[House Hearing, 112 Congress]
[From the U.S. Government Publishing Office]


 
                 INVESTIGATING FINANCIAL MISMANAGEMENT 
                    AT THE U.S. DEPARTMENT OF LABOR 

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

                                HEARING

                               before the

                        SUBCOMMITTEE ON HEALTH,
                     EMPLOYMENT, LABOR AND PENSIONS

                         COMMITTEE ON EDUCATION
                           AND THE WORKFORCE

                     U.S. House of Representatives

                      ONE HUNDRED TWELFTH CONGRESS

                             FIRST SESSION

                               __________

              HEARING HELD IN WASHINGTON, DC, JUNE 2, 2011

                               __________

                           Serial No. 112-26

                               __________

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                COMMITTEE ON EDUCATION AND THE WORKFORCE

                    JOHN KLINE, Minnesota, Chairman

Thomas E. Petri, Wisconsin           George Miller, California,
Howard P. ``Buck'' McKeon,             Senior Democratic Member
    California                       Dale E. Kildee, Michigan
Judy Biggert, Illinois               Donald M. Payne, New Jersey
Todd Russell Platts, Pennsylvania    Robert E. Andrews, New Jersey
Joe Wilson, South Carolina           Robert C. ``Bobby'' Scott, 
Virginia Foxx, North Carolina            Virginia
Bob Goodlatte, Virginia              Lynn C. Woolsey, California
Duncan Hunter, California            Ruben Hinojosa, Texas
David P. Roe, Tennessee              Carolyn McCarthy, New York
Glenn Thompson, Pennsylvania         John F. Tierney, Massachusetts
Tim Walberg, Michigan                Dennis J. Kucinich, Ohio
Scott DesJarlais, Tennessee          David Wu, Oregon
Richard L. Hanna, New York           Rush D. Holt, New Jersey
Todd Rokita, Indiana                 Susan A. Davis, California
Larry Bucshon, Indiana               Raul M. Grijalva, Arizona
Trey Gowdy, South Carolina           Timothy H. Bishop, New York
Lou Barletta, Pennsylvania           David Loebsack, Iowa
Kristi L. Noem, South Dakota         Mazie K. Hirono, Hawaii
Martha Roby, Alabama
Joseph J. Heck, Nevada
Dennis A. Ross, Florida
Mike Kelly, Pennsylvania

                      Barrett Karr, Staff Director
                 Jody Calemine, Minority Staff Director

         SUBCOMMITTEE ON HEALTH, EMPLOYMENT, LABOR AND PENSIONS

                   DAVID P. ROE, Tennessee, Chairman

Joe Wilson, South Carolina           Robert E. Andrews, New Jersey
Glenn Thompson, Pennsylvania           Ranking Minority Member
Tim Walberg, Michigan                Dennis J. Kucinich, Ohio
Scott DesJarlais, Tennessee          David Loebsack, Iowa
Richard L. Hanna, New York           Dale E. Kildee, Michigan
Todd Rokita, Indiana                 Ruben Hinojosa, Texas
Larry Bucshon, Indiana               Carolyn McCarthy, New York
Lou Barletta, Pennsylvania           John F. Tierney, Massachusetts
Kristi L. Noem, South Dakota         David Wu, Oregon
Martha Roby, Alabama                 Rush D. Holt, New Jersey
Joseph J. Heck, Nevada               Robert C. ``Bobby'' Scott, 
Dennis A. Ross, Florida                  Virginia



























                            C O N T E N T S

                              ----------                              
                                                                   Page

Hearing held on June 2, 2011.....................................     1

Statement of Members:
    Andrews, Hon. Robert E., ranking minority member, 
      Subcommittee on Health, Employment, Labor and Pensions.....    41
    Roe, Hon. David P., Chairman, Subcommittee on Health, 
      Employment, Labor and Pensions.............................     1
        Prepared statement of....................................     3

Statement of Witnesses:
    Flanagan, Heather Koppe, partner, KPMG, LLP..................     9
        Prepared statement of....................................    11
    Lewis, Elliot P., Assistant Inspector General for Audit, 
      Office of Inspector General, U.S. Department of Labor......     6
        Prepared statement of....................................     7
    Taylor, James L., Chief Financial Officer, U.S. Department of 
      Labor......................................................    13
        Prepared statement of....................................    15

Additional Submissions for the Record:
    Mr. Roe:
        Memo, dated May 23, 2011, from Elliot P. Lewis, Assistant 
          Inspector General for Audit, Department of Labor, 
          pertaining to the FY2010 Independent Auditors' Report..    31
        ``Management Assurances,'' dated Nov. 14, 2010, signed by 
          Labor Secretary Solis, et al...........................    33
        ``KPMG Independent Auditors' Report of the Department of 
          Labor's Financial Records for Fiscal Year 2010''.......    35


                        INVESTIGATING FINANCIAL
                          MISMANAGEMENT AT THE
                        U.S. DEPARTMENT OF LABOR

                              ----------                              


                         Thursday, June 2, 2011

                     U.S. House of Representatives

         Subcommittee on Health, Employment, Labor and Pensions

                Committee on Education and the Workforce

                             Washington, DC

                              ----------                              

    The subcommittee met, pursuant to call, at 10:01 a.m., in 
room 2175, Rayburn House Office Building, Hon. Phil Roe 
[chairman of the subcommittee] presiding.
    Present: Representatives Roe, DesJarlais, Noem, Roby, Heck, 
Ross, Andrews, Kildee, Hinojosa, and Wu.
    Also present: Representative Kline.
    Staff present: Andrew Banducci, Professional Staff Member; 
Katherine Bathgate, Press Assistant/New Media Cordinator; Casey 
Buboltz, Coalitions and Member Services Coordinator; Ed Gilroy, 
Director of Workforce Policy; Benjamin Hoog, Legislative 
Assistant; Marvin Kaplan, Professional Staff Member; Barrett 
Karr, Staff Director; Ryan Kearney, Legislative Assistant; 
Krisann Pearce, General Counsel; Molly McLaughlin Salmi, Deputy 
Director of Workforce Policy; Linda Stevens, Chief Clerk/
Assistant to the General Counsel; Alissa Strawcutter, Deputy 
Clerk; Joseph Wheeler, Professional Staff Member; Kate Ahlgren, 
Minority Investigative Counsel; Aaron Albright, Minority 
Communications Director for Labor; Tylease Alli, Minority 
Clerk; Daniel Brown, Minority Junior Legislative Assistant; 
Jody Calemine, Minority Staff Director; Brian Levin, Minority 
New Media Press Assistant; Megan O'Reilly, Minority General 
Counsel; Julie Peller, Minority Deputy Staff Director; Meredith 
Regine, Minority Policy Associate, Labor; and Michele 
Varnhagen, Minority Chief Policy Advisor and Labor Policy 
Director.
    Chairman Roe. I would like to call the meeting to order. A 
quorum being present, Subcommittee on Health, Employment, Labor 
and Pensions will come to order.
    Good morning, everyone.
    And welcome to our witnesses. Thank you for taking time out 
of your schedule to be here today.
    Six months ago, under the leadership of Mr. Andrews, this 
subcommittee held an independent audit of the Department--
examined an independent audit of the Department of Labor's 
financial records. It was our first look at the department's 
new financial management system implemented at great cost to 
the taxpayers for the understanding that it would improve the 
department's ability to track the money it spends.
    At the time a number of challenges surrounding 
implementation of the new system meant Congress and taxpayers 
were unable to receive a full evaluation of the department's 
financial management. For the first time in more than a dozen 
years the department cannot issue an unqualified report. In 
other words, the department failed to produce enough 
information for independent auditors to make an informed 
judgment on the department's finances.
    As I noted in December, any time an organization places a 
record system responsible for tracking billions of dollars, 
errors, unfortunately, are not uncommon. However, it is up to 
the organization's executive management to take responsibility 
for the mistakes and work to prevent them in the future.
    It appears this was the course the Department of Labor 
planned to take last winter. James Taylor, Mr. Taylor is here, 
the department's chief financial officer, was with us in 
December, and is here again today. He stated the department was 
undertaking many steps to overcome the problems that caused 
last year's incomplete report.
    Mr. Taylor testified, ``We are confident these actions will 
prove the 2010 disclaimer a temporary hiccup in what has been 
and what will be again a long record of unqualified opinions 
and sound financial management at the department.''
    We are here today to examine whether the department has 
lived up to this promise. Regrettably the answer is no. The 
challenges plaguing the Department of Labor's financial 
management still persist. The most recent audit found the same 
material weaknesses and significant deficiencies identified in 
last year's report.
    The Department of Labor is the only executive agency to 
have multiple new material weaknesses in its financial 
management system. According to the independent audit of KPMG, 
certified by the department's Office of Inspector General, the 
department does not have sufficient controls over financial 
reporting and budgetary accounting. It lacks adequate controls 
over access to key financial systems, and improvements are 
required in how the department prepares and reviews journal 
entries.
    The problems I have just described only relate to the four 
material weaknesses identified in the report. The department 
also has significant deficiencies over its payroll, and does 
not prevent untimely and inaccurate processing of certain 
transactions.
    Last, but certainly not least, the department is in 
violation of two federal laws intended to promote the integrity 
of financial management in the federal government. Despite 
having roughly 6 additional months to improve its record, 
department's finances have failed to receive a clean bill of 
health, the first time since fiscal year 1997.
    Some may argue the report we are discussing today signifies 
a clean audit. According to this logic, simply completing the 
report, albeit 6 months behind schedule, results in a passing 
grade. However, the numerous instances of financial--however, 
numerous instances of financial mismanagement.
    However, such logic is neither supported by standard 
accounting practices or a common sense. We should deal with the 
facts as presented by the professionals at KPMG, and avoid 
underestimating the seriousness of this report.
    The department oversees a number of federal efforts aimed 
at assisting the nation's workforce, including unemployment 
insurance, worker's compensation and various job training 
programs. At a time when the national debt exceeds $14 trillion 
and more than 13 million individuals are seeking work, every 
dollar counts. Any misallocation of scarce resources is a 
disservice to taxpayers and workers.
    The department's financial mismanagement is evidenced by 
the recent independent audit is unacceptable. I hope the 
administration can explain the disturbing facts of the recent 
audit, and provide a concrete plan to ensure this does not 
happen again.
    And now we yield to Mr. Andrews, the senior Democratic 
member of the subcommittee, for his opening remarks.
    [The statement of Mr. Roe follows:]

