[House Report 105-664]
[From the U.S. Government Publishing Office]



                                                 Union Calendar No. 371

105th Congress, 2nd Session -  -  -  -  -  -  -  - House Report 105-664


 
 MAKING THE FEDERAL GOVERNMENT ACCOUNTABLE: ENFORCING THE MANDATE FOR 
                    EFFECTIVE FINANCIAL MANAGEMENT

                               __________

                              THIRD REPORT

                                 by the

                        COMMITTEE ON GOVERNMENT

                          REFORM AND OVERSIGHT

                             together with

                            ADDITIONAL VIEWS





 July 31, 1998.--Committed to the Committee of the Whole House on the 
              State of the Union and ordered to be printed


              COMMITTEE ON GOVERNMENT REFORM AND OVERSIGHT

                     DAN BURTON, Indiana, Chairman

BENJAMIN A. GILMAN, New York         HENRY A. WAXMAN, California
J. DENNIS HASTERT, Illinois          TOM LANTOS, California
CONSTANCE A. MORELLA, Maryland       ROBERT E. WISE, Jr., West Virginia
CHRISTOPHER SHAYS, Connecticut       MAJOR R. OWENS, New York
CHRISTOPHER COX, California          EDOLPHUS TOWNS, New York
ILEANA ROS-LEHTINEN, Florida         PAUL E. KANJORSKI, Pennsylvania
JOHN M. McHUGH, New York             GARY A. CONDIT, California
STEPHEN HORN, California             CAROLYN B. MALONEY, New York
JOHN L. MICA, Florida                THOMAS M. BARRETT, Wisconsin
THOMAS M. DAVIS, Virginia            ELEANOR HOLMES NORTON, Washington, 
DAVID M. McINTOSH, Indiana              DC
MARK E. SOUDER, Indiana              CHAKA FATTAH, Pennsylvania
JOE SCARBOROUGH, Florida             ELIJAH E. CUMMINGS, Maryland
JOHN B. SHADEGG, Arizona             DENNIS J. KUCINICH, Ohio
STEVEN C. LaTOURETTE, Ohio           ROD R. BLAGOJEVICH, Illinois
MARSHALL ``MARK'' SANFORD, South     DANNY K. DAVIS, Illinois
   Carolina                          JOHN F. TIERNEY, Massachusetts
JOHN E. SUNUNU, New Hampshire        JIM TURNER, Texas
PETE SESSIONS, Texas                 THOMAS H. ALLEN, Maine
MICHAEL PAPPAS, New Jersey           HAROLD E. FORD, Jr., Tennessee
VINCE SNOWBARGER, Kansas                         ------
BOB BARR, Georgia                    BERNARD SANDERS, Vermont 
DAN MILLER, Florida                  (Independent)
RON LEWIS, Kentucky

                      Kevin Binger, Staff Director

                 Daniel R. Moll, Deputy Staff Director

           David A. Kass, Parliamentarian and Deputy Counsel

                       Judith McCoy, Chief Clerk

                 Phil Schiliro, Minority Staff Director

    Government Management, Information, and Technology Subcommittee

                   STEPHEN HORN, California, Chairman

PETE SESSIONS, Texas                 DENNIS J. KUCINICH, Ohio
THOMAS M. DAVIS, Virginia            PAUL E. KANJORSKI, Pennsylvania
JOE SCARBOROUGH, Florida             MAJOR R. OWENS, New York
MARSHALL ``MARK'' SANFORD, South     CAROLYN B. MALONEY, New York
   Carolina                          JIM TURNER, Texas
JOHN E. SUNUNU, New Hampshire
------ ------

                               Ex Officio

DAN BURTON, Indiana                  HENRY A. WAXMAN, California

          J. Russell George, Staff Director and Chief Counsel

                  Mark Brasher, Senior Policy Director

            Randy Kaplan, Professional Staff Member/Counsel

                 John Hynes, Professional Staff Member

                          Matthew Ebert, Clerk

                     Mason Alinger, Staff Assistant

                                     

  
                         LETTER OF TRANSMITTAL

                              ----------                              

                                  House of Representatives,
                                     Washington, DC, July 31, 1998.
Hon. Newt Gingrich,
Speaker of the House of Representatives,
Washington, DC.
    Dear Mr. Speaker: By direction of the Committee on 
Government Reform and Oversight, I submit herewith the 
committee's third report to the 105th Congress. The committee's 
report is based on a study conducted by its Subcommittee on 
Government Management, Information, and Technology.
                                                Dan Burton,
                                                          Chairman.


                            C O N T E N T S
                               __________
                                                                   Page
  I. Summary of oversight findings and recommendations................1
        A. Introduction..........................................     1
        B. Overview of investigation.............................     3
        C. Findings..............................................     4
        D. Recommendations.......................................     9
 II. Report on the committee's oversight review......................11
        A. Background............................................    11
              1. The need for effective financial management in 
                  the Federal Government.........................    11
              2. The Importance of effective internal control....    16
              3. Additional factors prompting this investigation.    17
        B. Results of the governmentwide audit and related agency 
            audits...............................................    18
              1. Oversight hearings held by the subcommittee.....    18
              2. Federal department and agency financial 
                  management grades..............................    23
        C. Proceedings of the subcommittee.......................    25
              1. April 1, 1998, hearing..........................    25
              2. April 15, 1998, hearing.........................    26
              3. April 16, 1998, hearing.........................    26
              4. April 17, 1998, hearing.........................    27
              5. April 21, 1998, hearing.........................    27
              6. April 24, 1998, joint hearing...................    27
              7. June 18, 1998, hearing..........................    28
III. Conclusions.....................................................28

                                 VIEWS

Additional views of Hon. Stephen Horn............................    30
Additional views of Hon. Henry A. Waxman, Hon. Dennis J. 
  Kucinich, Hon. Tom Lantos, Hon. Robert E. Wise, Jr., Hon. Major 
  R. Owens, Hon. Edolphus Towns, Hon. Paul E. Kanjorski, Hon. 
  Bernard Sanders, Hon. Carolyn B. Maloney, Hon. Thomas M. 
  Barrett, Hon. Eleanor Holmes Norton, Hon. Chaka Fattah, Hon. 
  Elijah E. Cummings, Hon. Rod R. Blagojevich, Hon. Danny K. 
  Davis, Hon. Thomas H. Allen, and Hon. Harold E. Ford, Jr.......    33

                               APPENDIXES

Appendix A.--Basis for agency financial management grades........    37
Appendix B.--Major Federal financial management legislation......    39
Appendix C.--Federal Financial Management Improvement Act........    44
Appendix D.--List of witnesses...................................    50

                                     

  
                             ABBREVIATIONS

                               __________

                                                                        
BAPA                                Budget and Accounting Procedures Act
                                     of 1950                            
CFO                                 Chief Financial Officer             
DOD                                 Department of Defense               
FASAB                               Federal Accounting Standards        
                                     Advisory Board                     
FFMIA                               Federal Financial Management        
                                     Improvement Act of 1996            
FMFIA                               Federal Managers' Financial         
                                     Integrity Act of 1982              
GAGAS                               Generally Accepted Government       
                                     Auditing Standards                 
GAO                                 General Accounting Office           
GMRA                                Government Management Reform Act of 
                                     1994                               
GPRA                                Government Performance and Results  
                                     Act of 1993                        
HCFA                                Health Care Financing Administration
HHS                                 Department of Health and Human      
                                     Services                           
IRS                                 Internal Revenue Service            
OMB                                 Office of Management and Budget     
SFFAC                               Statement of Federal Financial      
                                     Accounting Concepts                
SFFAS                               Statement of Federal Financial      
                                     Accounting Standards               
SGL                                 Standard General Ledger             
SSA                                 Social Security Administration      
                                                                        


  
                                                 Union Calendar No. 371
105th Congress                                                   Report
                        HOUSE OF REPRESENTATIVES

 2nd Session                                                    105-664
_______________________________________________________________________


 MAKING THE FEDERAL GOVERNMENT ACCOUNTABLE: ENFORCING THE MANDATE FOR 
                     EFFECTIVE FINANCIAL MANAGEMENT

                                _______
                                

 July 31, 1998.--Committed to the Committee of the Whole House on the 
              State of the Union and ordered to be printed

_______________________________________________________________________


  Mr. Burton, from the Committee on Government Reform and Oversight, 
                        submitted the following

                              THIRD REPORT

    On July 23, 1998, the Committee on Government Reform and 
Oversight approved and adopted a report entitled ``Making the 
Federal Government Accountable: Enforcing the Mandate for 
Effective Financial Management.'' The chairman was directed to 
transmit a copy to the Speaker of the House.

          I. Summary of Oversight Findings and Recommendations


                            a. introduction


    The Committee on Government Reform and Oversight (the 
``committee'') has primary legislative and oversight 
jurisdiction with respect to ``[g]overnment management and 
accounting measures, generally,'' as well as ``overall economy, 
efficiency and management of government operations and 
activities.'' (Rules of the House of Representatives, 105th 
Congress, X, 1(g)(4) and (6). The committee also has 
responsibility to:

        review and study . . . the application, administration, 
        execution, and effectiveness of those laws, or parts of 
        laws, the subject matter of which is within the 
        jurisdiction of [the] committee and the organization 
        and operation of the Federal agencies and entities 
        having responsibilities in or for the administration 
        and execution thereof, in order to determine whether 
        such laws and the programs thereunder are being 
        implemented and carried out in accordance with the 
        intent of the Congress. . . . In addition, [the] 
        committee shall review and study any conditions or 
        circumstances which may indicate the necessity or 
        desirability of enacting new or additional legislation 
        within the jurisdiction of [the] committee. (Rules of 
        the House of Representatives, 105th Congress, X, 2(b) 
        (1) and (2)).

    Pursuant to this authority, the Subcommittee on Government 
Management, Information, and Technology (the ``subcommittee'') 
convened seven oversight hearings to explore:
         The implementation of laws related to Federal 
        financial management in executive departments and 
        agencies and, in particular, the first year of full 
        implementation of the Chief Financial Officers Act of 
        1990 (the ``CFO Act''), as expanded by the Government 
        Management Reform Act of 1994 [GMRA] and amended by the 
        Federal Financial Management Improvement Act of 1996 
        [FFMIA];
         The extent to which Federal executive 
        departments and agencies were successful in applying 
        the requirements of these laws;
         The need for congressional action to improve 
        financial management in the Federal Government; and
         Options for congressional actions that would 
        effectively bring about such improvement.
    Billions of dollars paid by taxpayers are being lost each 
year to fraud, waste, abuse, and mismanagement in hundreds of 
programs in the Federal Government. Audits have revealed, for 
example, that the Health Care Financing Administration [HCFA], 
which administers the Medicare program, overpaid claims by more 
than $20.3 billion in just 1 year (fiscal year 1997), according 
to estimates by the Inspector General of the Department of 
Health and Human Services [HHS].\1\
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    \1\ Testimony of June Gibbs Brown, Inspector General, Department of 
Health and Human Services on the Audit of Health Care Financing 
Administration Financial Statements before the House Committee on 
Government Reform and Oversight, Subcommittee on Government Management, 
Information, and Technology, and the Committee on Commerce, 
Subcommittee on Oversight and Investigations and Subcommittee on Health 
and Environment, Apr. 24, 1998.
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    In the late 1980's, Congress recognized that one of the 
root causes of this loss was that the Federal Government's 
financial management leadership, policies, systems, and 
practices were in a state of disarray. Financial systems and 
practices were obsolete and ineffective. They failed to provide 
complete, consistent, reliable, and timely information to 
congressional decisionmakers and agency management.
    In response, Congress passed a series of laws designed to 
improve financial management practices and to ensure that tax 
dollars are spent for the purposes that Congress intends. Each 
executive agency covered by the CFO Act or specified by the 
Office of Management and Budget [OMB] is required to prepare 
and have audited a financial statement covering all accounts 
and associated activities of each office, bureau, and activity 
of the agency. Further, consolidated governmentwide financial 
statements must be prepared and audited annually. In addition, 
Federal agencies are required to conform with promulgated 
Federal Government accounting and systems standards, and to use 
the Federal Standard General Ledger.
    As a result of the passage and implementation of these 
laws, limited progress has been made. However much remains to 
be done before the Federal Government's financial management 
systems and practices provide reliable, timely financial 
information on a regular basis.


