are important as they provide an independent
    assessment of whether the Department's financial position and condition
    are fairly stated, so that policy makers can rely upon them to make
    informed decisions. The financial statement audit also includes reports
    on internal controls over financial reporting and compliance with
    certain laws, regulations, contracts, and grant agreements.
        The audit report includes a formal opinion on the financial
    position of the entity in conformance with generally accepted
    accounting principles (GAAP). An auditor may express four types of
    opinions in their report: unqualified, qualified, adverse, or
    disclaimer.
        Unqualified opinion: issued when the financial statements presented
    are free from material misstatements and are presented fairly in
    accordance with GAAP.
        Qualified opinion: issued when the financial statements, except for
    specific matters which do not comply with GAAP, are presented fairly.
        Adverse opinion: issued when the auditor determines that the
    financial statements presented are materially misstated and when
    considered as a whole, do not conform with GAAP.
        Disclaimer of opinion: issued when the auditor could not complete
    all of the necessary work to render an opinion because of a scope
    limitation(s). A disclaimer of opinion does not indicate the financial
    statements were materially misstated or did not conform with GAAP.
    However, since under those circumstances the auditors are not able to
    complete all of the necessary audit work, it also means that additional
    problems that have not yet been identified and reported to the
    Department may exist.
    System migration history
        The Department of Labor comprises 30 agencies and more than 17,000
    employees throughout the United States. Prior to January 2010, the
    Department's financial management functions, processes, and activities
    related to its core mission responsibilities were centered on the
    Department of Labor Accounting and Related Systems (DOLAR$) mainframe
    accounting system. DOLAR$ had been in service since 1989.
        In the mid-2000's, the Department decided that DOLAR$ was outdated
    and no longer able to efficiently and effectively meet the Department's
    financial management requirements. As a result, the Department began
    planning to migrate from DOLAR$ to a new financial management system.
    Through the implementation of this new system, the Department planned
    to automate previously manual processes and establish more effective
    internal controls.
        After several failed attempts to procure a new system, in July
    2008, the Department contracted with an external third-party shared
    service provider. The shared service provider offered the Department a
    pre-configured environment, with customized modules and sub-modules to
    meet the requirements of the Department's business processes. The
    Department named this new system the New Core Financial Management
    System (NCFMS).
        The Department planned a 15-month implementation period that would
    conclude at the end of FY 2009. The Department planned to shut down
    DOLAR$ and start up NCFMS in October 2009.
        Originally, NCFMS was scheduled to be fully operational by October
    14, 2009. However, the Department postponed the deployment of the new
    system until January 14, 2010. Upon implementation, the Department
    encountered many unforeseen complications in the implementation of the
    new system that, in some cases, they are still working to address
    today.
        It is important to highlight that the Department experienced much
    turnover in key leadership positions in the Office of the Chief
    Financial Officer during the time it was planning, developing, and
    implementing NCFMS. This included the retirement of its top two senior
    executives shortly after NCFMS was implemented.
    System pre-implementation audit
        The OIG contracted with KPMG to conduct a pre-implementation audit
    of NCFMS prior to its original scheduled deployment in October 2009.
    During the audit, we issued an Alert Memorandum to the then-Acting
    Chief Financial Officer (CFO) in August 2009, expressing concerns that
    staff be adequately trained prior to implementation of the new system.
    In particular, we noted that the conversion to NCFMS would have the
    greatest impact on 400 users of DOLAR$. Ensuring that these users
    received appropriate training before conversion would be critical to
    the success of the conversion. At that time, 93 of the 400 DOLAR$ users
    had not completed required training in any of the available training
    modules. In addition, none of the 5,125 secondary users--primarily
    those individuals involved with sub-systems such as Procurement,
    Grants, and Purchase Cards--had completed the required training.
        The then-Acting CFO concurred with our assessment of the importance
    of training users in the new system and the importance of this training
    to the success of the implementation. She indicated that her office was
    starting an intensive hands-on training phase that would run through
    the planned October 2009 ``Go Live'' date, and beyond. Despite the
    Department's efforts, lack of sufficient user training resulted in many
    data entry errors in the new system.
        In September 2009, we issued another Alert Memorandum raising
    concerns about the timely completion of the NCFMS Transactions
    Workbook. These workbooks were electronic spreadsheets to be used to
    record financial transactions during the period of time when DOLAR$ was
    expected to be unavailable and when NCFMS would become available--
    referred to as the Cut-Over period. The then-Acting CFO responded that
    the Department had delayed implementation of NCFMS until January 2010,
    and the Cut-Over plan would be reevaluated. As the auditors were unable
    to test much transactional data from NCFMS, we could not determine the
    extent to which cut-over issues caused problems.
        The NCFMS pre-implementation audit report was issued in final on
    January 13, 2010, but we had provided the Department a draft containing
    our audit results on December 18, 2009. The report identified 11
    implementation risks related to the design and execution of user
    acceptance testing, batch interface testing, real-time integration
    testing, and mock data conversion. The report concluded that these
    issues presented risks to the future integrity and availability of the
    Department's financial data.
        We recommended that the Department take into consideration the
    risks we had identified when making its decision to implement NCFMS.
    The then-Acting CFO disagreed with many of our reported results, and
    the Department went forward with implementing NCFMS on January 14,
    2010.
    Audit of Consolidated Financial Statements
        Following implementation, our attention turned to preparing for the
    Consolidated Financial Statements audit. In March 2010, we issued an
    Alert Memorandum expressing our concern that the Department would be
    unable to issue financial statements in sufficient time to allow KPMG
    to complete its audit by November 15, 2010, as required by OMB.