  Prepared Statement of Hon. David P. Roe, Chairman, Subcommittee on 
                Health, Employment, Labor, and Pensions

    Good morning everyone. Welcome to our witnesses; thank you for 
taking time out of your busy schedules to be with us today.
    Six months ago, under the leadership of Mr. Andrews, this 
subcommittee examined an independent audit of the Department of Labor's 
financial records. It was our first look at the department's new 
financial management system, a system implemented at great cost to 
taxpayers with the understanding it would improve the department's 
ability to track the money it spends.
    At the time, a number of challenges surrounding implementation of 
the new system meant Congress and taxpayers were unable to receive a 
full evaluation of the department's financial management. For the first 
time in more than a dozen years, the department could not issue an 
``unqualified report.'' In other words, the department failed to 
produce enough information for independent auditors to make an informed 
judgment on the department's finances.
    As I noted in December, anytime an organization replaces a records 
system responsible for tracking billions of dollars, errors are 
unfortunately not uncommon. However, it is up to an organization's 
executive management to take responsibility for the mistakes and work 
to prevent them in the future.
    It appears this was the course the Department of Labor planned to 
take last winter. James Taylor, the department's chief financial 
officer who was with us in December and is with us again today, stated 
the department was undertaking ``many steps to overcome the problems'' 
that caused last year's incomplete report. Mr. Taylor testified, ``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.''
    We are here today to examine whether the department has lived up to 
this promise. Regrettably, the answer is no. The challenges plaguing 
the Department of Labor's financial management still persist. The most 
recent audit found the same material weaknesses and significant 
deficiencies identified in last year's report. The Department of Labor 
is the only executive agency to have multiple new material weaknesses 
in its financial management system.
    According to the independent audit by KPMG, certified by the 
department's Office of Inspector General, the department does not have 
sufficient controls over financial reporting and budgetary accounting, 
it lacks adequate controls over access to key financial systems, and 
improvements are required in how the department prepares and reviews 
journal entries.
    The problems I have just described only relate to the four material 
weaknesses identified in the report. The department also has 
significant deficiencies over its payroll and does not prevent untimely 
and inaccurate processing of certain transactions. Last, but certainly 
not least, the department is in violation of two federal laws intended 
to promote the integrity of financial management in the federal 
government.
    Despite having roughly six additional months to improve its record, 
the department's finances have failed to receive a clean bill of health 
for the first time since fiscal year 1997. Some may argue the report we 
are discussing today signifies a ``clean'' audit. According to this 
logic, simply completing the report--albeit six months behind 
schedule--results in a passing grade, despite the numerous instances of 
financial mismanagement. However, such logic is neither supported by 
standard accounting practices or commonsense. We should deal with the 
facts as presented by the professionals at KPMG, and avoid understating 
the seriousness of this report.
    The department oversees a number of federal efforts aimed at 
assisting the nation's workforce, including unemployment insurance, 
workers' compensation, and various job training programs. At a time 
when the national debt exceeds $14 trillion and more than 13 million 
individuals are searching for work, every dollar counts. Any 
misallocation of scare resources is a disservice to taxpayers and 
workers. The department's financial mismanagement, as evidenced by the 
recent independent audit, is unacceptable. I hope the administration 
can explain the disturbing findings of the recent audit, and provide a 
concrete plan to ensure this doesn't happen again.
    I will now yield to Mr. Andrews, the senior Democrat member of the 
subcommittee, for his opening remarks.
                                 ______
                                 
    Mr. Andrews. Thank you. Good morning, Mr. Chairman. Thank 
you for your courtesies.
    I would like to welcome the witnesses, and welcome back the 
witnesses I think in at least two of the cases, maybe three.
    On May 23rd of 2011 the Department of Labor received an 
unqualified audit letter, which is a clean audit. How we got 
there was slower than it should have been.
    I want to make two points this morning. The first is the 
reason for the delay in getting that clean audit letter. And 
the second is to respectfully challenge my friend's assertion 
that the existence of exceptions in the clean audit letter are 
somehow evidence of financial mismanagement. They most 
emphatically are not.
    In 1989 the Department of Labor began using a software 
system to keep track of its books. And when 2002 rolled around 
they were still using that same software system. Now I think it 
would be true in most of corporate America or any government 
institution in America, if you are using in 2002 a piece of 
software generated in 1989, it probably did not work very well.
    The Bush Labor Department reached that conclusion. It 
reached the conclusion they need to replace that software 
system. So in 2002 the prior administration began a process to 
replace that software system.
    That process was an unmitigated disaster. The prior 
administration spent $35 million, and by 2007 they concluded 
that that system would never work, and they junked it.
    So for the better part of 6 years and $35 million, the 
prior administration tried to implement a piece of bookkeeping 
software that would give the department and the tax payers 
better access to financial data. In 2007 the prior 
administration began to correct this remedy and come up with a 
third system.
    By the time the new administration took office in January 
of 2009, that new system, which cost about $25 million, was 
partially implemented. It was partially implemented because the 
training that was needed to train the department employees on 
how to best use that system had not yet been fully done. So 
when the new administration took office, it was in the midst of 
helping to complete that implementation in that new system.
    Mr. Taylor, with whom we are pleased to welcome back to the 
committee, I believe, took office in June of 2010 at the 
Department of Labor as the chief financial officer. And he 
walked into a bit of a difficult situation because that 
software system was not yet fully implemented. The employees 
were not yet fully trained.
    By the time we reached the fall of 2010 it became obvious 
that KPMG was not going to be able to do due diligence on the 
financial audits because the correct documentation was not in 
place.
    As was our responsibility under the rules of the Congress, 
on December 7th of last year, the subcommittee, which I was 
then privileged to chair, and Mr. Roe--Dr. Roe was the senior 
minority member at the time, discharged our duty and had a 
hearing, and effectively said, when are you going to fix this 
problem so we can have an audit? Mr. Taylor made a commitment 
to the committee and to the public that he would lead an effort 
to make sure that that audit was completed by the spring.
    Mr. Taylor, you have honored that commitment. The audit 
documents were in place so the audit could be completed by the 
spring. And in fact on May 23rd of 2011, KPMG, through the IG's 
Office, issued a clean audit letter.
    Now, my friend refers to the four exceptions in the clean 
audit letter as somehow evidence of financial mismanagement. 
Well, if that were the case, we had financial mismanagement in 
2001, 2002, 2003, 2004, 2005, 2006, 2007 and 2008. Because in 
each of those 8 fiscal years there were significant exceptions 
made to the audit as well.
    As a matter of fact, in those 8 fiscal years where the 
prior administration was running the department, there were 64 
exceptions in total to the eight clean audit letters that were 
issued.
    Now, I do think we should focus in these exceptions and fix 
them. I would love to see an audit issued, timely audit issued 
for the 2011 fiscal year that has no exceptions in it. And I 
think that should be our goal. But I do think we should--we 
should begin today with a reflection of a record that says that 
we are looking at a department that received a clean audit 
letter.
    And I think we should thank you, Mr. Taylor, for honoring 
your commitment to the committee and putting us in position to 
produce that clean audit letter.
    So at this I would thank the witnesses, and turn back to my 
friend, the chairman.
    Chairman Roe. I thank the gentleman.
    Pursuant to Rule 7(c), all members will be permitted to 
submit written statements to be included in the permanent 
hearing record. And without objection, the hearing record will 
remain open for 14 days to allow such statements and other 
extraneous material referenced during the hearing to be 
submitted for the official hearing record.
    Now it is my pleasure to introduce our distinguished panel 
of witnesses.
    Mr. Elliot P. Lewis is the assistant inspector general for 
audit to the Department of Labor.
    Welcome back, Mr. Lewis.
    Mr. Lewis has been with the Department of Labor since 1991 
serving in a variety of positions within the Inspector 
General's Office of Financial Management Audits. Before joining 
the Federal Government, he was a partner at T.R. McConnell and 
Company, CPAs in Columbia, South Carolina from 1986 to 1991. 
And that is a--it was probably about as hot in Columbia, South 
Carolina as it was here yesterday.
    Heather Flanagan is a partner for audit at KPMG, LLC.
    KPMG is an audit, tax and advisory service provider that 
has served as independent auditor for DOL since fiscal year 
2006. KPMG also prepared audits in fiscal year 2010 for the 
Departments of Commerce, Energy, Homeland Security, Interior, 
Justice, Treasury, and the DSA, the Office of Personnel 
Management and the Small Business Administration.
    Mr. James L. Taylor is the chief financial officer of the 
Department of Labor. Prior to his work at DOL, Mr. Taylor was 
deputy federal inspector for the Department of Homeland 
Security where he assisted the Inspector General in managing 
over 600 audits, inspectors and investigators. Mr. Taylor has 
also served as deputy chief financial officer for the 
Department of Commerce and FEMA.
    Before I recognize each of you today will be--provide your 
testimony let me briefly explain our lighting system. You each 
have 5 minutes to present your testimony. When you begin the 
light in front of you will turn green. With 1 minute left the 
light will turn yellow. And when your time is expired the light 
will turn red, at which point I will ask you that you wrap up 
your remarks as best as possible.
    And after everyone has testified, members will each have 5 
minutes to ask questions. And I will try to also adhere to the 
5 minutes rule.
    We will start now with Mr. Lewis.