                      b. overview of investigation


    March 31, 1998, marked a significant milestone in the 
implementation of financial management reform legislation. The 
CFO Act, Public Law 101-576, as expanded by GMRA, Public Law 
103-356, required--for the first time ever--the preparation and 
audit of consolidated financial statements of the Federal 
Government for fiscal year 1997.\2\ GMRA required that the 
General Accounting Office [GAO] issue an audit report no later 
than March 31, 1998, on the consolidated financial statements 
for the preceding fiscal year.
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    \2\ The Consolidated Financial Statements of the U.S. Government 
for fiscal year 1997 cover the executive branch as well as parts of the 
legislative and judicial branches of the Federal Government. 
Government-sponsored enterprises and the Federal Reserve System are 
excluded.
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    GMRA also required that, starting March 1, 1997, and each 
year thereafter, all 24 Federal agencies subject to the 
requirements of the CFO Act submit audited financial statements 
to the Director of OMB.\3\ These 24 Federal agencies make up 
approximately 97 percent of the total Federal outlays for 
fiscal year 1997.
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    \3\ The 24 Federal agencies covered by the requirements of the CFO 
Act are the following: the Department of Agriculture; the Department of 
Commerce; the Department of Defense; the Department of Education; the 
Department of Energy; the Department of Health and Human Services; the 
Department of Housing and Urban Development; the Department of the 
Interior; the Department of Justice; the Department of Labor; the 
Department of State; the Department of Transportation; the Department 
of the Treasury; the Department of Veterans Affairs; the Environmental 
Protection Agency; the National Aeronautics and Space Administration; 
the Agency for International Development; the Federal Emergency 
Management Agency; the General Services Administration; the National 
Science Foundation; the Nuclear Regulatory Commission; the Office of 
Personnel Management; the Small Business Administration; and the Social 
Security Administration.
---------------------------------------------------------------------------
    Fiscal year 1997 also marked the first year of 
implementation of FFMIA, Public Law 104-208. The purpose of 
FFMIA is to ensure that agency financial management systems 
comply with Federal financial management system requirements, 
applicable Federal accounting standards, and the U.S. 
Government Standard General Ledger (Standard General Ledger) 
\4\ in order to provide uniform, reliable, and useful financial 
information. FFMIA required that beginning with the fiscal year 
ending September 30, 1997, auditors for each of the 24 major 
departments and agencies named in the CFO Act must report, as 
part of their annual audits of the agencies' financial 
statements, whether the agencies' financial systems comply 
substantially with Federal financial systems requirements,\5\ 
applicable Federal accounting standards,\6\ and the Standard 
General Ledger at the transaction level. FFMIA also requires 
GAO to report on agency implementation of provisions of FFMIA 
by October 1, 1997, and each year thereafter.
---------------------------------------------------------------------------
    \4\ The U.S. Government Standard General Ledger provides a standard 
chart of accounts and standardized transactions that agencies are to 
use in all their financial systems.
    \5\ OMB Circular No. A-127, ``Financial Management Systems,'' July 
1993, prescribes the financial management systems policies and 
standards for executive agencies to follow in developing, operating, 
evaluating, and reporting on financial management systems. Circular A-
127 references the series of publications entitled Federal Financial 
Management Systems requirements, issued by the Joint Financial 
Management Improvement Program, as the primary source of governmentwide 
requirements for financial management systems.
    \6\ The Comptroller General of the United States and the Director 
of the Office of Management and Budget have issued a comprehensive set 
of accounting standards that will be fully effective in fiscal year 
1998.
---------------------------------------------------------------------------
    It is imperative that these acts are implemented 
successfully. They form the basis for the data that is to be 
used in measuring program performance under the Government 
Performance and Results Act, Public Law 103-62 (the ``Results 
Act''.) Thus, strong congressional oversight, at a minimum, is 
needed to ensure the primary goal of all these pieces of 
legislation--a Federal Government that is accountable to the 
American taxpayer--is achieved.


                              c. findings


    Based on the investigation and oversight hearings conducted 
by the subcommittee, as well as on the governmentwide audit 
conducted by the GAO, the committee finds as follows:
1. There are Material Deficiencies in Federal Financial Information
    For the first time, Congress was provided a concise 
accounting for the myriad financial management problems faced 
by the Federal Government. A report by the GAO \7\ confirmed 
that at least tens of billions of taxpayers' dollars are being 
lost each year to fraud, waste, abuse, and mismanagement in 
hundreds of Federal Government programs. Government financial 
management is in disarray. Its financial systems and practices 
are obsolete and ineffective and do not provide complete, 
consistent, reliable, and timely information to the President, 
congressional decisionmakers, and agency management. The 
information in the financial statements was so poor that the 
auditors were not able to determine the adjustments necessary 
to make the information reliable.
---------------------------------------------------------------------------
    \7\ ``Financial Audit: 1997 Consolidated Financial Statements of 
the United States Government,'' GAO/AIMD-98-127, Mar. 31, 1998.
---------------------------------------------------------------------------
    The GAO report provided a synopsis of the significant 
weaknesses found in the financial systems, problems with 
fundamental recordkeeping, incomplete documentation, and weak 
internal controls, including computer controls. These 
weaknesses prevent the Federal Government from accurately 
reporting a large portion of its assets, liabilities, and 
costs. According to the GAO, ``[t]hese deficiencies affect the 
reliability of the consolidated financial statements and much 
of the underlying financial information.'' And, more important, 
these problems ``. . . also affect the [Federal G]overnment's 
ability to accurately measure the full cost and financial 
performance of programs and effectively and efficiently manage 
its operations.'' \8\
---------------------------------------------------------------------------
    \8\ Ibid., p. 14.
---------------------------------------------------------------------------
    Major problems prevented the GAO from being able to form an 
opinion on the reliability of the governmentwide financial 
statements. These problems included the Federal Government's 
inability to:
         properly account for and report on billions of 
        dollars of property, equipment, materials, and 
        supplies;
         properly estimate the cost of most Federal 
        credit programs and related loans receivable and loan 
        guarantee liabilities;
         estimate and report material amounts of 
        environmental and disposal liabilities and related 
        costs;
         determine the amount of various reported 
        liabilities, including postretirement health benefits 
        for military and Federal civilian employees, veterans 
        compensation benefits, accounts payable, and other 
        liabilities;
         accurately report major portions of the net 
        costs of government operations;
         determine the full extent of improper payments 
        that occur in major programs and that are estimated to 
        involve billions of dollars annually;
         properly account for billions of dollars of 
        basic transactions, especially those between government 
        entities;
         ensure that the information in the 
        consolidated financial statements is consistent with 
        agencies' financial statements;
         ensure that all disbursements are properly 
        recorded; and
         effectively reconcile the change in net 
        position reported in the financial statements with 
        budget results.
    The oversight hearings held by the Government Management, 
Information, and Technology Subcommittee on financial 
management at key executive branch agencies explored specific 
problems and potential solutions at each. Based on Inspector 
General financial audit reports of the 24 CFO Act agencies, 
only 10 \9\ could prepare financial statements that were 
reliable in all material respects based on the results of 
independent audits.
---------------------------------------------------------------------------
    \9\ As of the date of this report, 3 of the 24 agencies required to 
issue audited financial statements by Mar. 1, 1998, had not done so.
---------------------------------------------------------------------------
2. There are Material Control Weaknesses in Federal Financial Systems
    The General Accounting Office also reported several 
pervasive material weaknesses in internal controls across the 
Federal Government.\10\ These material weaknesses in internal 
control contributed to the deficiencies described above. These 
weaknesses result in ineffective controls over safeguarding the 
Federal Government's assets from unauthorized acquisition, use, 
or disposition, ensuring that transactions are executed in 
accordance with laws governing the use of budget authority and 
with other laws and regulations, and ensuring the reliability 
of financial statements.
---------------------------------------------------------------------------
    \10\ A material weakness, as defined by the American Institute of 
Certified Public Accountants in its Statements of Auditing Standards 
and in the Comptroller General's Government Auditing Standards, is a 
condition in which the design or operation of one or more of the 
internal control components does not reduce to a relatively low level 
the risk that errors or irregularities in amounts that would be 
material to the financial statements may occur and not be detected 
promptly by employees in the normal course of performing their duties.
---------------------------------------------------------------------------
    Specifically, GAO found widespread computer control 
weaknesses and material weaknesses in controls related to the 
Federal Government's tax collection activities. GAO stated in 
its report that ``[w]idespread computer control weaknesses are 
placing enormous amounts of [F]ederal assets at risk of fraud 
and misuse, financial information at risk of unauthorized 
modification or destruction, sensitive information at risk of 
inappropriate disclosure, and critical operations at risk of 
disruption. . . . The consequences of computer control 
weaknesses could be devastating and costly--for instance, 
placing billions of dollars of payments and collections at risk 
of fraud and impairing military operations. In addition to 
these potential consequences at [the Departments of the] 
Treasury and Defense, identified weaknesses at agencies such as 
the Department of Health and Human Service's Health Care 
Financing Administration and the Social Security Administration 
place sensitive medical and other personal records at risk of 
disclosure.'' \11\
---------------------------------------------------------------------------
    \11\ ``Financial Audit: 1997 Consolidated Financial Statements of 
the United States Government,'' GAO/AIMD-98-127, Mar. 31, 1998, pp. 20-
21.
---------------------------------------------------------------------------
    With respect to tax collection activities, the GAO reported 
that ``the [F]ederal [G]overnment has material weaknesses in 
controls . . . which effect its ability to efficiently and 
effectively account for and collect the government's revenue. . 
. . As a result, the government cannot separately report 
revenue for three of the four largest revenue sources--Social 
Security, Hospital Insurance, and individual income taxes.'' 
GAO further reported that ``serious weaknesses . . . affect the 
[F]ederal [G]overnment's ability to effectively manage its 
taxes receivable and unpaid assessments.\12\ The lack of 
appropriate subsidiary systems to track the status of taxpayer 
accounts affects the government's ability to make informed 
decisions about collection efforts. Additionally, the [F]ederal 
[G]overnment is vulnerable to loss of tax revenue due to 
weaknesses in controls over disbursements for tax refunds.'' 
\13\
---------------------------------------------------------------------------
    \12\ Other unpaid assessments consist of amounts for which (1) 
neither the taxpayer nor a court has affirmed that the amounts are owed 
and (2) the government does not expect further collections due to 
factors such as the taxpayer's death, bankruptcy, or insolvency.
    \13\ ``Financial Audit: 1997 Consolidated Financial Statements of 
the United States Government,'' GAO/AIMD-98-127, Mar. 31, 1998, pp. 21-
22.
---------------------------------------------------------------------------
    The prevalence of weak internal controls in Federal 
Government systems is exemplified by the fact that only 8 of 
the 24 CFO Act agencies' auditors reported that they did not 
discover material weaknesses during the course of their audits 
of fiscal year 1997 financial statements.
3. There is Pervasive Noncompliance with Laws and Regulations
    Also contributing to the Federal Government's financial 
management problems were material noncompliance with laws and 
regulations. GAO reported that ``tests for compliance with 
selected provisions of laws and regulations related to 
financial reporting disclosed that . . . the [F]ederal 
[G]overnment makes improper payments on major programs such as 
Medicare.'' Further, most agencies were not in compliance with 
FFMIA which requires auditors performing financial audits to 
report whether agencies' financial management systems comply 
substantially with Federal accounting standards, financial 
systems requirements, and the government's Standard General 
Ledger at the transaction level. GAO also reported that ``the 
majority of [F]ederal agencies' financial management systems 
are not designed to meet current accounting standards and 
systems requirements and cannot provide reliable financial 
information for managing government operations and holding 
managers accountable.'' \14\ Only 4 of the 24 agencies required 
to issue audited financial statements were reported by its 
auditors to be in compliance with the requirements of FFMIA.
---------------------------------------------------------------------------
    \14\ Ibid., pp. 22-23.
---------------------------------------------------------------------------
4. The Year 2000 Computing Crisis Poses a Significant Threat to Federal 
        Financial Systems
    A final factor affecting financial management in the 
Federal Government reported by the GAO was the year 2000 
computing crisis.\15\ This critical issue has been the subject 
of extensive oversight by the subcommittee. According to the 
GAO, ``the Federal Government is extremely vulnerable due to 
widespread dependence on computer systems to process financial 
transactions and management information, deliver vital public 
services, and carry out its operations.'' \16\ Few agencies in 
the Federal Government are addressing this problem at a rate 
that will allow them to pass the millennium date without 
failure or disruption of their operations.
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    \15\ For the past several decades, information systems have 
typically used two digits to represent the year, such as ``98'' for 
1998, in order to conserve electronic data storage and reduce operating 
costs. In this format, however, the year 2000 is indistinguishable from 
the year 1900 because both are represented as ``00.'' As a result, if 
not modified, computer systems or applications that use dates or 
perform date- or time-sensitive calculations may generate incorrect 
results beyond 1999.
    \16\ ``Financial Audit: 1997 Consolidated Financial Statements of 
the United States Government,'' GAO/AIMD-98-127, Mar. 31, 1998, p. 23.
---------------------------------------------------------------------------
5. The Role of the Inspector General in Improving Federal Financial 
        Management Can be Strengthened
    In the 20 years since the passage of the Inspector General 
Act, much has changed in the way the Federal Government manages 
its programs and operations. New management laws now being 
implemented are dramatically changing the accountability of the 
Federal Government, and demanding that Inspectors General shift 
their operational focus.
    Under the Chief Financial Officers Act of 1990, as amended 
by the Government Management and Reform Act of 1994, the 
Inspectors General have new responsibilities to ensure that 
Congress has complete, reliable financial information. These 
new responsibilities include the audit of the financial 
statements of the department or agency for which the Inspector 
General is responsible and any subcomponents of the department 
or agency required to have a separate statement. These audits, 
performed under Generally Accepted Government Auditing 
Standards, require that the auditor perform procedures and 
report on the agencies' internal controls and compliance with 
laws and regulations as well as report on the condition of the 
financial statements and related notes thereto.
    H.R. 2883, the ``Government Performance and Results Act 
Technical Amendments of 1998'' passed the House of 
Representatives on March 12, 1998, and is now being considered 
in the Senate. If enacted, this measure will require agencies 
to revise their strategic plans and resubmit them by the end of 
fiscal year 1998, and includes a provision requiring Inspectors 
General to audit agency performance measures.
    The proper role and function of Offices of Inspectors 
General was the focus of an April 21, 1998, Government 
Management, Information, and Technology Subcommittee hearing. 
At the hearing it was revealed that while Inspectors General 
continue to report billions in waste, fraud and abuse found in 
agency programs, little attention is being paid to prevention 
of these problems. For this reason, the effectiveness of 
Inspector General reports to officials and to Congress has been 
questioned. There is also concern that Inspectors General are 
not reporting agency problems or burying their recommendations 
deep within their semi-annual reports.
    Also, the qualifications of candidates for Inspectors 
General positions has come into question. Inspectors General 
need to be appointed based on their demonstrated leadership 
ability and experience. According to Senator Susan Collins (R-
Maine), chairman of the Senate Subcommittee on Investigations 
of the Committee on Governmental Affairs, ``[the Inspectors 
General] are the very officials in government whom we look to 
to combat waste, fraud and abuse and as such they should be 
held to a higher standard and be above reproach.'' \17\
---------------------------------------------------------------------------
    \17\ Testimony of Senator Susan Collins, chairman of the Permanent 
Subcommittee on Investigations of the Committee on Governmental Affairs 
of the Senate, before the Subcommittee on Government Management, 
Information, and Technology of the Committee on Government Reform and 
Oversight of the House of Representatives on Apr. 21, 1998.
---------------------------------------------------------------------------
    The subcommittee also found that there is no cohesive 
leadership for the Inspector General community. The President's 
Council on Integrity and Efficiency, established during the 
Reagan Administration, does some coordination. However, there 
is no real commitment at the highest levels of Government to 
provide leadership.
6. Greater Financial Management Leadership is Needed
    Clear leadership at the senior levels of the Federal 
Government is needed to successfully implement financial 
management initiatives. The capacity of senior leadership at 
OMB has been met. Further, emphasis is placed on the cyclical 
demands of the budget. As a result, OMB's management 
responsibilities have not been given the attention required. 
Many critical management issues, such as financial management 
and information systems management, currently facing the 
administration are going unheeded. For example, only after 
almost 2 years of congressional urging, did the administration 
establish a separate task force to deal with the year 2000 
issue. While this action was applauded, it was too long 
overdue.
    Similarly, at Federal departments and agencies, attention 
to the pressing need for effective financial and information 
systems management is not always given the required degree of 
attention. Many departments and agencies still have individuals 
responsible for financial management leadership--the Chief 
Financial Officer--serving in other equally challenging roles. 
Of the 24 CFO Act agencies, 4 have Chief Financial Officers 
serving in the role of the Chief Information Officer as well. 
Further, seven agency Chief Financial Officers are also serving 
in the capacity of a Chief Operations Officer, in charge of 
overall agency administration.\18\ Federal departments and 
agencies, typically, are large organizations with complex 
missions. As such, it is critical that these agencies have a 
strong management team to operate effectively and efficiently.
---------------------------------------------------------------------------
    \18\ Testimony of Thomas Schatz, president, Citizens Against 
Government Waste, June 18, 1998.
---------------------------------------------------------------------------
    Further, stronger leadership is needed from OMB to provide 
greater cohesiveness in the Inspector General community. This 
leadership is needed to ensure that the Inspectors General 
adhere to the highest standards of conduct. There is a need to 
support the role of the Inspector General to foster better 
teamwork between the Offices of the Inspector General and 
agency senior management in order to resolve agency problems.