    Specifically, we raised concerns that the Department had not adequately
    verified that all data had migrated correctly, and that it had not
    developed procedures for certain key financial reporting processes.
        We followed up in April highlighting certain key dates that the
    Department needed to meet in order to allow KPMG sufficient time to
    complete the necessary audit procedures. We noted that failure to meet
    these dates with complete and accurate information would critically
    impact KPMG's ability to complete its audit procedures and issue an
    opinion.
        In July, the newly confirmed CFO indicated that the Department had
    encountered NCFMS implementation problems with accounting codes,
    configuration and migration of transaction level data, and ensuring
    transactions and general ledger account balances properly mapped to and
    supported the Department's various internal and external reports. The
    CFO stated that the complexity and volume of these transactions and
    mapping efforts had been underestimated, that much progress had been
    made, and that they were making up time after the initial delays. The
    CFO indicated that the initial conversion level errors and delays, once
    corrected and validated, would not result in continued delays in
    generating required reports.
        Despite the Department's efforts, it was unable to meet KPMG's
    deadline for submitting second quarter financial data for audit
    testing. In June, we informed the Department that KPMG may not be able
    to complete a full scope audit by the OMB reporting deadline, which
    could result in the issuance of a disclaimer of an opinion.
        In response, the CFO reported that his office was working
    diligently to resolve the NCFMS implementation issues. He indicated
    that additional staff had been assigned to this high priority effort,
    with a primary focus on the production of timely, accurate, and
    complete annual financial statements for FY 2010 in time to allow the
    completion of the audit work.
        While the Department worked to meet its goal of producing auditable
    financial statements, it continued to experience difficulties and
    ultimately was unable to do so. On August 18, we informed the
    Department that, although audit work would continue until November 15,
    it was probable that the audit would result in the issuance of a
    disclaimer of an opinion, which in fact occurred.
    Specific reasons for disclaimer of opinion
        The audit report contained 24 specific recommendations related to
    findings that contributed to the disclaimer of opinion. The Department
    generally concurred with the recommendations and noted that many of the
    recommendations corresponded with corrective actions planned or already
    taken. The Department's ability to assure the accuracy and completeness
    of its financial statement balances and to provide data necessary for
    audit testing was hindered by data migration, integration with other
    systems, reconciliation, and system configuration issues as follows:
                Data Migration:
        The Department experienced numerous issues with the migration of
    data to the new system. For example:
        Certain internal agency codes and general ledger accounts in DOLAR$
    were incorrectly cross-walked to NCFMS during migration, causing data
    errors at the fund and general ledger account level.
        Certain transaction identifiers were not properly captured in NCFMS
    when migrated from DOLAR$. For example, certain obligations were not
    properly classified between direct and reimbursable. In addition,
    various issues related to the identification and coding of intra-
    governmental transactions by trading partner, including incomplete
    vendor information, were encountered as a result of data migration
    errors. Because of these issues, the Department was not able to provide
    representations as to whether the intra-governmental balances presented
    in the financial statements were materially correct.
                Integration with Other Systems
        Interfaces between the NCFMS and subsystems were not properly
    working subsequent to the implementation. For example, grant expense
    information from the grant sub-system was not transferred to NCFMS in a
    complete manner. In addition, certain grant obligations were not
    transmitted properly from NCFMS to a third-party service provider in
    order for grantees to drawdown funds. The Department subsequently
    developed and implemented certain ``work-arounds'' to address these
    issues.
        Data from Treasury and the Department's own Integrated Federal
    Employees' Compensation System could not be uploaded into NCFMS. As a
    result, the Department was unable to record the majority of
    transactions related to the Unemployment Trust Fund and the Federal
    Employees' Compensation Act timely. Additionally, once recorded,
    significant differences existed between the data uploaded into NCFMS
    and these subsystems.
                Reconciliation
        The Department was unable to complete in a timely manner certain
    account reconciliations as of September 30. For example, the Department
    was unable to reconcile its disbursement and collection activity with
    the U.S. Department of the Treasury's accounts. The Department was also
    unable to reconcile its underlying supporting data for certain
    Unemployment Trust Fund balances to the general ledger in a timely
    manner. Additionally, significant differences between the NCFMS
    property module and the general ledger existed.
                System Configuration
        NCFMS was not configured properly to record certain transactions in
    compliance with the United States Standard General Ledger (USSGL). As a
    result, the Department implemented manual processes, such as
    adjustments directly to the financial statement, to correct these
    errors. As of September 30, 2010, NCFMS was still not properly
    configured to record such transactions in accordance with the U.S.
    Standard General Ledger.
    Going forward--what remains to be done
        The most important issue facing the Department is the need to
    correct NCFMS implementation issues and related control deficiencies in
    order to either reissue corrected financial statements or provide
    accurate and complete information for the auditors to audit opening FY
    2011 balances.
        The Department has indicated that it plans to reissue its FY 2010
    Consolidated Financial Statements in early 2011. Among the actions the
    Department still needs to take in order to produce the financial
    statements are:
        promptly resolving the classification issues related to intra-
    governmental balances,
        ensuring that any remaining interface errors are promptly resolved
    and that all necessary financial reports are developed and available to
    the program agencies in the Department,
        completing all necessary initial reconciliations of module and
    subsystem data to the NCFMS general ledger and ensuring that routine
    reconciliation controls are implemented and performed, and
        reviewing significant transactions for USSGL compliance and make
    any necessary corrections.
        The OIG will continue to monitor the Department's actions to
    correct the problems that resulted in the disclaimer of opinion. There
    is much to be done, but the challenges are not insurmountable if
    appropriate resources are timely dedicated to all the necessary
    corrective actions.