 STATEMENT OF ELLIOT P. LEWIS, ASSISTANT INSPECTOR GENERAL FOR 
                AUDIT, U.S. DEPARTMENT OF LABOR

    Mr. Lewis. Mr. Chairman and members of the subcommittee, 
thank you for the opportunity to discuss the audit of the U.S. 
Department of Labor's revised fiscal year 2010 consolidated 
financial statements.
    As I detailed in my December testimony, following the 
implementation of a new financial system known as New Core, 
which replaced a 20-year-old accounting system, the department 
encountered a significant number of problems and errors 
involving data migration, integration with other systems, 
reconciliations in system configuration. This resulted in the 
department's inability to provide timely and accurate financial 
data, and the auditors being unable to give an opinion on the 
financial statements.
    Since November of last year the department was able to 
successfully mitigate the issues it experienced in 2010 to 
provide the necessary data for audit, and to revise and reissue 
the consolidated financial statements.
    In March of 2011 the CFO resubmitted its financial report 
and KPMG was able to complete the audit procedures necessary to 
render an unqualified, or clean, opinion. It is important to 
note the DOL's received an unqualified opinion on its financial 
statements for 14 consecutive years.
    However, while the opinion is unqualified for 2010, it is 
also important to emphasize that this does not guarantee an 
unqualified opinion for 2011. KPMG reported deficiencies in the 
department's internal controls and made numerous 
recommendations to address them. These issues need to be 
addressed to help ensure the department's ability to produce 
accurate financial statements in the future.
    The auditors identified several material weaknesses, which 
posed the greatest risk that the department's financial 
statements could be incorrect. Specifically, they found that 
the department needs to implement and perform routine 
reconciliations. Moreover, they need to develop and document 
all business processes and controls required to accurately and 
timely record certain transactions.
    Second, the department needs to ensure that financial 
obligations are correct and properly recorded. They also need 
to ensure staff are trained and possess the technical knowledge 
needed to properly record budgetary transactions.
    Third, the department needs to enhance supervision of 
adjusting journal entries and improve related documentation.
    Finally, the department needs to develop policies and 
controls to ensure appropriate access to financial management 
systems.
    In addition to the material weaknesses, the auditors noted 
two significant deficiencies: the need to ensure payroll is 
properly processed, and the need to improve the timeliness and 
accuracy of the accounting for property plan and equipment. Our 
audit of the 2011 statements will be assessing the extent to 
which the department has corrected these control weaknesses.
    Mr. Chairman, the department continues to make improvements 
to the new financial system, and to improve its financial 
management business processes. As this will obviously not be 
the last IT system the department replaces, it is equally 
important to look at this implementation for any lessons that 
can be gleaned from a broader project management standpoint.
    For example, for future IT system development projects, the 
department needs to fully understand and develop system 
requirements before beginning the procurement process, ensure 
that interfaces with other key departmental systems are built 
and tested prior to implementation, identify the proper user 
base, ensure that users are properly trained, establish strict 
project management oversight responsibility, and establish a 
viable funding plan prior to starting the project.
    By applying these lessons learned, the department will be 
better positioned to efficiently deliver future IT system 
development projects that are timely deployed and fully meet 
business needs.
    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.
    [The 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 
(DOL's) revised Fiscal Year (FY) 2010 Consolidated Financial 
Statements.
Background
    The Chief Financial Officers Act of 1990, P.L. 101-576, requires 
Offices of Inspectors General (OIG) to audit and report on their 
agency's Consolidated Financial Statements in accordance with generally 
accepted auditing standards and OMB guidance. In order to fulfill this 
responsibility, the DOL OIG contracts with an independent public 
accounting firm, KPMG LLP, to conduct the audit. OMB requires that the 
audit be completed by November 15 of each year. For an agency as large 
as DOL, the complexity of this audit requires that, in order to meet 
this deadline and complete all steps necessary to render an opinion on 
the statements, the Department must provide significant financial 
information and supporting documentation throughout the fiscal year. 
Therefore, an inability on the part of the Department to produce the 
necessary information in a timely manner can affect the successful 
completion of the audit and may result in a less-than-favorable opinion 
for the Department or a Disclaimer of Opinion, which is the inability 
to render an opinion.
Specific reasons for the disclaimer of opinion
    Mr. Chairman, as detailed in my previous testimony in December, it 
was the Department's inability to provide timely and accurate financial 
data that resulted in the Department receiving a Disclaimer of Opinion 
for FY 2010. Following the implementation of a new financial system 
known as the New Core Financial Management System (New Core), the 
Department encountered a significant number of problems and errors 
involving data migration, integration with other systems, 
reconciliation, and system configuration. Several examples of the 
problems they encountered were:
            Data Migration
    Internal agency codes and general ledger accounts that were 
incorrectly migrated to New Core.
    Certain transaction identification and coding that were not 
properly captured in New Core when migrated.
            Integration with Other Systems
    Integration between New Core and other financial systems that were 
not properly working subsequent to the implementation. For example, the 
Department was unable to record in a timely manner the majority of 
transactions related to the Unemployment Trust Fund and the Federal 
Employees' Compensation Act.
            Reconciliation
    Incomplete account reconciliations as of September 30. For example, 
the Department could not reconcile its underlying supporting data for 
certain Unemployment Trust Fund balances to the general ledger in a 
timely manner.
            System Configuration
    Improper system configurations resulting in the inability to 
properly record certain transactions in accordance with the United 
States Standard General Ledger requirements. As a result, the 
Department had to implement manual processes to correct these errors.
Audit of the Department's revised FY 2010 consolidated financial 
        statements
    In my December testimony, I identified several actions which the 
Department needed to take in order to reissue its FY 2010 Consolidated 
Financial Statements. In the intervening months, Mr. Chairman, the 
Department was able to successfully mitigate the issues it experienced 
in FY 2010 to provide the necessary data for audit and to revise and 
reissue the Consolidated Financial Statements. Some of the major 
adjustments made by the Department since November 15 include:
    Resolving integration errors between New Core and other financial 
systems by reconciling and investigating differences.
    Reviewing all significant transactions to ensure they were in 
accordance with United States Standard General Ledger requirements.
    Adjusting and providing sufficient documentation for the 
Consolidated Financial Statements balances, by correcting material 
errors not identified as of November 2010, which impacted fund balance 
with treasury and accounts payable.
    In March 2011, the CFO submitted a draft of the Department's 
revised Consolidated Financial Statements for audit and KPMG was able 
to complete the audit procedures necessary to render an unqualified or 
``clean'' opinion. The Department has now received an unqualified 
opinion on its financial statements for 14 consecutive fiscal years.
Material weaknesses and significant deficiencies
    Even though the Department received an unqualified opinion, KPMG 
reported deficiencies in the Department's internal controls and made 
numerous recommendations to address them. A deficiency in internal 
control exists when the design or operation of a control does not allow 
management or its employees, in the normal course of performing their 
assigned functions to prevent, or detect and correct misstatements on a 
timely basis. A material weakness is a deficiency, or a combination of 
deficiencies, in internal control such that there is a reasonable 
possibility that a material misstatement of the agency's financial 
statements will not be prevented, or detected and corrected on a timely 
basis. A significant deficiency is a deficiency, or combination of 
deficiencies, in internal control that is less severe than a material 
weakness, yet important enough to merit attention by those charged with 
governance.
    In terms of material weaknesses, the auditors found that the 
Department needs to implement and perform routine reconciliations, as 
well as develop and document all business processes and controls 
required to accurately and timely record transactions, including those 
from DOL subsystems and other Federal agencies.
    Second, the Department needs to ensure that financial obligations 
are correct and properly recorded, as well as ensuring users are 
trained and possess the technical knowledge needed to properly record 
budgetary transactions.
    Third, the Department needs to enhance supervisory monitoring 
reviews of adjusting journal entries and related documentation.
    Finally, the Department needs to coordinate efforts with individual 
DOL agencies to develop policies and controls to address, as well as 
monitor, access to financial management systems.
    In addition to the material weaknesses, the auditors noted the 
following significant deficiencies. The auditors found that the 
Department needs to design time and attendance reports that reflect the 
necessary information for it to ensure that payroll is properly 
processed. Lastly, the Department needs to improve the timeliness and 
accuracy of its accounting for property, plant, and equipment.
Lessons learned
    Mr. Chairman, the Department continues to make improvements to the 
new financial system and to improve its financial management business 
processes. As this will obviously not be the last system that the 
Department replaces, it is equally important to look at this 
implementation for any broader lessons that can be gleaned from a 
project management standpoint. For example, in the future the 
Department needs to:
    Fully understand and develop system requirements before beginning 
the procurement process;
    Ensure that interfaces with other key Departmental systems are 
built and tested prior to implementation;
    Identify the proper user base;
    Ensure that users are properly trained;
    Establish strict project management oversight responsibility;
    Establish a viable funding plan prior to starting the project.
Conclusion
    Mr. Chairman, the Department has taken sufficient and appropriate 
corrective actions to enable KPMG to issue an opinion on the revised 
statements. Although the opinion is unqualified, it is important to 
emphasize that this does not guarantee an unqualified opinion for the 
FY 2011 statements. Our audit of the FY 2011 statements will be 
assessing the extent to which the Department has corrected the control 
weaknesses recently identified in the 2010 audit.
    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 Roe. Okay. Thank you, Mr. Lewis.
    Ms. Flanagan?