                           d. recommendations


    Based on the foregoing findings, the committee recommends 
the following:
1. Require Agencies to be Accountable to Congress and the President 
        through Regular Oversight
    Strong congressional oversight has proven to be an 
effective tool to push executive departments and agencies to 
implement necessary reforms. To build upon this, Congress needs 
to mandate formal oversight hearings to review the status of 
agency financial management and actions to resolve related 
problems.
    Each department or agency must annually provide a detailed 
status report on its financial management operations. In turn, 
as appropriate, each department or agency should be reviewed on 
a regular basis by the relevant oversight, authorization, and 
appropriations committees. These hearings can be held 
quarterly, semiannually, or annually with the frequency 
dependent on the severity of the agency's problems.
    Agencies with outstanding financial management problems are 
required by FFMIA to prepare a ``remediation plan.'' This plan 
needs to be of sufficient detail to provide a road map for 
agency management and staff to resolve any reported problems in 
adhering to Federal Government accounting and systems 
standards, and the implementation of the Government Standard 
General Ledger. Congressional oversight hearings need to 
include a discussion of the agency's plan and the progress 
being made toward resolving outstanding problems with its 
various financial systems and practices. The oversight hearings 
need to include the department or agency's Inspector General 
who is responsible for reporting on the agency's compliance 
with the Federal Financial Management Improvement Act of 1996.
    To be successful, the agency remediation plans must provide 
a detailed description of planned actions with clear and 
reasonable milestones including the naming of specific staff 
responsible for resolving a particular issue. Such a plan 
should be signed off by the agency head and the relevant 
management officials of the agency such as the Chief Financial 
Officer, the Chief Information Officer, and the Inspector 
General. A draft of the approved plan needs to be sent to the 
Comptroller General to coordinate the agency's actions and 
related milestones in the remediation plan and agree to the 
plan. A draft of the plan should be available to the relevant 
congressional committees, and the Director of OMB, for such 
advice as they may provide. These parties must meet regularly 
to monitor the progress toward meeting the objectives of the 
plan. Congress can then effectively monitor agency actions and 
take corrective actions as necessary.
2. Provide Incentives to Agencies to Have Effective Financial 
        Management
    Congressional oversight alone cannot effect necessary 
change in the financial management practices of all departments 
and agencies. Incentives are needed to prompt agencies to take 
proactive measures to quickly resolve outstanding financial 
management problems. If an agency is unable or unwilling to 
effect crucial changes in its financial management systems and 
practices, Congress should take action. Possible actions 
include: (1) redirecting a percentage of the agency's 
appropriated funds to correct financial management problems 
from other programmatic or administrative areas; (2) 
restricting the use of a percentage of the agency's 
appropriated funds until the problems are corrected; or (3) 
reducing various amounts of appropriated funds to the agency 
until remedial actions are completed. These actions are 
intended to provide incentive to the agency to resolve its 
financial management problems in an expeditious manner.
    Further, Congress and the administration must hold agency 
officials responsible for not meeting planned milestones 
(within reasonable limits). If the officials responsible for 
the problem cannot resolve it, then the officials responsible 
should be removed from Federal service. Congress must also take 
action to restrict the activities of the agency in its ability 
to participate in or compete with other agencies or private 
sector entities for contracts for goods and services (i.e., 
commercial enterprises) until it has resolved its financial 
management problems.
    Congress should mandate that oversight boards be 
established in those circumstances in which an agency has been 
unable or unwilling to resolve its financial management 
problems, after other actions described above have failed. 
These recalcitrant agencies are those that meet the following 
criteria:
         the number of years problems have existed is 
        excessive;
         the magnitude of the problems to the 
        operations of the agency is material; and
         the magnitude of the problems to the Federal 
        Government as a whole is material.
3. Strengthen the Ability of the Inspector General to Carry out their 
        Financial Management Oversight Responsibilities
    Inspectors General are responsible for conducting audits of 
agencies programs and operations. The audit function in the 
executive branch is crucial. Executive branch agency audits 
provide information to executive branch managers and Congress 
which are necessary to uncover and resolve problems impeding 
effective financial management. To ensure that the Offices of 
the Inspector General can provide audit services of the utmost 
quality and integrity, it is imperative that Congress take 
steps to ensure that the Inspectors General are well-qualified 
and have the necessary resources to oversee agency financial 
management.
    The Offices of the Inspector General must ensure they are 
qualified to perform financial statement audits or specific 
segments of audits requiring specific expertise. These 
qualifications need to determined through a review by an 
external party and may be incorporated into the peer review 
process.
    For all future Inspector General appointments, have a 
board, which includes representatives of the President's 
Council on Integrity and Efficiency [PCIE], review the 
qualifications of the nominated Inspector General candidate to 
see if he or she is qualified for an Inspector General position 
before they can be forwarded for Senate confirmation.
4. Strengthen the President's Role as Chief Executive Officer of the 
        Executive Branch by Establishing an Office of Management
    Management of the executive branch of the Federal 
Government should be a Presidential priority. Among the 
President's many roles is the responsibility to serve as chief 
executive officer or general manager of the Federal Government. 
Many broad objectives--including effectively managing Federal 
Government finances--intended to make the Federal Government 
work better depend on the commitment by the President and his 
staff in the Executive Office of the President. By approaching 
the Federal Government almost exclusively from a budgetary 
perspective, Presidents limit their ability to address 
management reforms in the Federal Government.
    If the financial management function is to be strengthened 
the President needs the experts to be certain that the goal is 
achieved. That is also true of various other management 
functions. In the past, the Government Management, Information, 
and Technology Subcommittee has recommended legislation that 
would form an Office of Management separate and distinct from 
the Office of the Budget. This Office could help the President 
and his Cabinet concentrate on the critical management 
challenges facing the Federal Government.
    Cabinet officers are not always nominated for their 
managerial skills. They need help. Congress has provided help 
by mandating the roles of Chief Financial Officer and Chief 
Information Officer. In a number of departments and agencies, 
these roles have been combined in one person. That is not what 
Congress sought. The financial and information management 
functions are so complex that they require the full-time 
attention of a senior management official.

             II. Report on the Committee's Oversight Review


                             a. background


1. The Need for Effective Federal Financial Management
    The need for effective financial management in the Federal 
Government has long been recognized. Insights on this subject 
made by President Thomas Jefferson on April 1, 1802--196 years 
ago--are still relevant today:

        I think it an object of great importance . . . to 
        simplify our system of finance, and bring it within the 
        comprehension of every member of Congress . . . the 
        whole system [has been] involved in an impenetrable 
        fog. [T]here is a point . . . on which I should wish to 
        keep my eye . . . a simplification of the form of 
        accounts . . . so as to bring everything to a single 
        centre[;] we might hope to see the finances of the 
        Union as clear and intelligible as a merchant's books, 
        so that every member of Congress, and every man of any 
        mind in the Union, should be able to comprehend them to 
        investigate abuses, and consequently to control 
        them.\19\
---------------------------------------------------------------------------
    \19\ Thomas Jefferson in a letter to the Secretary of the Treasury, 
Albert Gallatin, Apr. 1, 1802, The Writings of Thomas Jefferson, Edited 
by Andrew A. Lipscomb, (Washington, DC, 1905.) Vol. 10, pp. 306-309.

