[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.]

                                 
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