               STATEMENT OF HEATHER K. FLANAGAN,
                       PARTNER, KPMG, LLC

    Ms. Flanagan. Chairman Roe, Ranking Member Andrews, and 
members of the subcommittee, my name is Heather Flanagan, and I 
am an audit partner with KPMG. Thank you for the invitation to 
come before you today to discuss the two audit engagements of 
the U.S. Department of Labor's fiscal year 2010 consolidated 
financial statements.
    KPMG, under contract to the DOL Office of Inspector 
General, was engaged to audit DOL's fiscal year 2010 
consolidated financial statements. During fiscal year 2010 DOL 
encountered significant functionality and operational issues 
related to its new financial accounting and reporting system, 
which was implemented in January 2010.
    These issues hindered DOL's ability to ensure the accuracy 
and completeness of financial statement balances, and to 
generate the critical financial statement data necessary to 
complete our testing over the consolidated financial statements 
during our initial audit engagement. I will discuss the more 
significant areas that were impacted by these issues.
    The first was the Unemployment Trust Fund. We were unable 
to complete testing over the fund's significant accounts 
because DOL was unable to provide to us in a timely fashion 
complete and accurate data that reflected the balances recorded 
in the general ledger.
    The second significant area was gross cost. We were unable 
to complete testing over certain expenses because a complete 
and accurate population of these expenses that agreed to the 
balances in the general ledger could not be provided in a 
timely fashion.
    The third important area was budget accounts. The final 
report on budget execution and budgetary resources, known as 
the FF-133, for the fourth quarter was not provided to us prior 
to the November 15th reporting deadline. Therefore we were 
unable to complete our testing of the statement of budgetary 
resources.
    The fourth significant area was fund balance with Treasury. 
DOL was unable to reconcile the net differences that were 
identified between its fund balance with Treasury accounts as 
of September 30, 2010, and Treasury's records.
    The fifth significant area was financial reporting. DOL 
management was unable to provide certain representations 
regarding consistency with U.S. Generally Accepted Accounting 
Principals with respect to the presentation of the fiscal year 
2010 financial statements that it issued in November.
    It was impractical to extend our procedures sufficiently to 
determine whether the financial statements may have been 
affected by these issues. As such, we issued a disclaimer of 
our opinion on the fiscal year 2010 consolidated financial 
statements issued by DOL on November 15th.
    Under government auditing standards we are required to 
report material weaknesses and significant deficiencies 
identified during the engagement. During our initial fiscal 
year 2010 engagement we identified the following deficiencies 
in internal control over financial reporting that we considered 
to be material weaknesses or significant deficiencies:
    The lack of sufficient controls over financial reporting, a 
lack of significant controls over budgetary accounting, 
improvements needed in the preparation and review of journal 
entries, lack of adequate controls over access to key financial 
and support systems, weakness noted over payroll accounting, 
and untimely and inaccurate processing of property, plant and 
equipment transactions.
    DOL recognized the need for, at a minimum, an audited 
consolidated balance sheet as of September 30, 2010 in order to 
receive an opinion on all of its consolidated financial 
statements in fiscal year 2011. Therefore, DOL decided to 
revise and reissue its fiscal year 2010 consolidated financial 
statements where certain malaises were performed, errors were 
identified and adjusting journal entries were recorded to 
correct the previously reported amounts as necessary.
    As a result, DOL requested that the OIG perform audit 
procedures necessary to report on its revised fiscal year 2010 
consolidated financial statements in anticipation of receiving 
an updated audit report. In December 2010 the OIG engaged KPMG 
to audit these revised financial statements.
    We have looked at their efforts on testing the details on 
each significant account during the second fiscal year 2010 
engagement. As required by government auditing standards, we 
will determine during our fiscal year 2011 audit of DOL 
consolidated financial statements whether DOL management has 
taken appropriate corrective actions to address the findings 
and recommendations identified during our fiscal year 2010 
audit engagements.
    DOL was ultimately able to reconcile accounts and record 
necessary adjusting entries to corrective financial statement 
balances. In addition, DOL was able to provide the necessary 
data for testing and the relevant evidence to support the 
balances supported in the financial statement.
    As a result, we were able to complete our audit procedures, 
and on May 20, 2011 we issued an updated audit report with an 
unqualified opinion on DOL's revised fiscal year 2010 
consolidated financial statements.
    Thank you for the opportunity to discuss the results of 
these two fiscal year audit engagements. And I would be happy 
to answer any questions you may have.
    [The statement of Ms. Flanagan follows:]