        Thank you, Mr. Chairman, for the opportunity to present the results
    of the audit. I would be pleased to answer any questions that you or
    other members of the Subcommittee may have.
                                     ______

        Chairman Andrews. Mr. Taylor, welcome to the committee.

      STATEMENT OF JAMES L. TAYLOR, CHIEF FINANCIAL OFFICER, U.S.
                          DEPARTMENT OF LABOR

        Mr. Taylor. Thank you, Mr. Chairman and members of the
    subcommittee. I appreciate the opportunity to come before you
    to discuss the financial management at the Department of Labor.
    And specifically, I do understand that the purpose of this
    hearing is to understand why the financial statement audit
    opinion for the Department of Labor fell from an unqualified
    opinion, or clean opinion, to a disclaimer. And a qualified
    opinion means that the independent auditors have determined
    that the financial statements fairly represent the position and
    activities of the Department. The disclaimer of opinion the
    Department of Labor received for 2010 means simply that the
    independent auditors could not complete the detailed effort
    required to opine on these statements. It does not necessarily
    mean that they found any statements materially in error.
        In the case of the Department of Labor, this inability to
    complete the audit resulted from our transition to the New Core
    Financial Management System and the issues which arose.
    Irrespective of the cause, the Department's leadership is
    disappointed in this result. The fact that other agencies have
    experienced similar problems when replacing systems and also
    lost a clean audit opinion does not make this experience less
    disappointing. We have already taken steps to overcome these
    problems and we are working every day to bring the Department's
    financial systems into compliance with the highest financial
    standards.
        It is because of this progress that I do intend to resubmit
    our financial statements to the Office of Inspector General
    within the next few months and request they fully audit our
    2010 financial activities and possibly reissue their opinion.
        To better put the financial system's effort in context, the
    Department spent $35 million between 2003 and 2008 in an effort
    to replace an old legacy system which had been in use for over
    two decades. When this previous effort failed, the Department
    awarded a contract for the development and implementation of
    the New Core Financial Management System in July of 2008. The
    Department was able to eliminate much of its risk by
    contracting for a product that was already in use within the
    Federal Government. And since the Department decided to use a
    shared service provider, we do not own any hardware or software
    associated with the implementation or the product. This
    eliminates the need for costly infrastructure maintenance and
    in-house technical resources. It also integrates a number of
    internal feeder systems, including procurement, travel, grants
    management and--procurement, travel, grants management and
    payroll, which produce realtime cross-platform financial data
    and reduces the transaction processing errors that result when
    those systems reconcile manually to the former system.
        New Core took 18 months to implement at an initial cost of
    less than $15 million and an annual operational cost of
    approximately $20 million in program use 2010, and $11 million
    in 2011. The initial ``go live'' date was October 1st, but as
    has been mentioned, the launch was delayed until January 14,
    2010 to provide additional time to train users and continue
    data migration activities.
        The Department had failures during the New Core
    implementation. First, New Core user requirements were
    significantly underestimated during the contract development.
    The initial contract envisioned less than a quarter of the
    users who are now actually interfacing with the system. Having
    significantly underestimated the user base, the original
    contract did not account for the additional need for user
    training, system support from the contractor, and general
    system loading resulting from the more than double the number
    of day-to-day users.
        Second, the new system also brought substantial business
    process changes that were not fully anticipated when the
    contractor was selected. We had dramatically changed how we
    process things like invoicing and travel payments and it is a
    more automated process. But that really impacted a cultural
    change in how the Department does business. And that was a lot
    for the Department, which has been doing the same way of
    business for 20 years, to swallow.
        Third, we have a significant challenge with data migration
    from the old system to the new. This involved the transfer of
    detailed data, some of it decades old, from legacy financial
    computer systems to New Core. For instance, the financial data
    in the Department's legacy financial system was never
    reconciled with the financial data of the procurement system.
    Before being migrated to New Core, this was a task that had to
    be accomplished so that both systems could use the same
    financial information. These migration issues also impacted our
    ability to provide timely and accurate financial reporting.
        Finally, the Department experienced significant turnover
    amongst the senior financial managers, as my colleague has
    already mentioned. The Department lacked a Senate-confirmed
    chief financial officer from January 2009 until I was confirmed
    in late June of this year. The Department career deputy CFO and
    the associate deputy CFO overseeing the implementation both
    retired shortly after the system launched in January 2010,
    leaving the Department without any permanent financial
    management leadership.
        In spite of all these issues I have discussed, it is
    important to note that none of these problems impacted the
    mission of the Department. During 2010 we made a conscious
    decision that the first priority would be in supporting the
    activities of the Department's agencies. We succeeded in that
    objective. The necessary financial activities to provide
    unemployment benefits, job training grants, and support costs
    for workplace and mine safety inspections continued without
    interruption.
        In closing, Mr. Chairman, the challenges which have
    occurred with implementation of the Department's new system are
    unfortunate, and I take responsibility for making sure they are
    overcome in a timely manner. While I was confirmed by the
    Senate in late June, I was detailed for my position as deputy
    IG in the Department of Homeland Security to serve as an
    advisor to the Deputy Secretary of Labor from late October 2009
    to February 2010. And this was in order to assist the
    Department in identifying issues and trying to mitigate the
    problems prior to going live. So, I am very familiar with the
    issues the Department faces.
        In addition to auditing DHS's financial activities
    immediately prior to coming to this position, I was previously
    charged with implementing financial systems as deputy CFO at
    FEMA and the Department of Commerce. While the process at DOL
    has certainly not been a seamless one, I have seen difficult
    implementations at other agencies, and I have no doubt that the
    challenges we have encountered at DOL can and will be overcome.
