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