    Prepared Statement of Heather Koppe Flanagan, Partner, KPMG, LLP

    Chairman Roe, Ranking Member Andrews, and Members of the 
Subcommittee; thank you for the invitation to come before you today to 
discuss the two audit engagements of the U.S. Department of Labor's 
(DOL) fiscal year (FY) 2010 consolidated financial statements.
    KPMG LLP (KPMG), under contract to the DOL Office of Inspector 
General (OIG), was engaged to audit DOL's FY 2010 consolidated 
financial statements. During FY 2010, DOL encountered significant 
functionality and operational issues related to its new financial 
accounting and reporting system, the New Core Financial Management 
System (NCFMS), which was implemented in January 2010. These issues 
hindered DOL's ability to assure the accuracy and completeness of 
consolidated financial statement balances and to provide us the 
critical financial data necessary to complete our testing over DOL's FY 
2010 consolidated financial statements during our initial audit 
engagement. The significant areas that were impacted by these issues 
are discussed in more detail below.
    Unemployment Trust Fund (UTF)--We were unable to complete testing 
over the UTF significant accounts (i.e., unemployment benefit expenses, 
accrued benefits, revenue, accounts receivables, advances and 
transfers) because DOL was unable to timely provide us complete and 
accurate populations of the related data that reflected the balances 
recorded in the general ledger. This situation was caused by errors in 
recording UTF transactions and failure to perform certain 
reconciliations to the general ledger.
    Gross Costs (Non-Payroll, Non-Benefits)--In addition to 
unemployment benefit expenses, we were unable to complete testing over 
certain other expenses because a complete and accurate population of 
these expenses that agreed to the related balances recorded in the 
general ledger could not be provided timely. In addition, because we 
could not test these expenses, our testing over the grant accrual could 
not be completed.
    Budget Accounts--The final Report on Budget Execution and Budgetary 
Resources (SF-133) for the fourth quarter was not provided to us prior 
to the November 15, 2010 Office of Management and Budget (OMB) 
reporting deadline. Therefore, we were unable to complete our testing 
over the fourth quarter reconciliations of the Statement of Budgetary 
Resources (SBR) to the SF-133s and reconciliations of the SF-133s to 
the Apportionment and Reapportionment Schedule (SF-132s). As a result, 
we were unable to conclude on budgetary resources, the status of 
budgetary resources, the change in obligated balance, and net outlays 
reported in the SBR. Further, a complete and accurate population of 
undelivered orders recorded in the general ledger as of September 30, 
2010 could not be provided for testing, and we were unable to complete 
the procedures necessary to conclude on borrowing authority related to 
repayable advances to the UTF.
    Fund Balance with Treasury--DOL was unable to reconcile the net 
differences that were identified between its fund balance with Treasury 
account as of September 30, 2010 and the U.S. Department of the 
Treasury's records, which prevented us from completing our testing of 
this balance.
    Financial Reporting--DOL management was unable to provide certain 
representations regarding consistency with U.S. generally accepted 
accounting principles with respect to the presentation of the FY 2010 
consolidated financial statements that it issued on November 15, 2010.
    It was impractical to extend our procedures sufficiently to 
determine the extent, if any, to which DOL's FY 2010 consolidated 
financial statements may have been affected by the aforementioned 
issues. As such, our initial audit engagement resulted in a disclaimer 
of an opinion on the FY 2010 consolidated financial statements issued 
by DOL on November 15, 2010. A disclaimer of opinion states that the 
auditors do not express an opinion on the financial statements as they 
were unable to form or have not formed an opinion as to the fairness of 
presentation of the financial statements in conformity with generally 
accepted accounting principles.
    In planning and performing our initial FY 2010 audit engagement, we 
considered DOL's internal control over financial reporting by obtaining 
an understanding of DOL's internal control, determining whether 
internal controls had been placed in operation, assessing control risk, 
and performing tests of controls as required by auditing standards 
generally accepted in the United States and Government Auditing 
Standards. These procedures were designed to assist us in planning our 
auditing procedures and contribute to the evidence supporting the 
auditors' report on the financial statements. However, the objective of 
our engagement was not to express an opinion on the effectiveness of 
DOL's internal control over financial reporting and therefore our 
procedures were not designed to identify all deficiencies in internal 
control. A deficiency in internal control exists when the design or 
operation of a control does not allow management or employees, in the 
normal course of performing their assigned functions, to prevent, or 
detect and correct misstatements on a timely basis.
    Under Government Auditing Standards, we are required to report 
material weaknesses and significant deficiencies identified during the 
audit engagement. A material weakness is a deficiency, or combination 
of deficiencies, in internal control such that there is a reasonable 
possibility that a material misstatement of the entity's financial 
statements will not be prevented, or detected and corrected on a timely 
basis. A significant deficiency is a deficiency, or a combination of 
deficiencies, in internal control that is less severe than a material 
weakness, yet important enough to merit attention by those charged with 
governance.
    During our initial FY 2010 audit engagement, we identified the 
following deficiencies in internal control over financial reporting 
that we considered to be material weaknesses or significant 
deficiencies.
Material Weaknesses
    1. Lack of Sufficient Controls over Financial Reporting
    2. Lack of Sufficient Controls over Budgetary Accounting
    3. Improvements Needed in the Preparation and Review of Journal 
Entries
    4. Lack of Adequate Controls over Access to Key Financial and 
Support Systems
Significant Deficiencies
    5. Weakness Noted over Payroll Accounting
    6. Untimely and Inaccurate Processing of Property, Plant, and 
Equipment Transactions
    DOL recognized the need for, at minimum, an audited consolidated 
balance sheet as of September 30, 2010, in order to receive an opinion 
on all its consolidated financial statements in FY 2011. Therefore, DOL 
decided to revise and reissue its FY 2010 consolidated financial 
statements once certain analyses were performed, errors were 
identified, and adjusting journal entries were recorded to correct the 
previously reported amounts, as necessary.
    As a result, DOL requested that the OIG perform audit procedures 
necessary to report on its revised FY 2010 consolidated financial 
statements, in anticipation of receiving an updated audit report. In 
December 2010, the OIG engaged KPMG to audit these revised financial 
statements.
    Because of the aforementioned control deficiencies, our planned 
audit approach for the second FY 2010 audit engagement did not include 
additional tests of controls, and we did not rely on internal controls 
in the areas requiring audit work. Therefore, we focused our efforts on 
testing the details of each significant account during the second FY 
2010 audit engagement. As required by Government Auditing Standards for 
financial statement audits, we will determine during our FY 2011 audit 
of DOL's consolidated financial statements whether DOL management has 
taken appropriate corrective action to address the findings and 
recommendations identified during our FY 2010 audit engagement.
    DOL was ultimately able reconcile accounts and record necessary 
adjusting entries to correct its consolidated financial statement 
balances. In addition, DOL was able to provide the necessary data for 
testing and the relevant evidence to support the balances reported in 
the consolidated financial statements. As a result, we were able to 
complete our audit procedures, and we issued an updated audit report 
with an unqualified opinion on DOL's FY 2010 consolidated financial 
statements on May 20, 2011.
    Thank you for the opportunity to discuss the results of these two 
FY 2010 audit engagements. I would be happy to answer any questions the 
Subcommittee may have.
                                 ______
                                 
    Chairman Roe. Thank you.
    Mr. Taylor?

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

    Mr. Taylor. Good morning, Mr. Chairman, and thank you. And 
Ranking Member Andrews and members of the subcommittee, I 
really do appreciate this opportunity to come before you today 
to provide an update on the financial management activities of 
the Department of Labor.
    Specifically I will address the department's fiscal year 
2010 financial statement audit, a topic about which I testified 
before this subcommittee last December. That hearing occurred 
because the department was able to achieve an unqualified 
opinion on 2010 financial statements.
    During the hearing, I, as a deputy chief financial officer, 
committed to this subcommittee to recommitting our financial 
statements to the department's Office of Inspector General, an 
independent auditor in the hopes that the auditor would be able 
to issue a new opinion.
    As you are aware, the department's independent auditor 
issued a disclaimer of opinion in November on the 2010 
financial statements. The auditors did not have sufficient time 
to complete the audit activities in November, primarily due to 
the department's transition to a new financial management 
system and the implementation and data conversion issues that 
arose from that effort.
    At that time our need to focus on supporting the 
department's mission and ensure funds were appropriately 
obligated at year-end did not allow us time to provide the 
auditors the data they required in a timely fashion.
    Since then we have continued to work in improving our 
financial reporting with the goal of resubmitting our 
statements and opinion, a clean opinion. We identified 
outstanding issues with our financial data, and established and 
met all major milestones in the audit process.
    As a result of that effort I am pleased to report that 
KPMG, as you just heard, did provide a clean or unqualified 
opinion on the department's fiscal year 2010 consolidated 
financial statements. An unqualified opinion is the most 
favorable of all financial audit outcomes, and means that the 
financial statements present fairly in all material aspects the 
financial position and operating results of the Department of 
Labor.
    As a result of the revised opinion we obtained late last 
month, the department now has received an unqualified opinion 
on its financial statements for 14 consecutive fiscal years.
    Both the original and revised 2010 audit reports note four 
material weaknesses that remain in need of the department's 
attention. Two points should be considered when reviewing these 
material weaknesses.
    First, every single one of them has been reported 
previously. They were reported significant deficiencies, in 
some case for as many as 4 years.
    In addition, as my colleagues note in their respective 
testimonies, these material weaknesses existed as of September 
30, 2010. KPMG did not conduct any further review of the status 
of these weaknesses as part of the recent financial statement 
resubmission effort.
    However, KPMG does not in its latest report for each of the 
financial management weaknesses, that we did in fact correct 
material areas identified, or provide evidence of the proper 
reconciliations previously missing.
    Over the past 6 months we have continued to work to 
normalize the department's financial operations and resolve 
outstanding data integrity issues arising from the integration 
of a number of existing legacy systems into a modern financial 
management cloud environment. We are making operations more 
efficient and effective for users, and continuing user outreach 
and training efforts.
    While there is still work to be done in all these areas, we 
are buoyed by the unqualified opinion we received, and we will 
build from this experience as we continue to strengthen the 
department's financial management environment. And based on the 
work already completed, I can not only assure the subcommittee 
that we have made substantial efforts in resolving the three 
material weaknesses specific to financial management, but I can 
also tell you unequivocally that the current financial system 
provides the department with unprecedented control over its 
financial activities.
    In closing, Mr. Chairman, I am pleased that the department 
was able to secure an unqualified opinion on the department's 
2010 financial statements, and the accompanying assurance the 
statements are presented fairly. Our stakeholders can have 
confidence in the data we have presented, and that the 
department has been financially transparent and accountable.
    We have overcome last year's temporary setback. We 
recognize there are still improvements we need to make in our 
financial operations and our financial reporting. We are 
extremely proud and appreciative of the work of our staff, but 
also our colleagues in the Office of Inspector General and KPMG 
in completing this process. Their expertise has been invaluable 
in assessing and addressing the issues we have encountered.
    Thank you for your time, sir. And I would be happy to 
answer any questions the subcommittee may have.
    [The statement of Mr. Taylor follows:]