    Thank you, Mr. Chairman.
        [The prepared statement of Mr. Taylor follows:]

        Prepared Statement of James L. Taylor, Chief Financial Officer,
                            U.S. Department of Labor

        Thank you, Mr. Chairman, Ranking Member Price and Members of the
    Subcommittee. I appreciate the opportunity to come before you today to
    discuss financial management at the Department of Labor (DOL).
    Specifically, I understand this hearing is in response to the
    Department's financial statement audit opinion dropping from an
    unqualified, or clean, opinion to a disclaimer.
        An unqualified opinion means that the financial statements present
    fairly, in all material respects, the financial position, results of
    operations, and cash flows of the audited entity in conformity with
    generally accepted accounting principles, while a disclaimer states
    that the auditor does not express an opinion on the financial
    statements. As the auditors noted, the primary reason for the
    disclaimer was the transition to a new financial management system, and
    the implementation issues which arose during that effort. The
    Department shares the Committee's disappointment in this outcome, and
    we are committed to working with the Office of Inspector General (OIG)
    to identify and resolve the financial audit findings. We have already
    taken many steps to overcome the problems which disrupted our initial
    transition and we continue to work every day to bring the Department's
    financial systems into compliance with the highest accounting
    standards.
        We are currently focused on normalizing financial operations, and
    plan to resubmit our FY 2010 statements within the next few months for
    review by the OIG. We are confident these actions will prove the 2010
    disclaimer a temporary hiccup in what has been, and will again be, a
    long record of unqualified opinions and sound financial management at
    the Department.
        When I was confirmed by the Senate to the position of Chief
    Financial Officer in late June, I knew that my first year on the job
    would be dominated by the challenges of completing the modernization of
    the Department's financial management systems--a process that began and
    was substantially defined by the previous Administration.
        I have worked in the federal financial management community for a
    number of different agencies. I have either implemented or audited the
    implementation of several financial management modernization projects.
    I have found that the complexity of implementing these initiatives
    almost always makes it difficult initially to obtain clean opinions
    from auditors. While the process at DOL has certainly not been a
    seamless one, I have seen difficult implementation problems at other
    agencies and I have no doubt that the challenges we have encountered at
    DOL can and will be overcome.
    Introduction
        The Department spent $35 million between 2003 and 2008 in an effort
    to replace an old financial system which failed to comply with
    applicable statutory and regulatory requirements. When this previous
    effort failed, the Department awarded a contract for the development
    and implementation of the Department's New Core Financial Management
    System (New Core or NCFMS) in July 2008, with a goal of replacing the
    legacy system which had been in use for over two decades. New Core is
    based upon a pre-configured software suite that is commercially
    available. The system generally met agency requirements and was
    preconfigured and pre-integrated to comply with all major Federal
    business processes. The Department was able to eliminate much of its
    risk by contracting for a product that was already in use within the
    Federal government, while also reducing development costs and
    accelerating the timeline for implementation. The Department does not
    own any hardware or software associated with New Core, eliminating the
    need for costly infrastructure, maintenance, and in-house technical
    resources dedicated to system maintenance.
        This system will provide users with a modern set of software tools
    and resources to automate manual processes and produce operational
    efficiencies, and establish, monitor, and enforce more effective
    internal controls to ensure resources were being safeguarded and used
    appropriately. The new system will also allow the Department to more
    readily adapt to new Office of Management and Budget (OMB), Treasury,
    and Congressional requirements, and improve the accuracy and timeliness
    of financial reports. It will also integrate a number of internal,
    independently developed feeder systems, including procurement, travel,
    and grants management systems, producing real-time cross-platform
    financial data and reducing transaction processing errors that resulted
    when those systems were reconciled in the former core accounting
    system.
        New Core took 18 months to implement at an initial cost of less
    than $15 million, and an annual operational cost of approximately $20
    million in program year 2010 and $11 million in program year 2011, and
    would have been in alignment with the recent OMB directive on systems
    modernization. The initial ``go live'' date was October 1, 2009;
    however, the launch was delayed until January 14, 2010, to provide
    additional time to train users and continue data migration activities.
    While this delay was necessary from an operational perspective, it
    added to the growing pains during the transition that led to problems
    for the FY 2010 audit cycle.
        In summary, Labor had failures on a number of fronts including: an
    underestimated user base; a lack of understanding of the substantial
    changes to business processes; and data quality problems. I will go
    into detail on each of these issues that are unfortunately common
    within the Federal space when implementing a financial system. The
    system was not the failure; the identification of system requirements
    and project planning were lacking. But we will overcome the transition
    and be back on track within a year through aggressive corrective
    actions that I have put into place with the support of the Department's
    leadership.
    Underestimated User Base
        New Core user requirements were significantly underestimated during
    contract development. The initial contract envisioned only 300
    transactional users, or those with access to the day-to-day accounting
    system. As of September 2010, we have over 625 users requiring this
    level of access. Further, the Department estimated only 200 users who
    could query the system for reports. As of September 2010, we have over
    1,400 users requiring this level of access. Having significantly
    underestimated the user base, the original contract did not account for
    the additional need for user training, system support from the
    contractor, and general system load resulting from more than double the
    number of day-to-day users contemplated, and seven times the number of
    users requiring financial reports to ensure they are within their
    spending limits in order to run their programs effectively.