    Federal financial management has been in a state of 
disarray for too long. Billions of dollars of taxpayers money 
are being lost each year to fraud, waste, abuse, and 
mismanagement in hundreds of programs in the Federal 
Government. Financial systems and practices are obsolete and 
ineffective and do not provide complete, consistent, reliable, 
and timely information to congressional decisionmakers and 
agency management. The source of these losses could be 
identified and significantly reduced by improved management 
practices.
Federal Financial Management Legislation
    In response to this problem, Congress passed a series of 
laws designed to ensure that agency management problems would 
be fixed. The Chief Financial Officers Act, as expanded by the 
Government Management Reform Act of 1994 and amended by the 
Federal Financial Management Improvement Act of 1996 represents 
the most comprehensive financial management reform legislation 
of the last 40 years. Other significant legislation affecting 
Federal financial management includes: the Budget and 
Accounting Procedures Act of 1950, the Inspector General Act of 
1978, as amended by the Inspector General Act Amendments of 
1988 (the ``IG Act''); Federal Managers' Financial Integrity 
Act of 1982 [FMFIA]; and the Debt Collection Act of 1982, as 
amended, and the Debt Collection Improvement Act of 1996. The 
key financial management provisions of each of these laws is 
described in detail in appendix B of this report.
Audited Financial Statements
    The Chief Financial Officer Act established 10 pilot 
agencies, requiring them to prepare financial statements and 
have those statements audited. This pilot program was intended 
to demonstrate the benefit of the preparation and audit of 
financial statements at Federal agencies. Based on the success 
of the pilot audits in uncovering financial managment problems 
in these agencies, Congress expanded the CFO Act with the 
passage of the Government Management Reform Act of 1994.
    The Government Management Reform Act [GMRA] is intended to 
provide a more effective, efficient, and responsive government. 
To that end, it specifically requires that each executive 
department and agency prepare and have audited a financial 
statement covering all accounts and associated activities of 
each office, bureau, and activity of the agency. The Director 
of OMB is responsible for setting the form and content of the 
financial statements against which the auditor must measure the 
agency's financial statements. The guidance provided by OMB 
incorporates the standards recommended by the Federal 
Accounting Standards Advisory Board [FASAB]. These audited 
statements are then to be sent to the Director of OMB not later 
than March 1 of each year following the fiscal year for which 
the statements are prepared.
    In addition, GMRA required that a set of consolidated 
governmentwide financial statements be prepared for fiscal year 
1997 and each year thereafter by the Secretary of the Treasury, 
in coordination with the Director of OMB. The financial 
statements are to be audited by the Comptroller General of the 
United States. These audited financial statements are due to 
Congress by March 31, of the following year.
Federal Accounting and Auditing Standards
    The Budget and Accounting Procedures Act of 1950 was 
enacted as a result of recommendations of the Hoover 
Commission.\20\ The Commission suggested sweeping reforms that 
were intended to modernize and simplify governmental accounting 
and auditing methods and procedures. Congress agreed and 
directed the Comptroller General to ``prescribe the principles, 
standards, and related requirements for accounting to be 
observed by each [E]xecutive agency.'' \21\ In response, the 
Comptroller General issued accounting principles to be followed 
by executive agencies in the General Accounting Officer's 
Policy and Procedures Manual for Guidance of Federal Agencies, 
Title 2, Appendix I.
---------------------------------------------------------------------------
    \20\ The Commission on the Organization of the Executive Branch of 
Government, chaired by former President Herbert Hoover and commonly 
known as the ``Hoover Commission'', was formed in 1947. The 
Commission's first report, issued in 1949, contained recommendations 
regarding accounting and budget matters, many of which were enacted in 
the Budget and Accounting Procedures Act of 1950.
    \21\ The Budget and Accounting Procedures Act of 1950 (ch. 946, 64 
Stat. 832, pt. II, sec. 112(a)).
---------------------------------------------------------------------------
    Title 2 standards were modeled, to a large degree, after 
private sector practices. They were the primary source of 
accounting guidance to be followed by Federal agencies from the 
1950s until they were superseded by Statements of Federal 
Financial Accounting Standards. With the passage of the CFO Act 
in 1990 and its requirement to audit certain agencies' 
financial statements, attention was focused on the accounting 
standards to which the agencies were to be held. As a result, 
the Office of Management and Budget objected to the Comptroller 
General setting such policy since he and the General Accounting 
Office which he heads are part of the legislative branch.
    To resolve this constitutional dispute and improve 
adherence to a set of comprehensive accounting standards, the 
Comptroller General, along with the Director of the Office of 
Management and Budget and the Secretary of the Treasury, agreed 
to establish an independent board that would recommend 
accounting principles. This board, known as the Federal 
Accounting Standards Advisory Board [FASAB], was established in 
October 1990 as a deliberative body to consider and recommend 
accounting standards and principles for the Federal Government. 
Two of its members represent the executive branch; one 
represents the legislative branch. So there is no 
constitutional intrusion from the legislative branch as 
represented by the Comptroller General.
    The recommendations of FASAB must be approved by the 
Comptroller General, the Director of the Office of Management 
and Budget, and the Secretary of the Treasury, who are referred 
to as the Board's principals. The approved standards, as 
adopted by the Board's principals, are then issued by the 
Comptroller General and the Director of OMB as Statements of 
Federal Accounting Standards. These Statements of Federal 
Accounting Standards are the body of standards that constitute 
generally accepted accounting principles for the Federal 
Government.
    The FASAB is responsible for recommending accounting 
standards after considering the financial and budgetary 
information needs of Congress and executive agencies, as well 
as other users of Federal financial information.\22\ While 
financial statements of private entities are principally 
intended to provide investors (shareholders, bankers, etc.) 
with information on the profitability of the entity, accounting 
and financial reporting in the Federal Government focuses on 
the government's duty to be publicly accountable. Federal 
financial reporting is intended to be used to (1) assess the 
government's accountability and its efficiency and 
effectiveness and (2) contribute to the understanding of the 
economic and social consequences of the allocation and various 
uses of Federal resources. Accounting standards for the Federal 
Government should result not only in understandable, relevant, 
and reliable financial information, but also foster effective 
accounting systems and internal controls that will help provide 
reasonable assurance that governmental activities are conducted 
economically, efficiently, and effectively, and in compliance 
with applicable laws and regulations.
---------------------------------------------------------------------------
    \22\ Federal Accounting Standards Advisory Board, Statement of 
Federal Financial Accounting Concepts No. 1, ``Objectives of Federal 
Financial Reporting,'' ch. 1, pars. 23-30; Sept. 2, 1993.
---------------------------------------------------------------------------
    FASAB completed the development of a comprehensive set of 
accounting standards for the Federal Government in 1996. These 
standards, augmented by two Statements of Federal Financial 
Accounting Concepts [SFFACs], consist of eight Statements of 
Federal Financial Accounting Standards [SFFASs]. Also, FASAB 
currently has five exposure drafts and one invitation for views 
on suggested standards outstanding, and has issued four 
interpretations of standards. The following table lists the 
documents issued by FASAB. It is expected that FASAB will 
continue to recommend statements on specialized topics and 
revise existing statements as necessary.


    Accounting Concepts and Standards Documents Issued by the Federal   
               Accounting Standards Advisory Board [FASAB]              
------------------------------------------------------------------------
          Title of Document           Date of Issuance   Effective Date 
------------------------------------------------------------------------
SFFAC 1: Objectives of Federal        September 2,      Not Applicable  
 Financial Reporting.                  1993                             
------------------------------------------------------------------------
SFFAC 2: Entity and Display           June 6, 1995      Not Applicable  
------------------------------------------------------------------------
SFFAS 1: Accounting for Selected      March 30, 1993    October 1, 1993 
 Assets and Liabilities.                                                
------------------------------------------------------------------------
SFFAS 2: Accounting for Direct Loans  August 23, 1993   October 1, 1993 
 and Loan Guarantees.                                                   
------------------------------------------------------------------------
SFFAS 3: Accounting for Inventory     October 27, 1993  October 1, 1993 
 and Related Property.                                                  
------------------------------------------------------------------------
SFFAS 4: Managerial Cost Accounting   July 31, 1995     October 1, 1997 
 Concepts and Standards.                                 \1\            
------------------------------------------------------------------------
SFFAS 5: Accounting for Liabilities   December 20,      October 1, 1996 
 of the Federal Government.            1995                             
------------------------------------------------------------------------
SFFAS 6: Accounting for Property,     November 30,      October 1, 1997 
 Plant and Equipment.                  1995                             
------------------------------------------------------------------------
SFFAS 7: Accounting for Revenue and   May 10, 1996      October 1, 1997 
 Other Financial Sources.                                               
------------------------------------------------------------------------
SFFAS 8: Supplementary Stewardship    June 11, 1996     October 1, 1997 
 Reporting.                                                             
------------------------------------------------------------------------
Exposure Draft: Management's          February 1997     Not Applicable  
 Discussion and Analysis.                                               
------------------------------------------------------------------------
Exposure Draft: Governmentwide        June 1997         Not Applicable  
 Supplementary Stewardship Reporting.                                   
------------------------------------------------------------------------
Exposure Draft: Accounting for        June 1997         Not Applicable  
 Internal Use Software.                                                 
------------------------------------------------------------------------
Exposure Draft: Amendments to         February 1998     Not Applicable  
 Accounting for Property, Plant, and                                    
 Equipment.                                                             
------------------------------------------------------------------------
Exposure Draft: Accounting for        February 20,      Not Applicable  
 Social Insurance.                     1998                             
------------------------------------------------------------------------
Invitation for Views: Accounting for  July 1996         Not Applicable  
 the Cost of Capital by Federal                                         
 Entities.                                                              
------------------------------------------------------------------------
Interpretation 1: Reporting on        March 12, 1997    Effective upon  
 Indian Trust Funds.                                     implementation 
                                                         of SFFAS 7     
------------------------------------------------------------------------
Interpretation 2: Accounting for      March 12, 1997    Effective upon  
 Treasury Judgment Fund Transactions.                    implementation 
                                                         of SFFAS 4 and 
                                                         5              
------------------------------------------------------------------------
Interpretation 3: Measurement Date    August 29, 1997   Reporting       
 for Pension and Retirement Health                       periods ending 
 Care Liabilities.                                       on or after    
                                                         September 30,  
                                                         1997           
------------------------------------------------------------------------
Interpretation 4: Accounting for      December 19,      No effective    
 Pension Payments in Excess of         1997              date set \2\   
 Pension Expense.                                                       
------------------------------------------------------------------------
\1\ Implementation of SFFAS 4 was deferred one year from October 1,     
  1996, to October 1, 1997. It is applicable to Federal financial       
  statements prepared for fiscal year 1998 and thereafter.              
\2\ Interpretation 4 was issued by FASAB, however it will not be        
  effective until it is published by OMB. As of the date of this report,
  OMB had not published Interpretation 4.                               

2. The Importance of Effective Internal Control
    Federal financial management legislation--the Federal 
Managers' Financial Integrity and Federal Financial Management 
Improvement Acts in particular--placed great emphasis on the 
importance of effective internal control. Its importance cannot 
be overstated, especially in the large complex operating 
environment of the executive branch of the Federal Government. 
Internal control is the first line of defense against fraud, 
waste, abuse, and mismanagement and helps to ensure that an 
entity's mission is achieved in the most effective and 
efficient manner. Although the subject of internal control 
usually surfaces--as it has in the hearings held by the 
Government Management, Information, and Technology 
Subcommittee--after improprieties or inefficiencies are found, 
good managers are always aware of and seek ways to help improve 
operations through effective internal control.
    Internal control can be simply defined as the methods by 
which an organization governs its activities to accomplish its 
mission effectively and efficiently. More specifically, 
internal control is concerned with stewardship and 
accountability of resources consumed in the process of striving 
to accomplish an entity's mission with effective results. GAO 
has defined internal control in its Standards for Internal 
Controls in the Federal Government as follows:

        The plan of organization and methods and procedures 
        adopted by management to ensure that resource use is 
        consistent with laws, regulations, and policies; that 
        resources are safeguarded against waste, loss, and 
        misuse; and that reliable data are obtained, 
        maintained, and fairly disclosed in reports.