    [GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
        
                                ------                                

    Chairman Roe. I thank the members. And I will start the 
questioning off today.
    I was the mayor of Johnson City, Tennessee. And when I 
first went on the commission we had 53 audit findings. So I am 
very familiar with audit findings. And some were material.
    And I appreciate the fact and the history that the ranking 
member gave us. But the problem with this is, and I am going to 
go through some definitions because I am not a CPA or an 
auditor, so that the average people can understand what we are 
talking about.
    An unqualified audit simply means, as I understand it, that 
the auditor has all the information they need to provide an 
opinion. I think.
    Is that correct? And I have stated that properly, Ms. 
Flanagan?
    Ms. Flanagan. Yes, that is correct.
    Chairman Roe. Okay. So--and clean would refer to me that 
there is absolutely nothing wrong. That would be how I would 
view it if I heard that. So this verbiage means that 
unqualified means that the people looking at it, in your case 
KPMG, has the information they need to be able to render an 
opinion. It does not mean that everything is okay with what is 
going on.
    I sort of appreciate the position, Mr. Taylor, you were in. 
You came 18 months into this. You lost two of your senior 
people, and you had a brand new system. I get that.
    And also, Mr. Lewis, you made some great points. I hope 
that is not lost on other people that are doing this the five 
or six points you brought out that this is how we want to move 
forward if you put in somewhere else. It made absolute sense 
that this--you could extrapolate this over any department that 
may be implementing a new system.
    However, if I were in--and so a clean audit and an 
unqualified audit means that we have got all the information. 
It does not mean that there is not a problem there. And some of 
the problems that we looked at in these, especially some that I 
viewed in here where there was an ability not to know where 
Labor's money and Treasury and the fund balances.
    The things that I read about in here about unexpected 
appropriations where $10 billion, which is $10,000 million, is 
incorrectly presented as something else as an unexpected 
appropriation, if this kind of audit were seen in a private, I 
were going out and buying a stock in a company and I saw this 
kind of audit, that company would be off the board, I think, 
because of the lack of confidence people would have. And that 
is what we are dealing with here, is the confidence of the 
American people. In my case the confidence of the citizens of 
Johnson City, Tennessee that we could actually look at this 
audit and know that their money was being spent and looked at 
just exactly like they would look at their own businesses.
    And I think, Mr. Taylor, that is what you are trying to say 
today, is that you want to get to that point. But I think these 
material weaknesses are very significant. And the fact that 
they occurred before does not give me any warm and fuzzy 
feeling.
    And then in the November 15th, I suppose, Ms. Flanagan, you 
will have a chance to look at, which is only 5 months, you will 
have a chance to look at this again. And at that point in time 
I assume that you will have all the information you need at 
that point to make a decision.
    Am I right, Mr. Taylor, that you will have all of the data 
that she needs, or their company needs I should say----
    Mr. Taylor. Yes, sir.
    Chairman Roe. So it will not be a situation like we faced 
last year in December when Mr. Andrews held a committee 
hearing. Am I right on that?
    Mr. Taylor. You are correct.
    Chairman Roe. And can we expect in 5 months, now that you--
a year is not long. You have been there a short time. But can 
we expect these material weaknesses to be rendered. I mean to 
be held harmless, to be taken care of?
    Mr. Taylor. I am very comfortable that as we stand right 
now that at least two of the material weaknesses are resolved. 
And in fact we could not have been able to do the resubmission 
that we did to get the unqualified opinion if we had not 
resolved them.
    Chairman Roe. Which are?
    Mr. Taylor. One material--I am sorry?
    Chairman Roe. Which ones are they?
    Mr. Taylor. The one I know on the journal vouchers, the 
adjustments that were made, and on budgetary accounting.
    On financial reporting I think we made significant 
progress. We have a lot of work to do, still have a lot of work 
to do there because of the integration issues. But I think we 
have made a lot of progress. That will obviously depend on the 
independence of the infinite review of the auditors.
    The fourth material weakness is, I just want to point out, 
is for an overall access issue to systems throughout the 
department, not just the financial system. And it is one with 
which the department's Office of the CIO does not concur.
    So three of those are really financial management. One is 
an overall systems access issue that the department has.
    Chairman Roe. I guess a question I was confused with on 
reading all this information was how can a fund balance in the 
Department of Labor and Treasury be not reconciled when you are 
talking about billions of dollars?
    Ms. Flanagan, I am going to ask you that question. You are 
the auditor.
    Ms. Flanagan. It is not uncommon to have differences 
between an agency's fund balance of treasury accounts and 
Treasury. However, normally there is a reconciliation process 
that occurs monthly in order to identify and resolve those 
differences.
    Chairman Roe. Okay. Well, I guess the reason, if I go to 
explain it to somebody at a local diner, how can I explain to 
them that there are billions of dollars that do not account 
from one account to the other? How do I do that?
    Ms. Flanagan. That is more of an accounting question versus 
an auditing question. I mean the basic analogy is always a bank 
statement and does your checking account agree to your bank 
statement.
    And in the case of the department last year, it did not, by 
millions of dollars during the year. And it was eventually 
reconciled.
    Chairman Roe. Okay. I thank you.
    Mr. Andrews?
    Mr. Andrews. Thank you, Mr. Chairman.
    I thank the witnesses for their testimonies.
    I think there is a shared goal here that every dime the 
taxpayers send to the department is properly spent and properly 
accounted for, and there is no dispute about that.
    Ms. Flanagan, what is an unqualified letter? What is the 
meaning of that? Explain that to a layperson.
    Ms. Flanagan. An unqualified opinion relates solely to the 
financial statements themselves and the balances that are 
reported in them. An unqualified opinion says that those 
balances are materially correct, and that the----
    Mr. Andrews. And material----
    Ms. Flanagan [continuing]. Users of those statements can 
rely on them.
    Mr. Andrews. Materially correct means that the 
representations on a document match the actual money that was 
received and spent. Is that basically right?
    Ms. Flanagan. Yes.
    Mr. Andrews. Okay.
    Now let us, so the clean audit letter that was issued, in 
layperson's terms, mean that we have an accurate accounting of 
how much the department took in and how much money it spent?
    Ms. Flanagan. Correct.
    Mr. Andrews. Okay.
    Now, Mr. Taylor, let us talk about the four exceptions. 
Because the chairman's right, our goal should be zero 
exceptions.
    And the fact that these are exceptions that existed long 
before you got there and long before the administration got 
there and Secretary Solis got there, so what?
    I mean we want them done. We want them done away with, and 
it is our common job to do something about that.
    If you were explaining to one of the chairman is 
constituents in a diner, we have more diners in New Jersey than 
in Tennessee, so we will make it in New Jersey. What these two 
exceptions that you think are unresolved mean. What do they 
mean? What are we doing wrong that we need to fix?
    Mr. Taylor. In the case of the financial reporting we have 
for the first time an integrated approach to all of our 
financial reporting, which never existed before. When you had 
to do an external report it was almost a data call. You almost 
had to go out and get data new every time. Now it all comes 
into one place.
    We have to make sure that the data in all those systems is 
moving across the interfaces in an accurate and smooth way.
    Mr. Andrews. Can you help me with interfaces?
    Mr. Taylor. Sorry.
    Mr. Andrews. We just lost the guy in the----
    Mr. Taylor [continuing]. It is really about----
    Mr. Andrews. Here is what he wants to know. If my tax money 
is being used for a job training program in Tennessee, how can 
I be sure that they got the amount of money they were supposed 
to and they spent the money on what they were supposed to by 
the time they were supposed to spend it on?
    Do either of these weaknesses relate to that problem?
    Mr. Taylor. They do not relate to control over financial 
management. They relate to reporting. And we have processes in 
place that will provide the reporting required to accurately 
manage the financial activities.
    In fact, last year even though we could not provide the 
auditors with the information they needed to complete their 
work, we did not have, after reviewing this twice now, we did 
not have a single violation in the Efficiency Act, and we did 
not leave any more money unspent that we had in prior years. So 
we really focused on that management part.
    Mr. Andrews. What is your plan to resolve these two 
remaining exceptions that you think are still lingering?
    Mr. Taylor. Well, the one exception is the department-wide 
issue relating to access to financial systems. As I mentioned, 
the Chief Information Officer's Office does not concur with the 
finding. It has been there for a number of years.
    We believe in the department that we have redundant 
controls to resolve it.
    Mr. Andrews. Now, is the access problem that people who 
maybe should not have access do? Or people who need access do 
not? What is the nature of the problem?
    Mr. Taylor. It is a security issue. People who do not----
    Mr. Andrews. Want to be sure that only people that are 
properly secured and checked have access to financial systems.
    Mr. Taylor. That is my understanding----
    Mr. Andrews. And there is some disagreement over whether 
there is a problem there. But I think we all agree that we only 
want the people who are supposed to have access to have access.
    Mr. Taylor. Absolutely.
    Mr. Andrews. And what is the second problem that you are 
working on?
    Mr. Taylor. And the second one is financial reporting. And 
that is the preparation, the accurate preparation of the 