    Lack of Understanding of Substantial Business Process Changes
        The new system also brought substantial business process changes
    that were not fully anticipated when the contractor was selected. With
    real-time feedback on errors, automated invoice processing, and other
    enhancements, users were required to learn an entirely new way of
    performing the Department's financial management functions. Career
    staff, who had been performing functions a certain way for decades,
    were required to relearn basic processes and perform their functions in
    an entirely new environment. This change in business practice impacted
    every financial activity performed in the department, from processing
    grants and procurement actions to travel and personnel actions. While
    training in the National Office and regional sites was increased and an
    onsite training room with live system access and onsite support to aid
    individual users was created to address this shortcoming, the
    Department nevertheless had to play catch-up for months following the
    launch of the system as users became accustomed to a new way of
    tracking financial transactions.
        We have also faced challenges adjusting to the more transparent
    internal controls environment that New Core provides. Numerous controls
    are embedded in the new system to prevent improper payments, Anti-
    Deficiency Act violations, fraud, and abuse. In the previous
    environment, these controls were largely performed manually by the
    CFO's office out of the general user's view. Now, real-time funds
    checks performed by New Core create error messages that the user sees
    and transactions will not be processed if the error messages are not
    resolved. These messages are interpreted by the user as system errors
    rather than spending controls because they were never visible to the
    user before. It has taken time for our travel, grants, and procurement
    user communities to become acclimated to seeing and resolving error
    messages related to transaction validation rules. As users realize that
    these are not system errors, we can focus more attention on resolving
    real data migration and system integration issues affecting our system
    and its users.
    Data Quality Challenges
        While working through the issues caused by an expanded user base,
    we have also faced significant challenges with data migration from the
    old system to the new one. This involved the transfer of significant
    amounts of granular data, some of it decades old, from legacy financial
    and feeder systems to a modern system. For instance, the financial data
    in the Department's legacy financial system was never reconciled with
    the financial data in the procurement system. Before being migrated to
    New Core, the contract data had to be reconciled so that both systems
    would use the same financial data. This synchronization required
    enormous manual effort for NCFMS program staff and Department
    contracting staff, and was significantly more time consuming than
    anticipated. This situation was exacerbated with the migration of old
    vendor data, some of which was outdated and included erroneous banking
    data. This had a negative impact on the Department's ability to make
    timely vendor payments. We had to dedicate significant staff resources
    to this effort, as data transfer issues between systems have affected
    day-to-day financial information and hampered operations. These
    migration issues also affected our ability to provide timely and
    accurate financial reporting, both to DOL managers and externally to
    OMB, Treasury, and the audit team. This, in turn, significantly
    contributed to the disclaimed opinion.
        The decision to delay the launch of New Core from October 2009 to
    January 2010 also meant that we operated two accounting systems during
    one fiscal year. Migrating previous fiscal years' data was challenging
    but the numbers were largely static. Migrating ``live'' financial data
    between systems for the same fiscal year was extremely difficult due to
    the inherent fluctuations in the numbers. Transactions initially
    processed in one system had to be reconciled with the new system while
    new transactions were posted for the current period, essentially
    doubling the workload for our staff and creating a significant resource
    burden.
    Consistent Project Management
        The Department experienced significant turnover amongst its senior
    financial managers during most of the system's implementation and post-
    launch phases. The Department lacked a Senate-confirmed Chief Financial
    Officer from January 2009 until my confirmation in June 2010. The
    Department's career Deputy Chief Financial Officer and the Associate
    Deputy Chief Financial Officer overseeing the implementation both
    retired shortly after the system launched in January 2010, leaving the
    Department without any permanent financial management leadership.
    Coming at a critical period in the implementation, this gap in
    leadership led to delays in identifying and resolving some of the
    problems encountered during the startup of the new financial system and
    the business process re-engineering required to adapt DOL's existing
    procedures to the new system.
        In spite of all the issues I have discussed here, it is important
    to note that the implementation issues I have been outlining did not
    impact the mission of the Department. During 2010, we made the
    conscious decision to focus on ensuring the mission was accomplished.
    We succeeded in that objective. The activities necessary to provide
    unemployment benefits, job training grants, support costs for workplace
    and mine safety inspections continued to function. In addition, we have
    made significant progress in addressing all of the challenges outlined
    earlier; and I am pleased to report that in 2011 we will be able to
    provide more accurate financial reporting and support for the
    Department's programs. The Department has nearly reached pre-
    implementation late payment rates and expects to improve operational
    efficiencies in 2011 beyond the benchmarks of the previous system.
    Additional data migration activities have substantially improved
    throughput despite the implementation of system-enforced internal
    controls and segregation of duties. Our issuance of grants, travel
    payments and procurements is consistently performed accurately and
    timely by New Core, nearly eliminating the need for manual workarounds
    previously necessary to release funds due to system integration and
    data migration issues. We continue to work closely with OMB, our
    Inspector General, and our component agencies to resolve remaining
    financial reporting issues and do not expect these issues to have a
    material impact on the FY 2011 financial audit process. In fact, since
    we have made so much progress in resolving the implementation and
    financial reporting issues, it is my intention to resubmit our
    financial statements to the Office of Inspector General within the next
    few months to provide it the opportunity to fully audit our 2010
    financial activities and potentially issue a revised opinion. As
    examples of our progress, New Core is now properly recording all grant
    obligations, costs, and payments. We also had difficulty preparing and
    reconciling the monthly submissions of the Statement of Transactions
    (SF-224) for several months following implementation of NCFMS, an issue
    which has also been resolved as the SF-224 reports are now being
    reconciled on a monthly basis and submitted timely.
        In closing, Mr. Chairman, I have been involved in federal financial
    management for 30 years, both in the CFO and Inspector General
    communities. I've also directed the implementation of new financial
    systems on several occasions. The challenges which have occurred with
    the implementation of the Department's new system are unfortunate and I
    take responsibility for making sure they are overcome in a timely
    manner. The fact that other agencies have experienced similar problems
    when replacing older systems, and also lost their clean audit opinions,
    does not make this experience any less disappointing. However, we are
    confident that this situation is temporary and we remain on the right
    track to regain our clean audit opinion.