    Internal control should not be looked upon as separate, 
specialized systems within an agency. Rather, internal control 
should be recognized as an integral part of each system that 
management uses to regulate and guide its operations. Internal 
control is synonymous with management control in that the broad 
objectives of internal control cover all aspects of agency 
operations. Although ultimate responsibility for good internal 
control rests with management, all employees have a role in 
effective operation of internal control that has been set by 
management.
    It is important to recognize that internal controls can be 
designed to provide reasonable, not absolute, assurance that an 
organization's activities are being accomplished in accordance 
with its objectives. In its Statement of Auditing Standards No. 
55 \23\ the American Institute of Certified Public Accountants 
identified internal control limitations, such as the 
possibility of errors arising from such causes as 
misunderstanding of instructions, mistakes of judgment, and 
personal carelessness. Also, many control procedures depend on 
the segregation of duties. The effectiveness of these 
procedures can be circumvented by collusion. Similarly, 
management authorizations may be ineffective against errors or 
fraud perpetrated by management. In addition, the standard of 
reasonable assurance recognizes that the cost of internal 
control should not exceed the benefit derived. Reasonable 
assurance equates to a satisfactory level of confidence under 
given considerations of costs, benefits, and risks.
---------------------------------------------------------------------------
    \23\ ``Codification of Statements on Auditing Standards (Including 
Statements on Standards for Attestation Engagements), Numbers 1 to 
82,'' American Institute of Certified Public Accountants, as of Jan. 1, 
1997.
---------------------------------------------------------------------------
    The full cost of fraud, waste, abuse, and mismanagement 
cannot always be known in advance and measured in terms of 
dollars. If improper activities are allowed to continue, public 
confidence is eroded in the government's ability to manage its 
programs effectively and honestly. Such erosion to any degree 
cannot be measured in dollar terms. The trust of the citizenry 
in its government is a priceless relationship.
    Management at most Federal agencies are faced with tight 
budgets and thus limited human, information, and financial 
resources. In such an environment, especially given the diverse 
and complex nature of Federal Government operations, weak 
control environments can provide fertile ground for fraud, 
waste, abuse, and mismanagement.
3. Additional Factors Prompting This Investigation
    Effective financial management practices and timely 
financial information which is reliable enables senior 
management to make decisions which will result in effective and 
efficient operations. This belief is reflected in the 
Government performance and Results Act passed by Congress in 
1993. It seeks to ``. . . improve the confidence of the 
American people in the capacity of the Federal Government, by 
systematically holding Federal agencies accountable for 
achieving program results . . .'' and ``. . . improve 
[C]ongressional decisionmaking by providing more objective 
information on achieving statutory objectives, and on the 
relative effectiveness and efficiency of Federal programs and 
spending.'' Without reliable and timely financial information 
on the costs and benefits of Federal programs, effective 
results will not occur. Thus, it is imperative that Congress 
ensure that financial management practices provide 
decisionmakers with the financial information they need to 
achieve high levels of efficiency and effectiveness.


 b. results of the first governmentwide financial statement audit and 
                         related agency audits


1. Oversight Hearings Held by the Subcommittee
    On March 31, 1998, the General Accounting Office released 
its audit report on the financial status of the Federal 
Government required under the Chief Financial Officers Act of 
1990 as expanded by the Government Management Reform Act of 
1994 and amended by the Federal Financial Management 
Improvement Act of 1996. This report provided for the first 
time since the U.S. Government began in 1789, a concise 
accounting for the myriad problems faced by the executive 
branch. The Government Management, Information, and Technology 
Subcommittee held a hearing on April 1, 1998, to examine the 
results of this audit.
    The subcommittee held hearings that focused on the status 
of financial management at the Department of Defense, the 
Health Care Financing Administration, the Internal Revenue 
Service, and the Social Security Administration. Collectively, 
they account for almost all the revenue and a majority of the 
cost (excluding interest on the national debt held by the 
public) for the Federal Government each year. In addition, 
Defense accounts for a significant portion of the assets held 
by the Federal Government. As a result, these agencies play a 
significant role in the Governmentwide statements and 
significantly affect the audit results. All these agencies have 
experienced problems in relation to financial management and 
have had varying degrees of success in resolving them. Each 
agency and department is required to issue separate audited 
financial statements. Hearings were held by the subcommittee to 
explore specific issues at each of these agencies.\24\
---------------------------------------------------------------------------
    \24\ The results of each of these hearings is discussed in sec. II, 
C., Proceedings of the Subcommittee, on pp. 25-28 of this report.
---------------------------------------------------------------------------
    These hearings:
         explored the results of the first year of full 
        implementation of the GMRA throughout the Federal 
        Government, and in particular at the four agencies 
        noted above;
         considered the need for congressional action 
        to improve financial management in the executive 
        branch; and
         where needed reviewed options for possible 
        congressional actions to ensure the successful 
        implementation of Federal Government financial 
        management reforms.
Internal Revenue Service [IRS]
    The IRS collects more than 95 percent of the Federal 
Government's $1.7 trillion in annual revenue. The IRS issues 
two sets of financial statements: one set for its custodial 
operations--the revenues collected and refunds paid and related 
taxes receivable and payable--and another for its appropriated 
funds. IRS' financial data are then incorporated into the 
agencywide statements prepared by the Department of the 
Treasury.
    The IRS is responsible for enforcing tax laws in a fair and 
equitable manner, but has long been the focus of criticism for 
perceived abuse of its broad enforcement powers. In response to 
this criticism, Congress established a Commission on the 
Restructuring of the IRS. The Commission, led by Representative 
Rob Portman of Ohio and Senator Bob Kerrey of Nebraska, 
released a comprehensive report in June 1997 proposing several 
changes in the way the IRS is managed. The Commission's 
recommendations were the basis of H.R. 2676, the ``Internal 
Revenue Service Restructuring and Reform Act of 1997,'' which 
was passed by the House and Senate on July 7, 1998, and is 
awaiting action by the President.
    Also at congressional urging, the Clinton administration 
appointed a new Commissioner with extensive experience in 
managing large organizations. Charles O. Rossotti, founder of a 
firm in the management systems and technology industry, was 
appointed Commissioner of the IRS in September 1997. Since his 
appointment, Commissioner Rossotti has proposed a sweeping 
reorganization of the IRS that exceeded changes mandated in the 
legislation passed by Congress.
    In fiscal year 1997, for the first time since it was 
required to issue annual audited statements in fiscal year 
1992, the IRS received a clean opinion on its financial 
statements covering the collection and refunds of taxes. 
(Separate statements are prepared covering IRS' appropriated 
operations.) \25\ However, the audit report disclosed 
significant weaknesses in internal controls and areas of 
noncompliance with laws and regulations.
---------------------------------------------------------------------------
    \25\ For fiscal year 1997, IRS issued two sets of financial 
statements. One set of statements accounts for the tax revenues 
collected or due and refunds paid or owed. These net tax revenues and 
related assets and liabilities cannot be used by the IRS in its 
operations. IRS has a fiduciary duty to collect and account for these 
taxes which are used to fund Federal Government operations. The other 
set of financial statements accounts for the appropriations received by 
IRS to fund its operations.
---------------------------------------------------------------------------
    The subcommittee's oversight hearing on April 15, 1998, 
highlighted the need for better computer systems to improve the 
IRS' debt management. The IRS estimates it can collect only 13 
percent of the $214 billion in debt assessed by the IRS which 
it claims it is owed by delinquent taxpayers. The hearing also 
illustrated the need for better controls over cash coming into 
IRS service centers. Between 1995 and 1997, there were 80 
instances of actual or alleged embezzlement by IRS employees, 
costing taxpayers $5.3 million.\26\
---------------------------------------------------------------------------
    \26\ Testimony of Gene L. Dodaro, Assistant Comptroller General, 
General Accounting Office, on financial management at the Internal 
Revenue Service before the House Committee on Government Reform and 
Oversight, Subcommittee on Government Management, Information, and 
Technology, Apr. 15, 1998.
---------------------------------------------------------------------------
Department of Defense [DOD]
    The General Accounting Office, Defense Inspector General, 
and the military department audit agencies have long reported 
problems in DOD's financial management systems and practices. 
Each year numerous reports are issued with virtually the same 
problems as the prior year. DOD's reported financial management 
problems include inadequate control over assets such as real 
property, capital leases, construction in process, and 
inventories; the understatement of costs associated with 
environmental clean-up; military retiree benefits and other 
liabilities not covered by current budgetary resources; and 
instances of noncompliance with laws and regulations. These 
problems resulted in the Inspector General's inability to 
render an opinion on DOD's financial statements for fiscal year 
1997. The GAO disclaimed an opinion on the Consolidated 
Governmentwide Financial Statements of the Federal Government, 
in great part due to Defense's inability to provide complete 
and verifiable information of its finances.
    The issues that need to be resolved cross operational lines 
in DOD and at the military services. As a result, action is 
needed from the top management levels at DOD to ensure that the 
longstanding problems are resolved.
    On April 16, the subcommittee examined the need for 
remedial actions at the DOD to correct its longstanding and 
severe problems in achieving even the most basic level of 
accountability. These problems include DOD's:
         inability to find all its equipment and 
        inventories;
                 Examples of missing equipment and 
                inventories items at the Navy included:
                         2 utility boats valued at 
                        $174,000 each
                         2 large harbors tugs valued at 
                        $875,000 each
                         7 covered lighters--barges 
                        used to carry cargo--with values 
                        ranging from $40,000 to $85,000 each
                         1 floating crane valued at 
                        $468,000
                         15 uninstalled engines, 
                        including 2 F-18 engines valued at $4 
                        million each
                 Missing items at the Army included:
                         An Avenger missile launcher 
                        worth approximately $1 million. More 
                        than 7 months after the end of the 
                        fiscal year, the missile launcher was 
                        located by DOD.
         inability to estimate and report costs for 
        environmental and disposal liabilities--which GAO 
        believes is understated by tens of billions of dollars;
         inability to determine the cost of 
        postretirement health benefits for its military 
        employees;
         inability to provide and accurately report on 
        the net cost of its operations;
         inability to account for billions of dollars 
        of basic transactions; and
         inability to ensure that all disbursements are 
        properly recorded and reconciled.\27\
---------------------------------------------------------------------------
    \27\ On Nov. 14, 1995, the Government Management, Information, and 
Technology Subcommittee held a hearing on DOD's financial management 
problems, including its inability to account for billions of dollars it 
had spent. As of September 1995, the amount of these so called 
``problem disbursements'' was reported to be $20.5 billion. This amount 
was down from the $25 billion DOD had reported in February 1995 when 
the problem was brought to congressional attention in GAO's 1995 High-
Risk report. (``High Risk Series: An Overview,'' GAO-HR-95-1, February 
1995.) In his Nov. 14, 1995, testimony, DOD Deputy Chief Financial 
Officer Alvin Tucker stated that problem disbursements had been reduced 
from $51 billion in June 1993. In DOD's latest report as of January 
1998, it reported $22.6 in problem disbursements.
---------------------------------------------------------------------------
    In brief, because of the inabilities noted above, there was 
no clean opinion for Defense.
Social Security Administration [SSA]
    For fiscal year 1997, Social Security, which is now an 
independent agency not part of a Cabinet department, earned an 
unqualified ``clean'' opinion on its financial statements for 
the 4th consecutive year. The auditors reported no material 
weaknesses in SSA's internal controls. The audit report noted, 
however, two instances of noncompliance with laws and 
regulations. SSA published its financial statements and the 
related audit report in its ``accountability report'' on 
November 21, 1997--more than 3 months early. SSA was one of the 
few agencies to issue its report prior to the March 1, 1998, 
due date.
    Social Security was one of the first agencies to have its 
financial statements audited as a pilot under the CFO Act. The 
first audit required of SSA under the CFO Act was for fiscal 
year 1990.
    On April 17, the Government Management, Information, and 
Technology Subcommittee looked at lessons learned at SSA in its 
efforts to achieve effective financial management systems and 
practices. It received a clean opinion on its financial 
statements for the 4th year in a row and had an effective 
system of internal controls--these are commendable 
achievements. However, the audit continued to disclose areas 
that need improvement:
         SSA's known benefit overpayments amounted to 
        $1 billion in fiscal year 1997.
         SSA continues to have a large backlog of 
        continuing disability reviews, by which SSA ensures 
        that people receiving disability benefits are entitled 
        to them.
         SSA needs to better protect sensitive 
        information stored in its computers.
Health Care Financing Administration [HCFA]
    HCFA accounts for more than 18 percent of all Federal 
budget outlays and pays for one-third of the health care costs 
throughout the United States. It has been unable to provide 
timely or reliable financial information. Also, the growth of 
HCFA's Medicare and Medicaid payments have far exceeded the 
growth in the Consumer Price Index for medical goods and 
services. GAO has cited HCFA's Medicare program as a high risk 
area for fraud, waste, and abuse.\28\
---------------------------------------------------------------------------
    \28\ ``High Risk Series: Medicare,'' GAO/HR-97-10, February 1997.
---------------------------------------------------------------------------
    HCFA's fiscal year 1996 financial statements received a 
disclaimer of opinion. The Inspector General of HHS was unable 
to render an opinion because of significant limitations on the 
scope of her work. Specifically, she cited insufficient 
documentation maintained by the contractors who process the 
payment of Medicare claims for HCFA among these problems. There 
were also material weaknesses in internal controls over HCFA 
operations and substantial non-compliance with laws and 
regulations.
    HCFA released its audited financial statements for fiscal 
year 1997 at the April 24, 1998, hearing. The results of the 
audit showed that some improvements had been made by HCFA as 
the Inspector General issued a qualified opinion on the 
financial statements. The qualification resulted from 
continuing problems in determining: (1) the accuracy of 
reported collections of amounts owed to HCFA during the year 
and remaining balances of accounts receivable as of the fiscal 
year end and (2) that amounts paid by HCFA to health care 
providers through the final cost report settlement process were 
reasonable and appropriate.
    On April 24, the subcommittee held a joint hearing on the 
financial management status of HCFA with the Subcommittee on 
Health and Environment and the Subcommittee on Oversight and 
Investigations of the House Committee on Commerce. HCFA 
accounts for over 85 percent of the Department of Health and 
Human Service's expenses. It issues its own set of audited 
financial statements. These data are then incorporated into the 
agencywide financial statements of the Department of Health and 
Human Service.
    Based on last year's audit results, the joint hearing 
focused on actions HCFA is taking to resolve its financial 
management problems, including excessive Medicare payments. 
These fiscal year 1997 overpayments are estimated at $20.3 
billion--or 11 percent of the Medicare fee-for-service payments 
made that year. This estimate does not include fraudulent 
payments. Any estimate which included fraudulent payments would 
clearly exceed the projection of overpayments noted above.
    The subcommittees found that, while progress was made, much 
more is needed to ensure that the Medicare and Medicaid 
programs--critical to the security of tens of millions of 
elderly and impoverished Americans--are fiscally sound.
    Specific issues disclosed in the auditor's report on the 
financial statements included the following:
         The Administrator of HCFA is using the results 
        of the audit concerning the $20.3 billion overpayments 
        to target actions to stop such overpayments.
         Medicare contractors did not maintain support 
        needed to determine the accuracy of reported 
        collections of amounts owed to HCFA during the year and 
        remaining balances of accounts receivable as of the 
        fiscal year end. These accounts receivable represent 
        amounts medical providers owe HCFA due to overpayments 
        reported by Medicare contractors. Some of the 
        contractors were unable to provide subsidiary ledgers 
        or other documentation to support amounts reported to 
        HCFA. In some cases the contractors could not reconcile 
        their records of accounts receivable to amounts 
        reported to HCFA. As a result, auditors were unable to 
        determine if the records maintained by the contractors 
        included all the amounts owed to HCFA.
         Medicare Part A providers are paid interim 
        amounts throughout the year and then file a cost report 
        with Medicare contractors to reconcile actual costs to 
        interim payments received. The contractor is 
        responsible for ensuring the amounts paid by HCFA were 
        reasonable and appropriate. However, due to the limited 
        scope of the contractors' audits of provider cost 
        reports, there is no assurance that amounts paid by 
        HCFA to providers through the final cost report 
        settlement process were reasonable or appropriate. In 
        fiscal year 1997, these payments amounted to $2.4 
        billion. Based on contractor reports, HCFA estimated 
        that it has a liability of approximately $5 billion for 
        pending cost report settlements.
2. Federal Department and Agency Financial Management Grades
    On April 1, 1998, the Government Management, Information, 
and Technology Subcommittee released its first report card 
measuring the effectiveness of financial management at the 24 
Federal departments and agencies which prepared audited 
financial statements. The grades were based on the results of 
the audits prepared by the agency's Inspectors General, 
independent public accountants, and the General Accounting 
Office. The report card is a gauge for Congress to see where 
attention is needed to push agencies to get their financial 
affairs in order.
    The Department of Energy and the National Aeronautics and 
Space Administration demonstrated that they could effectively 
manage their finances. Each of these agencies received an 
``A.'' However, these agencies were the exception rather than 
the rule.
    Another six agencies earned commendable ``Bs.'' These six 
were the National Science Foundation, General Services 
Administration, Department of the Interior, Department of 
Labor, Nuclear Regulatory Commission, and the Social Security 
Administration.
    Of the 24 agencies, 11--46 percent--were not able to meet 
the March 1 reporting date established by the Government 
Management Reform Act of 1994, 5 months after the close of the 
Federal Government's fiscal year. As of the publication of this 
report, three agencies--the Department of Agriculture, the 
Federal Emergency Management Agency, and the Department of 
State--have yet to submit audited financial statements.
    Many other agencies could not pass muster. The failing ones 
included the Agency for International Development, the 
Department of Defense, the Department of Justice, and the 
Office of Personnel Management. Two more agencies that reported 
late, the Department of Commerce and the Department of 
Transportation, also wound up with ``Fs.'' Another seven 
agencies received ``Ds.''
    These audits were required by the 1994 act. This act is 
intended to provide a more effective, efficient, and responsive 
Government. To that end, the act specifically requires that 
consolidated governmentwide financial statements be prepared 
and audited and that each executive agency prepare and have 
audited a financial statement covering all accounts and 
associated activities of each office, bureau, and activity of 
the agency. A copy of the grades follows:

                  Federal Financial Management Status Report--Federal Departments and Agencies                  
----------------------------------------------------------------------------------------------------------------
                                         Reliable         Effective      Compliance with                        
                                        Financial          Internal         Laws and       Grade FY    Grade FY 
         Department/Agency          Information (yes/   Control (yes/   Regulations (yes/     96          97    
                                      qualified/no)          no)               no)                              
----------------------------------------------------------------------------------------------------------------
Department of Energy                YES                YES              YES               A           A         
----------------------------------------------------------------------------------------------------------------
National Aeronautics and Space      YES                YES              YES               A           A         
 Administration.                                                                                                
================================================================================================================
National Science Foundation.......  Qualified          YES              YES               D           B+        
----------------------------------------------------------------------------------------------------------------
General Services Administration...  YES                YES              NO                D+          B-        
----------------------------------------------------------------------------------------------------------------
Department of the Interior          YES                YES              NO                D+          B-        
----------------------------------------------------------------------------------------------------------------
Department of Labor                 YES                YES              NO                D           B-        
----------------------------------------------------------------------------------------------------------------
Nuclear Regulatory Commission.....  YES                YES              NO                A           B-        
----------------------------------------------------------------------------------------------------------------
Social Security Administration....  YES                YES              NO                A           B-        
================================================================================================================
Department of Education             YES                NO               NO                D+          D+        
----------------------------------------------------------------------------------------------------------------
Environmental Protection Agency...  YES                NO               NO                C           D+        
----------------------------------------------------------------------------------------------------------------
Small Business Administration.....  YES                NO               NO                B-          D+        
----------------------------------------------------------------------------------------------------------------
Department of Health and Human      Qualified          NO               NO                F           D-        
 Services.                                                                                                      
----------------------------------------------------------------------------------------------------------------
Department of Housing and Urban     Qualified          NO               NO                D-          D-        
 Development.                                                                                                   
----------------------------------------------------------------------------------------------------------------
Department of the Treasury          Qualified          NO               NO                F           D-        
----------------------------------------------------------------------------------------------------------------
Department of Veterans Affairs....  Qualified          NO               NO                F           D-        
================================================================================================================
Agency for International            NO                 NO               NO                F           F         
 Development.                                                                                                   
----------------------------------------------------------------------------------------------------------------
Department of Commerce              NO                 NO               NO                F           F         
----------------------------------------------------------------------------------------------------------------
Department of Defense               NO                 NO               NO                F           F         
----------------------------------------------------------------------------------------------------------------
Department of Justice               NO                 NO               NO                F           F         
----------------------------------------------------------------------------------------------------------------
Office of Personnel Management....  NO                 NO               NO                F           F         
----------------------------------------------------------------------------------------------------------------
Department of Transportation......  NO                 NO               NO                F           F         
================================================================================================================
Department of Agriculture           No report          No report        No report         F           INC       
----------------------------------------------------------------------------------------------------------------
Federal Emergency Management        No report          No report        No report         F           INC       
 Agency.                                                                                                        
----------------------------------------------------------------------------------------------------------------
Department of State                 No report          No report        No report         D-          INC       
----------------------------------------------------------------------------------------------------------------

     c. proceedings of the subcommittee on government management, 
                      information, and technology


1. April 1, 1998, Oversight Hearing on the Results of the Audit of the 
        Consolidated Financial Statements of the Federal Government
    At this hearing the subcommittee received testimony from 
representatives of the General Accounting Office, the Office of 
Management and Budget, and the Department of the Treasury. 
Witnesses focused on the results of the first-ever audit of the 
consolidated financial statements of the Federal Government. 
The audit represents the culmination of implementation of the 
Government Management Reform Act's financial management 
provisions.
    Assistant Comptroller General Gene Dodaro described the 
myriad financial management problems which prevented the 
General Accounting Office from expressing an opinion on the 
statements. Many of these problems were found at the majority 
of the 24 departments and agencies of the Federal Government 
required to report under the CFO Act.
    Office of Management and Budget Acting Deputy Director for 
Management G. Edward DeSeve joined with Gerald Murphy, Senior 
Advisor to the Undersecretary for Domestic Finance of the 
Department of the Treasury, in presenting the progress the 
executive branch has made in improving financial management. 
They explained some of the actions to needed to resolve them. 
Mr. DeSeve stated that the administration's goal for achieving 
an unqualified opinion on the consolidated financial statements 
of the Federal Government was for fiscal year 1999 which will 
end on September 30, 1999.
2. April 15, 1998, Oversight Hearing on Management of the Internal 
        Revenue Service [IRS]
    The subcommittee received testimony from the newly 
confirmed Commissioner and the former Chief Financial Officer 
of the Internal Revenue Service as well as representatives of 
the GAO. The final panel included representatives from the 
American Bar Association, the American Institute of Certified 
Public Accountants, and the National Academy of Public 
Administration.
    Commissioner of Internal Revenue Charles O. Rossotti 
acknowledged the serious problems that must be resolved for the 
IRS not only to better manage its operations but also to remain 
viable. The Commissioner identified the year 2000 computer date 
conversion problem as his highest priority. If not corrected, 
this computer problem could prevent the IRS from accomplishing 
its primary mission of collecting from and refunding taxes to 
the taxpayers.
    Anthony Musick, the former Chief Financial Officer of the 
IRS, also testified about the difficulty in generating reliable 
financial information on the agency's tax collection 
(custodial) activities from current internal revenue systems. 
He noted that these systems are outdated and were not designed 
to provide financial management information. Although the IRS 
has been able to obtain an unqualified opinion on its custodial 
financial statements, its systems of internal control remain 
ineffective. This situation prevents the IRS from effectively 
managing its financial activity.
    Assistant Comptroller General Dodaro discussed the systems 
problems found by the audit and the challenges facing IRS in 
correcting them. He elaborated on the adverse effect of these 
systems problems on IRS's efforts to collect delinquent taxes 
due. The GAO staff found instances where these systems problems 
resulted in an undue burden on many taxpayers.
3. April 16, 1998, Oversight Hearing on Financial Management at the 
        Department of Defense [DOD]
    The subcommittee received testimony from the Defense 
Inspector General, representatives of the GAO, and 
representatives of DOD. Inspector General Eleanor Hill 
testified that her office could not issue an opinion on the 
DOD's agencywide financial statements.
    Assistant Comptroller General Dodaro described the impact 
of the DOD's financial management failures on the audit of the 
consolidated governmentwide financial statements.
    Nelson Toye, Deputy Chief Financial Officer of DOD, claimed 
that the Department planned actions to resolve and eliminate 
the issues that had precluded the Inspector General from 
rendering an opinion on the financial statements.
4. April 17, 1998, Oversight Hearing on Financial Management at the 
        Social Security Administration [SSA]
    The subcommittee received testimony from Social Security 
Inspector General David Williams and Acting Deputy Principal 
Commissioner of the Social Security Administration John R. 
Dyer. SSA has received an unqualified opinion on its financial 
statements and has no reported material weaknesses in internal 
controls. However, it does have reported instances of non-
compliance with laws and regulations affecting financial 
management. Inspector General Williams and Acting Principal 
Deputy Commissioner Dyer shared their experiences in the 
preparation and audit of the financial statements including the 
benefits derived from that exercise.
5. April 21, 1998, Oversight Hearing on the Inspector General Act of 
        1978
    The subcommittee received testimony from both current and 
former Inspectors General as well as from the General 
Accounting Office, former congressional staff and outside 
interest groups. During the hearing, witnesses discussed new 
responsibilities of Inspectors General under the Chief 
Financial Officers Act of 1990, as amended by the Government 
Management Reform Act of 1994.
    These new responsibilities include the audit of the 
financial statements of the department or agency for which they 
are responsible and any subcomponents of the department or 
agency that is required to have separate statements. These 
audits are performed under generally accepted government 
auditing standards. They require that the auditor perform 
procedures and report on the agency's internal controls and 
compliance with laws and regulations as well as report on the 
condition of the financial statements and their related notes.
6. April 24, 1998, Joint Oversight Hearing on Financial Management at 
        the Health Care Financing Administration [HCFA]
    The subcommittees received testimony from the Inspector 
General of the Department of Health and Human Services and the 
Administrator of the Health Care Financing Administration. This 
was a joint hearing with the Subcommittee on Health and 
Environment and the Subcommittee on Oversight and 
Investigations of the Committee on Commerce. The subcommittee 
determined that, while progress was made, much more is needed 
to ensure the fiscal soundness of the Medicare and Medicaid 
programs which are critical to the security of tens of millions 
of elderly and impoverished Americans. The estimate of 
overpayments made for fiscal year 1997 amounted to $20.3 
billion. The preparation and audit of the financial statements 
has focused attention on this serious issue. HCFA Administrator 
Nancy-Ann Min DeParle stated she is using the results of the 
audit to target actions to reduce overpayments.
7. June 18, 1998, Oversight Hearing on Options to Strengthen Federal 
        Financial Management
    At this hearing the subcommittee received testimony from 
Representative Richard Armey of Texas, the majority leader of 
the House of Representatives; Representative Mark Neumann of 
Wisconsin; Gene Dodaro, Assistant Comptroller General, GAO; and 
Thomas Schatz, president, Citizens Against Government Waste.
    Mr. Armey expressed support for initiatives explored by the 
subcommittee to strengthen measures to enforce existing Federal 
financial management laws. Mr. Neumann stated his belief that 
without consequences for failure to provide effective financial 
management, the agencies would not place the emphasis on 
correcting these problems. He proposed legislation that would 
provide consequences for those agencies that fail their audit: 
budgetary restrictions and dismissal of individuals responsible 
for failure to bring financial statements into compliance.
    Mr. Dodaro presented several options for the subcommittee 
to consider including increased congressional oversight. He 
noted the effectiveness of congressional oversight as evidenced 
by recent actions taken by the administration to improve 
Federal financial management.
    Mr. Schatz stressed that one of the impediments to 
effective implementation of Federal financial management 
legislation is a lack of strong leadership. He discussed the 
problem of Chief Financial Officers in many agencies also 
having the designation of Chief Information Officer. This 
situation not only weakens the full-time leadership that should 
be provided by financial management but it also weakens the 
full-time leadership that is needed for information management 
as well.