timeliness of the financial reporting. And that is where we are 
still working.
    Mr. Andrews. Is the problem more accuracy or timeliness?
    Mr. Taylor. More timeliness, but some accuracy.
    Mr. Andrews. Okay. So, and if I understand the timeliness 
problem is you got to perform two intermediate tasks at the 
final answer that you want?
    Mr. Taylor. At the time, yes. That would be correct, yes--
--
    Mr. Andrews. You want to try to get it sooner----
    Mr. Taylor. More than we--definitely as of the end of 2010.
    Mr. Andrews. Is there any disagreement over whether that 
problem exists?
    Mr. Taylor. No.
    Mr. Andrews. Do you concur with the finding of the 
exception?
    Mr. Taylor. In fact as of 2010 we concur with all of them.
    Mr. Andrews. I appreciate it.
    I, again, I do want to commend you again that you came here 
6months roughly after you started this job, walked into a real 
problem, promised the tax payers and the committee that there 
will be the documents to have an audit done by the spring. You 
delivered on that promise. And the audit came back with an 
unqualified opinion. We thank you for your professionalism and 
your efforts.
    Mr. Taylor. Thank you.
    Mr. Andrews. I yield back.
    Chairman Roe. I will thank the gentleman for yielding.
    Ms. Roby?
    Ms. Roby. Thank you, Mr. Chairman.
    Thank you to each of our witnesses that are here today. We 
really appreciate you taking time to be here.
    I have one very, very simple question for Mr. Lewis. And I 
would like for you to explain to us, the members of this 
committee, the difference between a material weakness and a 
significant deficiency. And I want you to tell us which is more 
serious.
    Mr. Lewis. Okay. Well, first off the material weakness is 
the more serious.
    Both material weakness and significant deficiencies involve 
problems with the design or the operation of your accounting 
systems that not only feed the financial statements and produce 
the financial statements, but are supporting all of your other 
day-to-day operations of running the department and issuing 
grants, et cetera, so all the controls and aspects of running 
those systems.
    If we detect weaknesses in those systems either in how they 
are designed, they were not designed properly, they do not have 
good controls; or they have good controls but they are not 
being utilized as they were meant to be utilized, then we make 
note of those exceptions.
    The auditors will then evaluate how extensive they think 
that problem is, how much is at risk, say in a particular 
system, how much money does it process, you know, how much 
could go wrong if that control is not working or is not there. 
That is how they make their decision of whether it is a 
significant deficiency or it is a material weakness.
    The material weaknesses are the ones that could most likely 
result in you having a significant error in the financial 
statements. And these are all being judged against the 
department's financial statements at that level.
    Ms. Roby. So here we have four material weaknesses. Can you 
site other instances where there were four material weaknesses? 
How many times were there other material weaknesses like this 
in the department over the past 10 years?
    Mr. Lewis. In the past 10 years we have not had any 
material weaknesses. I think, as someone stated earlier, these 
were issues that have been around to some degree, and in some 
nature year-after-year. But it was last year, with the, you 
know, combination of putting in a new system that triggered 
them to what was a significant deficiency from becoming, you 
know, to becoming a bigger problem----
    Ms. Roby. A larger problem.
    Mr. Lewis [continuing]. And becoming a material weakness.
    Ms. Roby. Thank you so much.
    I yield back, Mr. Chairman.
    Chairman Roe. Mr. Kildee?
    Mr. Kildee. Thank you, Mr. Chairman.
    Mr. Lewis, are there findings in this audit report which 
are the same that we discussed in December? Are those findings 
uncommon among federal agencies?
    Mr. Lewis. I have not done my own comparison to all the 
other agencies, but I, you know in my experience in doing other 
audits and what I have seen of other agencies I do not suspect 
that what we have is highly unusual, what we have seen in other 
entities.
    Mr. Kildee. As we discussed last December, was there any 
indication whatsoever of waste, fraud or abuse or incompetence?
    Mr. Lewis. There was nothing that the auditors brought to 
our attention that they felt would fit that category.
    Mr. Kildee. None of those categories.
    In the private sector, I am co-chair of the Automotive 
Caucus here in the Congress, and helped lead General Motors and 
Chrysler to their problems. How does the auditing within 
government, particularly this agency here, compare to the level 
of quality in the auditing in the private sector?
    Mr. Lewis. I think it is quite comparable. We are operating 
under not only the same standards that the commercial auditors 
would follow in a commercial entity, but additional standards 
that the GAO imposes when you are doing a government audit. So 
it is a high standard.
    Mr. Kildee. What can we do, and within our system, that you 
feel basically is comparable to--in the private sector and 
there is no indication of waste, fraud and abuse or competence? 
What can we do to get better, a higher level of audits?
    Mr. Lewis. Upon interpreting that correctly in terms of 
what can we do to better address the problems we are 
identifying in the audit? Is that it?
    Mr. Kildee. Yes.
    Mr. Lewis. Is that fair?
    Mr. Kildee. Yes.
    Mr. Lewis. I think it is really a matter of having the 
attention and the commitment at the highest level in an agency 
to address the problems that are identified in the audit, and 
to address them when they are hopefully smaller issues. You 
know when we bring them as significant deficiencies to really 
try to resolve them at that point before you get to a year when 
you compound it with other things, and what was a small problem 
has now become a larger problem.
    Mr. Kildee. So at least in their attitude toward working in 
an agency, having responsibility or leadership in the agency 
that they have at least mentally a high level of priority to 
make sure that it would be able to get an audit that would be 
helpful and correctly revealing of what the situation is.
    Mr. Lewis. I did not quite catch the question.
    Mr. Kildee. Well, there is attitude toward the fact that 
you are going to be audited, and that the audit is very, very 
important to us.
    Mr. Lewis. Yes.
    Mr. Kildee. And to the chief executive. That this auditing 
is very important is that our level of priority are 
sufficiently high that would help these audits reveal better 
than they are now.
    Mr. Lewis. Yes. I mean that is very important to the, not 
just the successful audit, but the successful financial 
management in the department and in any department that there 
be that commitment and attention to it from the top.
    Mr. Kildee. If you have got a regular pattern of problem 
auditing, might you trace that then to a lack of prioritizing 
within that agency?
    Mr. Lewis. You could certainly, I think, draw that 
conclusion that if you see things repetitively that it is could 
be a commitment to addressing those problems.
    Mr. Kildee. Thank you very much.
    Chairman Roe. I thank the gentleman for yielding.
    Ms. Noem?
    Ms. Noem. Yes. I would yield my time to the chairman.
    Chairman Roe. Okay. Thank you for yielding.
    Just a couple of questions, and I think Mr. Kildee hit on 
it, and all of us have here. I think that the reason that a 
financial audit is so critical for a couple reasons.
    One, it protects the people, Mr. Taylor, in the 
organization when you take over that you are not doing anything 
wrong.
    And secondly, we have a public trust. I know as mayor we 
had a public trust so that the people. I mean there is enough 
conspiracy out there that people, and we do a good enough job 
of wasting people's money anyway, that they do not want to 
think there is any fraudulent use of it.
    And they see $700 toilets and all of that, and I understand 
their frustration when they see this go on in government. We 
expect it in the private sector. We expect it in the public 
sector. And the bar probably should be even higher in the 
public sector. So that is one of the reasons I think this is 
absolutely critical so people can trust us, can trust these 
departments that their money is being spent properly.
    And I guess the question, one of the questions I wanted to 
get to, and either Ms. Flanagan or Mr. Lewis, just a question 
is that when the KPMG audited this as per request of the OIG, 
they found that the DOL failed to comply with two federal laws. 
The Federal Financial Management Improvement Act of 1996 and 
the Federal Manager's Financial Integrity Act of 1982 was 
deficient in its management of $173 billion budget. Could you 
all comment on that and what that was?
    Ms. Flanagan. Related to the act of 1996, that act requires 
financial systems to comply with three requirements. One of 
those requirements relates just to financial systems. And an 
indicator that there is non-compliance is that the system 
cannot produce auditable financial statements in a timely 
manner, which was certainly the case in November of 2010.
    Also those requirements relate to transactions recorded in 
accordance with the U.S. Standard General Ledger, which we 
cited non-compliance with in our report. And also accounting, 
just federal accounting standards, which in November the 
department was unable to represent that their statements were 
fairly presented in accordance with those accounting 
principles.
    Those situations occurred as of September 30th, and we did 
not reassess them during our second audit engagement this year.
    The other act related--the act of 1982, the deficiencies we 
found or non-compliance we found related to that act was the 
process that the department has to do its reporting under that 
act. And we felt that that reporting was done untimely and was 
reliant on obtaining a draft of our internal control report 
prior to them issuing their management refreshment statement.
    Chairman Roe. Yes. I do not think this was intentional. I 
think, I mean I do not think anybody set out to intentionally 
do this. I think you discovered it.
    And I guess, Mr. Lewis, and you may or may not know this, 
are there any penalties associated with it when you break these 
laws? I know it is obviously a civil law, but are there any 
penalties associated?
    Mr. Lewis. I do not know of any penalty associated with it 
other than you are in non-compliance. And I would, with the 
first one Ms. Flanagan was discussing, you could look at it 
that the things that are required in order to get a clean 