        Thank you for your time, and I would be happy to answer any
    questions you may have.
                                     ______

        Chairman Andrews. Thank you, gentlemen, both very much. I
    appreciate it. We will begin with questions. Mr. Taylor, I
    think I heard you say that some time in the next few months the
    Department should be ready to present to the auditing firm
    consolidated financial statements that are auditable; is that
    correct?
        Mr. Taylor. Yes, sir, it is.
        Chairman Andrews. Do we know about when that will be?
        Mr. Taylor. Our goal is to have it by the end of July--end
    of January, I'm sorry.
        Chairman Andrews. January of 2011?
        Mr. Taylor. Yes, sir.
        Chairman Andrews. And although I know you can't assure the
    future, is it your opinion that when fiscal year 2011 closes on
    September 30, 2011, that the statements, the consolidated
    financial statements, will be auditable at that point for 2011?
        Mr. Taylor. I am very comfortable that they will be.
        Chairman Andrews. And Mr. Lewis, I assume it is then your
    agency's decision as to whether to issue a supplemental report
    or not, based upon those new consolidated financial statements?
        Mr. Lewis. That is correct. But we have been working very
    closely with the CFO's Office with the Department on that note,
    and that is exactly what we plan to do. If the Department wants
    to reissue and get a new opinion, we will certainly do that.
        Chairman Andrews. Speaking only for myself, not for the
    other members of the committee, I think it will be a very
    desirable result so that we have your imprimatur on that.
        Let me ask--well, let me ask one other question, Mr. Lewis.
    And I know that because you are dealing with unaudited--with
    really unauditable statements at this point, you really can't
    give a definitive answer. But in the review of the unauditable
    statements that your contractor looked at for fiscal 2010, was
    there any evidence whatsoever of fraud or theft?
        Mr. Lewis. No.
        Chairman Andrews. Was there any evidence of any nefarious
    misconduct that you saw?
        Mr. Lewis. No.
        Chairman Andrews. So am I correct in characterizing this as
    an absence of sufficient information to make a qualified
    audited judgment?
        Mr. Lewis. Correct.
        Chairman Andrews. Mr. Taylor, let me ask you a question
    which is a bit broader, which I think concerns a lot of members
    of the committee. And I do understand that you did not get
    confirmed until June 22nd of 2010, which is nearly 6 months
    after, I guess more than 6 months after the system went live,
    around 6 months, so I am not in any way accusing you when I ask
    these questions. But a taxpayer would certainly wonder the
    following. In July of 2008, long before Secretary Solis took
    office, by the way, in July of 2008 the Department makes a
    decision to implement a new financial management accounting
    system. That system is not yet in a position to produce
    auditable financial statements by November 15th of 2010. Why?
    What happened?
        Mr. Taylor. That is a very legitimate question. The actual
    implementation took 18 months. And 18 months in the Federal
    sphere is actually a very short period of time. And OMB is
    pushing other departments to----
        Chairman Andrews. We may want that sphere to change.
        Mr. Taylor. I totally agree. And other systems I have been
    involved in took years to accomplish the same end. The planning
    for the implementation and the actual cut-over of 18 months is
    actually a very reasonable time frame in my history of doing
    this.
        Chairman Andrews. I will confess to you that my
    governmental experience is at much smaller levels of
    government, county government, and my private sector experience
    is really limited to being an observer, obviously. But I don't
    know many publicly traded companies who can get away with that
    explanation to the shareholders that it will take 18 months to
    implement. As a matter of fact, I think the Securities and
    Exchange Commission would never accept that explanation.
        Again, I am not in targeting these questions at you,
    holding you accountable, because you didn't arrive until June
    of 2010. But what do you think we could do to implement a
    system the next time we do such a thing more expeditiously? I
    mean, why does it take 18 months at a minimum? And my
    understanding is there is no allegation of any software
    malfunction; is that right?
        Mr. Taylor. That is correct.
        Chairman Andrews. It is more a matter of training people
    how to use it and how to do the data entry and what practices
    they should follow; is that right?
        Mr. Taylor. A lot of the time is used up in making sure
    that you undergo the proper training and that the interfaces
    are set up appropriately.
        Chairman Andrews. Are all of the users of the system
    employees or contractors of the Department of Labor, or do
    nonemployees and contractors also use it?
        Mr. Taylor. Employees of the Department of Labor.
        Chairman Andrews. So really everybody who uses this is
    being compensated somehow by the Department?
        Mr. Taylor. Correct.
        Chairman Andrews. And again, I understand this goes back to
    prior to Secretary Solis, and I am not asking this question in
    any kind of partisan method at all, but I must say that
    taxpayers would wonder why it takes so long to implement such a
    thing, and I think it is a lesson we could all learn to avoid
    such a thing. When this amount of money is being handled, you
    know, the possibility that we don't know where it is and what
    it is being spent for, because the system is not auditable, is
    not a very good result.
        Now, on the other side of the coin, it looks to me like you
    have made a lot of progress since June. And I am encouraged to
    hear Mr. Lewis says he will be receiving these reports. And I
    hope that the sequel to this riveting hearing is that a letter
    has been issued by the auditor, which gives a clean audit to
    the Department. We certainly hope that will be the case.
        I thank you, and I would ask Mr. Roe for his questions.
        Mr. Roe. Thank you, Mr. Chairman. And just briefly, a
    couple of questions. The way I understand this is that the IG
    is an independent agency within the Department of Labor,
    correct?