                            III. Conclusions

    Financial management has long been recognized as a problem 
area in the Federal Government. Congress has developed a strong 
legislative framework, that if properly implemented, would 
significantly improve financial management in the Federal 
Government. Improved financial management leads to more 
efficient and effective operations through better and more 
informed decisionmaking. Too many executive departments and 
agencies have been too slow to implement the financial 
management legislation. Although limited progress has been 
made, much more progress is needed.
    The Government Management, Information, and Technology 
Subcommittee's hearings and the audit reports have continued to 
raise serious issues affecting the soundness of fundamental 
management information used by decisionmakers. To make good 
decisions, Congress and the President and his Cabinet need 
reliable data on a timely basis. In the balance are both the 
quality of our Government's services and the fiscal health of 
this Nation. Congressional and executive attention to financial 
management therefore is crucial. Immediate action is needed to 
ensure that the Federal Government gets its financial house in 
order.
    Successful implementation of the Chief Financial Officers 
Act of 1990, as expanded by the Government Management Reform 
Act of 1994 and amended by the Federal Financial Management 
Improvement Act of 1996, is the foundation for the success of 
the Government Performance and Results Act of 1993. Legislation 
is needed to penalize agencies that are not in compliance with 
existing Federal financial management legislation. Further, the 
President needs appropriate staff to focus on management 
problems, whether they be in general management, financial 
management, and/or information management. The agencies need to 
be strengthened to ensure that adequate attention is focused on 
financial management problems. Without these actions, many 
executive departments and agencies will continue to avoid their 
fundamental responsibility to be accountable to the American 
taxpayer.

                 ADDITIONAL VIEWS OF HON. STEPHEN HORN

    On July 27, 1998, 4 days after the committee voted to adopt 
the report, the Department of Agriculture [USDA] issued its 
audited agencywide financial statements for fiscal year 1997. 
The USDA financial report was issued approximately 5 months 
after the March 1, 1998, submission date as required by the 
Government Management Reform Act of 1994. Based on the audit 
report accompanying its financial statements, the USDA earned 
an ``F'' for financial management during fiscal year 1997.
    USDA's Inspector General issued a disclaimer of opinion on 
the agencywide financial statements. A disclaimer of opinion 
signifies that the Inspector General could not determine if 
amounts reported in the financial statements were reliable in 
all material respects. Further, the Inspector General's audit 
report identified several material weaknesses in internal 
controls and specific instances of non-compliance with certain 
laws and regulations related to financial management.
    The agencies' financial management grades reflect the 
inclusion of the recent audit of USDA's financial statements. 
The information provided in this additional view is intended to 
update information included in section II.B.1. of the committee 
report entitled ``Federal Agency Financial Management Grades.''
    Of the 24 agencies, 11--46 percent--were not able to meet 
the March 1 reporting date established by the Government 
Management Reform Act of 1994. As of the publication of this 
report, two agencies--the Federal Emergency Management Agency 
and the Department of State--have yet to submit audited 
financial statements.
    Fourteen agencies did not have effective financial 
management. Among them were seven agencies receiving ``Fs'': 
Agriculture; the Agency for International Development; 
Commerce; Defense; Justice; Personnel Management; and 
Transportation. Another seven agencies received ``Ds'': 
Education; Environmental Protection; Small Business; Health and 
Human Services; Housing and Urban Development; Treasury; and 
Veterans Affairs.
    A copy of the revised grades based upon the issuance of the 
Department of Agriculture's audited financial statements 
follows:

                  Federal Financial Management Status Report--Federal Departments and Agencies                  
----------------------------------------------------------------------------------------------------------------
                                         Reliable         Effective      Compliance with                        
                                        Financial          Internal         Laws and       Grade FY    Grade FY 
         Department/Agency          Information (yes/   Control (yes/   Regulations (yes/     96          97    
                                      qualified/no)          no)               no)                              
----------------------------------------------------------------------------------------------------------------
Department of Energy                YES                YES              YES               A           A         
----------------------------------------------------------------------------------------------------------------
National Aeronautics and Space      YES                YES              YES               A           A         
 Administration.                                                                                                
================================================================================================================
National Science Foundation.......  Qualified          YES              YES               D           B+        
----------------------------------------------------------------------------------------------------------------
General Services Administration...  YES                YES              NO                D+          B-        
----------------------------------------------------------------------------------------------------------------
Department of the Interior          YES                YES              NO                D+          B-        
----------------------------------------------------------------------------------------------------------------
Department of Labor                 YES                YES              NO                D           B-        
----------------------------------------------------------------------------------------------------------------
Nuclear Regulatory Commission.....  YES                YES              NO                A           B-        
----------------------------------------------------------------------------------------------------------------
Social Security Administration....  YES                YES              NO                A           B-        
================================================================================================================
Department of Education             YES                NO               NO                D+          D+        
----------------------------------------------------------------------------------------------------------------
Environmental Protection Agency...  YES                NO               NO                C           D+        
----------------------------------------------------------------------------------------------------------------
Small Business Administration.....  YES                NO               NO                B-          D+        
----------------------------------------------------------------------------------------------------------------
Department of Health and Human      Qualified          NO               NO                F           D-        
 Services.                                                                                                      
----------------------------------------------------------------------------------------------------------------
Department of Housing and Urban     Qualified          NO               NO                D-          D-        
 Development.                                                                                                   
----------------------------------------------------------------------------------------------------------------
Department of the Treasury          Qualified          NO               NO                F           D-        
----------------------------------------------------------------------------------------------------------------
Department of Veterans Affairs....  Qualified          NO               NO                F           D-        
================================================================================================================
Department of Agriculture           No                 No               No                F           F         
----------------------------------------------------------------------------------------------------------------
Agency for International            NO                 NO               NO                F           F         
 Development.                                                                                                   
----------------------------------------------------------------------------------------------------------------
Department of Commerce              NO                 NO               NO                F           F         
----------------------------------------------------------------------------------------------------------------
Department of Defense               NO                 NO               NO                F           F         
----------------------------------------------------------------------------------------------------------------
Department of Justice               NO                 NO               NO                F           F         
----------------------------------------------------------------------------------------------------------------
Office of Personnel Management....  NO                 NO               NO                F           F         
----------------------------------------------------------------------------------------------------------------
Department of Transportation......  NO                 NO               NO                F           F         
================================================================================================================
Federal Emergency Management        No report          No report        No report         F           INC       
 Agency.                                                                                                        
----------------------------------------------------------------------------------------------------------------
Department of State                 No report          No report        No report         D-          INC       
----------------------------------------------------------------------------------------------------------------


                                   Hon. Stephen Horn.

      

ADDITIONAL VIEWS OF HON. HENRY A. WAXMAN, HON. DENNIS J. KUCINICH, HON. 
    TOM LANTOS, HON. ROBERT E. WISE, Jr., HON. MAJOR R. OWENS, HON. 
  EDOLPHUS TOWNS, HON. PAUL E. KANJORSKI, HON. BERNARD SANDERS, HON. 
CAROLYN B. MALONEY, HON. THOMAS M. BARRETT, HON. ELEANOR HOLMES NORTON, 
 HON. CHAKA FATTAH, HON. ELIJAH E. CUMMINGS, HON. ROD R. BLAGOJEVICH, 
HON. DANNY K. DAVIS, HON. THOMAS H. ALLEN, AND HON. HAROLD E. FORD, Jr.

      
    The Subcommittee on Government Management, Information, and 
Technology held a series of oversight and legislative hearings 
related to Federal financial management. The subcommittee 
reviewed the results of the first-ever government-wide 
financial audit. It also considered agency-wide financial 
audits at agencies that collectively account for almost all the 
revenue and a majority of the expenses of the Federal 
Government. Clearly, these audits demonstrate that the Federal 
Government has a long way to go before it can produce reliable 
and timely financial information on a continuing basis. These 
audits provide useful information on how the government is 
managing its financial responsibilities.
    While we agree with most of the report issued today, we 
submit additional views to express a few concerns with the 
report. First, we disagree with the recommendation to establish 
a separate agency called the Office of Management. It does not 
make sense to split the Office of Management and Budget [OMB] 
and centralize all management functions in a separate Federal 
agency. Divorcing management priorities and policies from the 
budget process makes little practical sense. Management 
improvements are most effectively achieved when combined with 
budgetary review. It is difficult to undertake new management 
approaches without the ability to coordinate budget support. 
Conversely, without the ``hammer'' of budget restrictions, 
agencies may be unlikely to respond to management initiatives.
    Without the ability to use budgetary resources and 
constraints to force management priorities, a separate 
management agency will have little clout. In fact, the only 
former director of OMB that testified before the subcommittee 
indicated that he had not ``totally bought into the fact that 
it is a good idea to create an Office of Federal Management 
away from OMB,'' and when he called agency heads to get 
management improvements, his calls were returned
more quickly because he was at the Office of Management and 
Budget.\1\ OMB strongly opposes the proposal to centralize 
management functions in a separate agency. Indeed, with the OMB 
2000 initiative, OMB has taken the opposite approach and 
decentralized budget and management decisions at the budget 
examiner level.
---------------------------------------------------------------------------
    \1\ Testimony of Joseph H. Wright before the House Government 
Management, Information, and Technology Subcommittee, 92-95 (May 12, 
1998).
---------------------------------------------------------------------------
    In addition, we disagree with efforts to penalize agencies 
with a ``one size fits all'' approach. We would oppose the 
automatic dismissal of financial managers or executives from 
Federal service if their agencies fail to make adequate 
progress in financial management. New cost accounting and 
revenue standards will be implemented next year. These new 
standards could make it much more difficult for agencies to 
obtain clean audits for 1998. In particular, at large Federal 
agencies such as the Department of Defense [DOD] and the 
Internal Revenue Service [IRS], unforeseen constraints may 
prevent a manager from succeeding despite good efforts.
    We suggest that financial managers who do not achieve 
expected results simply be removed from responsibility for 
financial improvement. This is less draconian and would obtain 
the same result. It would also be less likely to deter 
qualified people from taking on the toughest assignments, such 
as improving DOD's financial systems.
    The majority report also states that Congress must restrict 
agencies' ability to compete with the private sector for 
contracts pending resolution of financial management problems. 
We are concerned that preventing agencies from competing with 
private contractors may have severe negative consequences--
costing the American public more and providing worse service.
    Further, the report underemphasizes DOD's financial 
problems, which represent the largest single obstacle to ever 
obtaining an unqualified opinion on the consolidated statements 
of the U.S. Government.\2\ DOD has 122 different finance and 
accounting systems.\3\ The agency lacks an overarching systems 
architecture, as required by the Clinger-Cohen Act of 1996.\4\ 
This makes consistent financial reporting difficult. For 
example, Gene Dodaro, Assistant Comptroller General of the 
United States, told the subcommittee:
---------------------------------------------------------------------------
    \2\ Testimony of Gene Dodaro before the House Government 
Management, Information, and Technology Subcommittee, 16 (April 16, 
1998).
    \3\ Testimony of the Honorable Eleanor Hill, Inspector General of 
the Department of Defense, before the House Government Management, 
Information, and Technology Subcommittee, 13 (April 16, 1998).
    \4\ Testimony of Gene Dodaro before the House Government 
Management, Information, and Technology Subcommittee, 56-57 (April 1, 
1998).