opinion on your audit are legal requirements in effect. And by 
not being able to get the clean opinion, you know, most 
entities should be automatically out of compliance with that 
act.
    Chairman Roe. I think, again, back to my point, and I think 
all of us on this panel on both sides want us to have the 
public trust. And I think the public feels like if I have to 
obey the law then federal agencies should obey the law. And I 
think that is the reason that this is extremely important. Not 
only to protect the DOL, but to protect the public.
    So at this point I will yield the balance of my time to Mr. 
Hinojosa.
    Mr. Hinojosa. Thank you, Mr. Chairman.
    Chairman Kline and Ranking Member Miller, today's hearing 
must focus on the steps that the Department of Labor's taking 
to strengthen its financial management system. It is important 
to note that between the years 2003 and 2008 the Bush 
administration spent approximately $35 million on an effort to 
replace a 25-year-old financial system at the Department of 
Labor, a system which failed to comply with applicable 
statutory and regulatory requirements, and ultimately was 
abandoned.
    In 2008 the Bush administration made another attempt to 
implement Department of Labor's financial management system, 
but I understand that there were complications once again.
    As a member of this committee it is reassuring to know that 
under President Obama's leadership that Secretary Hilda Solis 
and her staff have been working diligently to resolve the 
issues in a timely manner.
    My first question goes to James Taylor. And I apologize 
that I came in a bit late because I was at another meeting. So 
if this was discussed with somebody before me, I apologize for 
that. But I would like to know.
    In your testimony, Mr. Taylor, you indicate that the 
department's independent auditor has issued a clean opinion on 
the department's 2010 consolidated financial statements. Can 
you share with us in this committee what some of those issues 
and concerns were when you joined DOL?
    Mr. Taylor. Well, the implementation had been initiated. It 
was behind schedule. Essentially the financial statements had 
to be prepared for more than one system because the conversions 
in the new system occurred in January of 2010. So the fiscal 
year began in the first quarter actually was in the old system.
    Media conversions are always a problem. Same thing happened 
at the Department of Energy in 2005, and they lost their clean 
opinion in GAAP material weakness. It took them 2 years to get 
their clean opinion back.
    In our case when I came in at the end of January, it was 
clear that we could not perform our primary function, which is 
supporting the mission of the department and making sure that 
our funds were properly expended, in addition to providing the 
auditors information they need in a timely basis. And we were 
pretty much clear in saying that early on in that last quarter.
    So we knew we were not going to get a clean opinion. We 
knew we were probably going to get unqualified for a couple 
months before it occurred. And so we focused first on the 
mission.
    The interfaces with the legacy systems--the new financial 
system is a cloud environment, or a shared service environment. 
We do not have any infrastructure at all for the financial 
system within the department. It is the first department to do 
this. It is very complicated.
    In addition, the existing entities in the department, the 
existing systems for procurement, for HR, for travel, all of 
those systems were purchased as standalone. It did not really 
interface with one another, or were not integrated. This 
process integrated all those activities.
    On top of that you had a 20 plus year old financial 
database, and trying to convert that to the latest, more robust 
reporting system was very complicated. We ran into those kinds 
of issues during the year. And those were the challenges that 
we faced coming in.
    Mr. Hinojosa. I have an MBA and I run a business for 25 
years, a large one. And I know how difficult it is to make 
those changes when the software systems do not interface, and 
that you have to run them parallel for a certain number of 
months, 3, sometimes 6.
    Did you all do that? Were they run parallel so that you 
could see how the old system and the new one were going to 
interface?
    Mr. Taylor. Yes, sir. What we did, it was not really 
intentional. The original plan was that the department was 
going to convert as of October 1st.
    I have done this at the Department of Commerce and at FEMA 
previously. When you try to--and usually in IT development 
running parallel makes a lot of sense, particularly for 
processing systems. When you have a system of record like a 
financial system, it is extremely complicated to keep the two 
in balance when you are trying to run more than one 
simultaneously.
    Mr. Hinojosa. If you did that will the Department of Labor 
be in compliance with all the federal laws as of the end of 
this September 30, 2011?
    Mr. Taylor. Well, now this will be the first year on the 
new system, totally on the new system. And we are very 
confident we will be in total compliance.
    Mr. Hinojosa. With that I yield back, Mr. Chairman.
    Chairman Roe. Thank the gentleman for yielding.
    Dr. DesJarlais?
    Mr. DesJarlais. Good morning.
    Mr. Taylor, in December you suggested DOL was focused on 
resubmitting the fiscal year 2010 statements to OIG for the 
audit and normalizing financial operations. How much did this 
review process cost?
    Mr. Taylor. The review process itself, we did not spend 
money, any specific money for the resubmission effort. We have 
added about $7 million to the contract itself, and those 
required to help resolve issues and do the data conversion.
    Mr. DesJarlais. Has that impacted the fiscal year 2011 
audit?
    Mr. Taylor. No, sir. In fact I think we had to do what we 
did. The resubmission was really a milestone, and it was a nice 
target to keep us focused. But everything that we did would 
have had to be done anyway in order for us to get a clean 
opinion in 2011.
    Mr. DesJarlais. Okay. Thank you.
    Mr. Lewis, beginning in 2006 the Office of the Deputy 
Secretary started holding regular quarterly meetings about 
operations at the OCFO. From what I understand OIG took part in 
these meetings along with the deputy secretary, the assistant 
secretary for administration management and the CFO.
    Do these meetings continue to occur?
    Mr. Lewis. Yes.
    Mr. DesJarlais. Okay. And did you find these meetings 
beneficial?
    Mr. Lewis. Yes. That is, I believe you are referring to the 
department's internal control board, and that continues and we 
participate in that. And I think that is beneficial and it is a 
requirement that they do that to do their own self-assessment 
of their operations.
    Mr. DesJarlais. Okay.
    In 2010 several warnings had been sent out. And I am 
interested in hearing about fiscal year 2011 audit, which is 
currently under way. Specifically I would like to know where we 
are in the process and whether or not your office has issued 
any alert memoranda thus far related to the 2011 audit.
    Mr. Lewis. We have not issued anything at this point 
related to the 2011 audit. It is at a very early stage because 
the auditors have been focused on the reissued statements in 
2010 and ensuring that we had good beginning balances for 2011. 
So now that that has been settled, they are now starting to 
just really focus on the 2011 period.
    Mr. DesJarlais. Okay. Thank you.
    And Mr. Chairman, that is all I have. Would you like me to 
yield my time?
    Okay. Thank you.
    Chairman Roe. Dr. Heck?
    Mr. Heck. I have no questions at this time, Mr. Chairman. 
Thank you.
    Chairman Roe. Mr. Andrews?
    Mr. Andrews. We have no further questions, Mr. Chairman. I 
would be happy to defer until Noem or whomever else's 
questions.
    Well, in that case, I want to thank the chairman and my 
colleagues and the witnesses for doing boring, non-media 
centered, really necessary work. We live in an environment 
where the top news story in Capitol Hill seems to get more 
bizarre as the weeks go on. I will not comment on this week's 
story.
    But our real work here is to be good stewards of the public 
trust and the taxpayer's money. And it is a very legitimate 
question when an audit is delayed as to whether we are, each of 
us is discharging that duty responsibly.
    And I am encouraged by the news since the December hearing. 
And I thank, Mr. Taylor, you and your team who have made that 
possible.
    And I thank Ms. Flanagan and Mr. Lewis for their continued 
vigilance to ensure that we get the right result.
    I am hopeful that we will be able to have a totally boring 
and non-eventful fiscal year 2011, meaning that we have no 
delay in the audit being completed, and a clean letter being 
issued, and zero out those exceptions if we can.
    But I think that the hard work of government is the boring 
work of government. So thank you for doing it in a way that is 
not flashy, but important.
    And Mr. Chairman, I am glad we had a chance to share these 
titillating 56 minutes, but who is counting? I do appreciate 
the chance to be with you this morning. And yield back.
    Chairman Roe. I thank the gentleman for yielding. And 
having spent 6 years in local government, you are right.
    It does not make the headlines going from 53 audit findings 
to zero. But zero is where we ought to be. That is what we 
require in public companies. If public companies come out with 
sloppy audits, they go out of business and people lose jobs. 
And I think we have a fiduciary responsibility to gain the 
public trust.
    There is a huge distrust of government now, both sides of 
the aisle. It is absolutely imperative that we have that. And 
you cannot have that when people pick up a newspaper in the 
local diner and say we do not know where billions of dollars 
went.
    And it does not necessarily mean there has been anything 
done wrong with it, but we should be able to count that 
competent people can do that. And I think that there are three 
competent people sitting in front of us right now.
    And I heard Mr. Taylor say that in November the 15th he 
expects two of these material findings to be resolved, and 
hopefully the other two will be. That is the goal is to have no 
findings whatsoever.
    And I also appreciate each of you coming here and 
presenting this, as the ranking member said, maybe not the most 
exciting thing, but I think extremely important, I found in my 
previous life. So thank you for being here.
    And with no further comments, the meeting is adjourned
    [Additional submissions of Mr. Roe follow:]

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    [Whereupon, at 10:57 a.m., the subcommittee was adjourned.]

                                 
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