        Mr. Lewis. Correct.
        Mr. Roe. And also in reading your testimony was that you
    didn't feel like you needed--and I agree with you--the
    resources to carry on this audit. And that is why the outside
    firm was--which I think also was a good idea--they had the
    resources. That is why I think it would be very important for
    them to be here.
        Because you just made a statement a minute ago that I have
    to disagree with a little bit, which is you stated that--and
    you may be absolutely right in doing this, but I would be
    reluctant I think to say it--that you didn't see any fraud,
    abuse or anything. If you don't have all the information
    available to you it would be hard, I think, to make that
    statement when the material weaknesses, and that is whatever a
    serious problem is, and I guess that is are you a little bit
    overweight, I am not sure what a serious problem is, a
    definition of that. But a material weakness would be a lack of
    sufficient controls over financial reporting. So you really
    couldn't make that statement if you didn't have those controls,
    could you?
        Mr. Lewis. Well, let me make that more distinctive. In what
    we could look at--because you are right, we were limited; we
    didn't see, which that is different to me than saying there is
    not any there. If I was asked, is there any fraud or
    malfeasance there, I couldn't answer that question. Probably
    even if we had completed the entire audit, I wouldn't be able
    to answer that. To the extent of what we were able to look at,
    we didn't see that in what we were able to look at. But you are
    correct, there was a lot that we could not look at.
        Mr. Roe. Well, it appears to me that we went from an older
    system, the so-called legacy system that you had, and we had
    12--I mean, since 1997 all the audits were fine, and then we
    switched to this new system and all of a sudden there were all
    kinds of findings that didn't allow you to have a clean audit.
    So, I agree that something happened. And I think we need to
    know what that something is, whether, as the chairman said,
    whether it is personnel that are there and so on to clean this
    up. Because I don't--I am not implying there is any intent, I
    am just saying there is no way that you could say there is not,
    that something didn't happen when you don't have information
    there.
        And Mr. Taylor, I appreciate you haven't been on board very
    long, so just a few months. How much did the DOL spend
    initially on the 2010 audit and how much will be spent cleaning
    up this; do you know?
        Mr. Lewis. The normal cost for a year is around $4 million.
    We have spent maybe $400,000 over that at this point because of
    the additional work that had to be done as a result of this. We
    are right now, as we sit here, negotiating with the firm in
    terms of what would be the additional cost to finish and what
    would be the additional cost if we actually reissued the
    statements and reissued the opinion in the middle of the year,
    which we wouldn't have to do.
        Mr. Roe. And those costs were about the same for either
    system, the new automated system or the legacy system you were
    using?
        Mr. Lewis. Yes.
        Mr. Roe. So the cost for auditing were about the same?
        Mr. Lewis. Yeah. The audit cost was comparable this year to
    previous years, had we not run into the problems we did.
        Mr. Roe. And Mr. Taylor, when do you see this being--I know
    the chairman asked these questions--when do you see this being
    brought to fruition when we no longer will have this problem?
        Mr. Taylor. Well, in terms of the problem themselves, many
    of them have already been resolved. The auditors simply have
    not had a chance to come in and reaudit the activity. So we are
    convinced that the operational issues that were identified in
    the audit report, they have been resolved. Day-to-day
    activities in the Department have better internal controls and
    are processing very smoothly.
        In terms of getting the auditors to come in and read and
    look at our work and be able to look at the financial reports
    that we didn't give them the opportunity to do before, by the
    end of January.
        Mr. Roe. The other question is, it is over now, but I would
    have thought when you switched to a new system you might want
    to parallel it the first year to make sure that they balanced
    up. I would have thought when you switched to an entirely new
    system you would have run your old along there at the same
    time. Have you thought of doing that?
        Mr. Taylor. That comes up a lot. And in some IT systems
    that makes sense. But I have done this about 3 or 4 times now
    and never been involved in an activity where we ran parallel
    financial systems, because the financial systems are the
    systems of record. And in order to keep two systems operating
    at the same time for an extended period of time and keep them
    in sync is a very resource-intensive effort and it is really
    difficult to do successfully. In fact, part of the problems we
    have this year was the fact that because we delayed doing the
    implementation until January, that meant the first quarter was
    all on the old system. We did run parallel for the first
    quarter in trying to complete better training and do some other
    things to mitigate the problems going forward. And that posed a
    lot of problems for us that resulted in what you saw here with
    the disclaimer.
        Mr. Roe. Thank you, Mr. Chairman. I yield back.
        Chairman Andrews. I thank the gentleman from Tennessee. The
    chair recognizes the gentleman from Michigan, Mr. Kildee, for
    his questions for 5 minutes.
        Mr. Kildee. Thank you, Mr. Chairman. Mr. Lewis, why was a
    decision made to replace the old accounting system in the year
    in question? Was this an appropriate time to undertake such a
    complex task? And, maybe, also why has that not been replaced
    earlier?
        Mr. Lewis. Well, there had been other efforts to replace
    the system earlier that did not succeed for various reasons,
    lack of funding. But I think it was replaced because it was a
    very old system. Although it was functioning, I think it took
    more work to meet the demands of what is expected from an
    agency or entity, any entity today, in terms of having realtime
    financial information that the old system wasn't capable of
    providing. Although it could eventually comply with what needed
    to be done, it didn't really have the realtime capability to
    provide information. So I think that was an appropriate reason
    for replacing a system that had been around since the mid-
    1980s.
        Mr. Kildee. Mr. Taylor, you had been auditing in various
    agencies. Are there similar problems that you worry about in
    maybe some other agencies of government similar to the problems
    that we found here in the Department of Labor?
        Mr. Taylor. Well, without having direct knowledge of other
    departments, I can tell you that what I have seen in my career
    is that whenever you try to replace a legacy system you run
    into similar problems. I have seen them before, experienced
    them before.
        And in my prior job as deputy IG we were working with the
    Department of Homeland Security so that they could actually
    produce an integrated system. They are working on that at the
    same time on a much grander scale than the Department of Labor,
    but they have the same issues.
        Mr. Kildee. Thank you very much. Thank you, Mr. Chairman.
        Chairman Andrews. I thank the gentleman. The chair is happy
    to recognize the gentlelady from Ohio, Ms. Fudge, for her
    questions for 5 minutes.
        Ms. Fudge. Thank you very much, Mr. Chairman. And thank you
    both. I certainly do thank both the chair and the ranking
    member for asking questions that everyday citizens would ask. I
    think it is very important. I happen to have served actually in
    every level of government from local, county, State, and now
    Federal. And with the exception of the Federal, I have dealt
    with these kinds of issues on a number of occasions. And I
    would say that 18 months really is very good, quite frankly,
    especially when you are dealing with an agency as large as the
    Department of Labor. And people who have been used to a system
    for very long, all of us know that most of us are resistant to
    change, and it is a very difficult process. Clearly, I would
    hope that as you look at the findings, that we would in fact
    have a clean or unqualified audit in the near future.
        And I too am concerned about the fact that our auditor,
    KPMG, as large a company as it is, could not find one person to
    be here today. Certainly timing with us is an issue. It is an
    issue for us sitting here. But to have a company that size that
    has received these kinds of resources from the government, I
    would have to believe that some one person could have shown up
    today. Just in terms of a time frame--and the ranking member
    mentioned this to you as well--do you believe that you are 80
    percent there, 60 percent there? If you could please, Mr.
    Taylor, or Mr. Lewis?
        Mr. Taylor. Well, in terms of performing financial
    reporting on a day-to-day basis, we are there. We can do the
    financial reporting right now with the current--with the new
    system. In terms of providing the extracts, data extracts and
    the information that the auditors need to complete their work
    and the samples, I think we are just about there as well. And I
    think that by the end of January we will definitely be there.
        Ms. Fudge. So then you no longer have the problem of trying
    to transfer data from one system to another. You have complete
    information. All that you need to have right now to get this
    thing 100 percent operational and to be put in a position to
    either file a new report and/or get a clean audit, you are
    saying are there?
        Mr. Taylor. If I could make a clear distinction. In terms
    of being operational, we are 100 percent operational. We are
    supporting the day-to-day activities of the Department as we
    speak. There is no grant, no contract, no personnel action that
    cannot be accomplished in the current system. In terms of
    providing all the information to the auditors that they
    require, I think we are pretty much there now, but I think that
    by the January time frame I think that we will have it all.
        And there will always be issues that arise in any
    operation. But the idea when you are on the audit side, you
    look at materiality. And the question is, materially do you
    have any issues? And right now, materially, I don't think I do
    have any issues.
        Ms. Fudge. And my last question is, so you are the person
    that would be held responsible if in fact by the end of January
    this thing doesn't come out the way it should?
        Mr. Taylor. If I cannot provide the information to the
    auditors by the end of January, yes, I am the one who is
    accountable for that.
        Ms. Fudge. Thank you so much, Mr. Chairman. I yield back.
        Chairman Andrews. I thank the gentlelady. I would ask the
    ranking member if he has any concluding comments.
        Mr. Roe. Just very briefly, again, I agree with
    Congresswoman Fudge that it would have been a lot better, I
    think, had the auditors been here. But you all have been very
    forthright and forthcoming. I think we will know by the end of
    January.
        When will we be able to--in this subcommittee--be able to
    have that information when the auditors have looked, because I
    would like to know that this has been cleared up, that there
    are no findings. When can we expect to find that?
        Mr. Lewis. Well, of course, that will be dependent on
    exactly what the Department provides us and when they provide
    it. But probably within a couple of months after they have
    given us the final clean information and that there are no
    problems with it, that is probably the earliest we would see
    something.
        Mr. Taylor. April time frame, assuming that we meet our
    schedule.
        Mr. Roe. The subcommittee should be able to have findings
    of a clean audit when the auditors have looked at all the data
    that is there, issue a report on whether it is clear or not?
        Mr. Lewis. Correct.
        Mr. Roe. Well, I appreciate you being here, and I thank you
    for your testimony.
        Chairman Andrews. I thank my friend, I thank my colleagues,
    and especially thank the witnesses.
        It occurs to me the committee then has three agenda items
    going forth from today.
        Number one is we would encourage, Mr. Taylor, you and the
    Department to, as you are, expeditiously meet the deadline of
    providing the consolidated statements to the IG.
        Number two, when the IG and its contractor have completed
    their thorough review of those statements, we would be eager to
    receive your conclusions in April or whenever that is.
        And then number three, I think all members of the committee
    are interested in the more generic problem of how we can avoid
    this kind of delay in the future so that we never again have a
    situation, if we can avoid it, where the Labor Department or
    any other department is in a position where there is an
    inability to provide auditable and complete data by the
    deadline.
        And we appreciate, Mr. Taylor, your efforts in solving this
    problem. Mr. Lewis, we appreciate you and your organization
    being very vigilant for the taxpayers and for those who depend
    upon the Department.
        And, without objection, members will have 14 days to submit
    additional materials or questions of the hearing record.
        [An additional submission of Mr. Andrews follows:]

                                    ------

        Chairman Andrews. And, without objection, the hearing is
    adjourned.
        [Whereupon, at 2:41 p.m., the subcommittee was adjourned.]