          [W]e found that hundreds of billions of dollars of 
        the reported $1.2 trillion on the [government-wide 
        consolidated] financial statements was not adequately 
        supported by accounting or logistical records. Now the 
        biggest area here is at the Department of Defense. 
        Defense accounts for roughly 80 percent of all these 
        assets and one of the reasons that Defense has not been 
        able to obtain a clean opinion on its financial 
        statements . . . is because of problems . . . properly 
        accounting for its assets.\5\
---------------------------------------------------------------------------
    \5\ Testimony of Gene Dodaro before the House Government 
Management, Information, and Technology Subcommittee, 17 (April 1, 
1998).

    DOD also was unable to determine its environmental 
liability, and as a result, the government-wide estimate of 
$212 billion is clearly understated. DOD cannot determine the 
cost of post-retirement health benefits for its military 
employees, report accurately the net cost of its operations, 
account for billions in basic transaction costs, or ensure that 
all disbursements are properly recorded and reconciled.\6\
---------------------------------------------------------------------------
    \6\ There are, of course, a number of other agencies that have 
significant financial management problems including the Office of 
Personnel Management, the Health Care Financing Administration, and the 
Departments of Agriculture, Treasury, Justice and Commerce.
---------------------------------------------------------------------------
    Finally, we must point out that, while overall government-
wide progress has been too slow in past administrations, the 
Clinton administration has demonstrated heightened concern and 
experienced significant improvement. Only 30 percent of the 
major Federal agencies were audited in 1990; last year 96 
percent of these agencies conducted financial audits. Only two 
Federal agencies produced reliable financial information on 
their balance sheets in 1992. By 1998, 10 Federal agencies were 
able to produce reliable information on their balance sheets. 
In addition, the General Accounting Office issued clean 
opinions for the IRS, the Bureau of Public Debt, and the Social 
Security Administration. Federal chief financial officers 
predict that 15 of 24 agencies will achieve unqualified 
opinions next year. Clearly, agencies are headed in the right 
direction.
    Moreover, the administration is dedicated to obtaining 
reliable government-wide financial statements by fiscal year 
1999. President Clinton issued a memorandum on May 26, 1998, to 
agency heads requiring that certain agencies prepare action 
plans to ensure that they will receive an unqualified audit on 
the fiscal year 1999 audit. Agencies that do not have ``clean 
audits'' and good internal controls must submit their action 
plans to OMB on July 31, 1998, and provide OMB with quarterly 
reports on their progress. OMB will monitor agency progress 
toward the goal of a clean government-wide audit as well as 
clean opinions at each major Federal agency.
    Improving Federal financial management will require 
vigilant and sustained congressional oversight. There should be 
consequences for agencies that fail to improve. This must be a 
high priority of future administrations. However, it does no 
good to fire people indiscriminately, or to withhold funding if 
such action is counterproductive. Immediate action that 
penalizes agencies may worsen matters, by depriving them of 
needed funds when the century date change computer conversion, 
system modernization, and financial management consolidation 
and improvement are all occurring.
    Finally, we did not participate in determining agency 
``grades'' for financial management. While we recognize the 
value of a simple system to identify and evaluate the status 
and progress of Federal agencies, we are concerned that the 
grading system oversimplifies the analysis and does not 
characterize the situation accurately. The categories 
``internal controls'' and ``noncompliance with laws and 
regulations'' encompass a wide range of issues and are graded 
on a simple pass/fail basis. Some agencies may ``fail'' for 
minor problems, while others such as DOD may ``fail'' for many, 
significant, and systematic problems. These two categories are 
weighted equally with audit opinions, and therefore skew grades 
downward for almost all the agencies.
                                   Hon. Henry A. Waxman.
                                   Hon. Dennis J. Kucinich.
                                   Hon. Tom Lantos.
                                   Hon. Robert E. Wise, Jr.
                                   Hon. Major R. Owens.
                                   Hon. Edolphus Towns.
                                   Hon. Paul E. Kanjorski.
                                   Hon. Bernard Sanders.
                                   Hon. Carolyn B. Maloney.
                                   Hon. Thomas M. Barrett.
                                   Hon. Eleanor Holmes Norton.
                                   Hon. Chaka Fattah.
                                   Hon. Elijah E. Cummings.
                                   Hon. Rod R. Blagojevich.
                                   Hon. Danny K. Davis.
                                   Hon. Thomas H. Allen.
                                   Hon. Harold E. Ford, Jr.

        APPENDIX A--Basis For Agency Financial Management Grades

                                ------                                


    The grades for each of the 24 departments and agencies were 
based on the results of the financial statement audits. These 
audits were performed by the agency's Inspector General, an 
independent public accounting firm, or the General Accounting 
Office. All the auditors were required to follow generally 
accepted government auditing standards (GAGAS). These standards 
incorporate the American Institute of Certified Public 
Accountant's Statements on Auditing Standards, the same 
standards required to be followed in the audits of private 
sector entities. However, GAGAS does add certain requirements 
beyond the Statements on Auditing Standards. Most notably, 
GAGAS has additional reporting requirements beyond an opinion 
on the financial statements.
    Three reports are required to be issued at the completion 
of each audit of government entities under GAGAS and as 
incorporated in OMB Bulletin 93-06, Audit Requirements for 
Federal Financial Statements.\1\ These reports are (1) an 
opinion of the financial statements, (2) a report on internal 
control structure, and (3) a report on compliance with laws and 
regulations.
---------------------------------------------------------------------------
    \1\ OMB Bulletin 93-06, Audit Requirements for Federal Financial 
Statements, establishes requirements and guidance for auditors to 
follow in auditing Federal financial statements.
---------------------------------------------------------------------------
    The opinion provides the auditor's assessment of the 
reliability of the information contained in the financial 
statements. There are four types of opinions that the auditor 
can render--Unqualified, Qualified, Adverse, or Disclaimer. An 
unqualified opinion signifies that the information in the 
financial statements was reliable in all material respects. A 
qualified opinion signifies that, except for specified 
information in the financial statements, the information is 
reliable. An adverse opinion means the statements are not 
reliable. Last, a disclaimer of opinion signified that the 
auditor was unable to determine if material information in the 
statements was reliable.
    The report on internal controls provides an assessment, by 
the auditors, of the effectiveness of internal controls. The 
report is required to identify any instances of material 
weaknesses or reportable conditions in internal control that 
came to the attention of the auditors during the course of the 
audit. The American Institute of Certified Public Accountants 
defines a material weakness in internal control as ``. . . a 
condition in which the design or operation of one or more of 
the internal control components does not reduce to a relatively 
low level the risk that errors or irregularities in amounts 
that would be material in relation to the financial statements 
being audited may occur and not be detected within a timely 
period by employees in the normal course of performing assigned 
functions.'' \2\
---------------------------------------------------------------------------
    \2\ Codification of Statements on Auditing Standards (Including 
Statements on Standards for Attestation Engagements), Numbers 1 to 82, 
American Institute of Certified Public Accountants, as of Jan. 1, 1997; 
AU sec. 325.15.
---------------------------------------------------------------------------
    The report on compliance with the laws and regulations 
provides the auditor's assessment of instances where the agency 
did not follow or conform materially to requirements of laws 
and regulations deemed material to the financial operations of 
that agency. The Office of Management and Budget also provides 
guidance to the auditors in OMB Bulletin 93-06, as to which 
general laws and regulations need to be considered during the 
audit. Starting in fiscal year 1997, agencies' adherence to the 
requirements of FFMIA is required to be assessed in the report 
on compliance with laws and regulations, in accordance with OMB 
guidance.\3\ The Federal Financial Management Improvement Act 
of 1996 [FFMIA] specifically requires that agencies conform 
with promulgated Federal Government accounting and systems 
standards, and use the Government Standard General Ledger. 
(Many agencies did not materially conform to the requirements 
of FFMIA and thus, certain agencies that were deemed to be 
materially in compliance with laws and regulations in fiscal 
year 1996 were not compliant in fiscal year 1997.)
---------------------------------------------------------------------------
    \3\ OMB issued a memorandum dated Sept. 9, 1997, for agencies and 
auditors to use in assessing compliance with FFMIA. This interim 
guidance was to be followed in audits of Federal financial statements 
for fiscal year 1997.
---------------------------------------------------------------------------
    The subcommittee weighted all these reports equally and 
assessed grades on a 4 point scale with A = 4, B = 3, C = 2, D 
= 1, and F = 0. In the financial information category, if an 
unqualified opinion was rendered by the auditor an A (4 points) 
was given, a qualified opinion received a C (2 points) and a 
disclaimer received an F (0 points). There were no adverse 
opinions rendered in fiscal years 1996 or 1997, however an 
adverse opinion would also receive an F.
    If no material weaknesses in internal controls were 
reported, the agency received an A (4 points). Conversely, if 
there were material weaknesses reported an F (0 points) was 
given to the agency in this category.
    Similarly, if the auditor reported the agency had no known 
instances of non-compliance with laws and regulations an A (4 
points) was awarded and if material non-compliances were 
reported an F (0 points) was given.
    These grades were then averaged (with equal weight) to 
determine the overall grade for the agency.
    If no report was completed and provided prior to March 31, 
1998, then an incomplete was initially assessed. As reports 
became available, the agency's grade was determined. The grades 
included in this report are based on audit reports issued as of 
the publication of this report. By law, agencies are required 
to submit audited financial statements to the Director of OMB 
by March 1st of each year starting in 1997 for the preceding 
fiscal year. This due date is 5 months after the close of the 
Federal Government's fiscal year on September 30th.

       APPENDIX B--Major Federal Financial Management Legislation

                                ------                                


                                                                                                                
----------------------------------------------------------------------------------------------------------------
            Public Law                                 Key Financial Management Provisions \1\                  
----------------------------------------------------------------------------------------------------------------
Budget and Accounting Procedures                                                                                
 Act of 1950                                                                                                    
                                     The Budget and Accounting Procedures Act of 1950 provided that the 
(Chapter 946, 64 Stat. 832)          maintenance of accounting systems and producing of financial reports with  
                                     respect to the operations of Executive agencies be the responsibility of   
                                     the Executive branch and that the auditing for the Government be conducted 
                                     by the Comptroller General to determine the extent to which accounting and 
                                     related financial reporting fulfill the purposes specified, financial      
                                     transactions have been consummated in accordance with laws, regulations, or
                                     other requirements, and adequate internal financial control over operations
                                     is exercised.                                                              
                                     The Comptroller General was given the responsibility of prescribing
                                     accounting and auditing principles and standards to be followed in the     
                                     preparation of financial reports by Executive agencies and by the GAO in   
                                     the audit of the financial transactions of each Executive, Legislative, and
                                     Judicial agency.                                                           
----------------------------------------------------------------------------------------------------------------
Inspector General Act of 1978, as                                                                               
 amended by the Inspector General                                                                               
 Act Amendments of 1988                                                                                         
                                     The Inspector General Act (IG Act) requires that Inspectors General
(P.L. 95-452 and 100-504)            perform audits in accordance with generally accepted government auditing   
                                     standards.                                                                 
                                     The Chief Financial Officers Act of 1990, as expanded by the       
                                     Government Management Reform Act, and amended by the Federal Financial     
                                     Management Improvement Act, has demanded shifts in the focus of the        
                                     Inspectors' General work.                                                  
----------------------------------------------------------------------------------------------------------------
Federal Managers' Financial                                                                                     
 Integrity Act of 1982                                                                                          
                                     The Federal Managers' Financial Integrity Act of 1982 (FMFIA)      
(P.L. 97-255)                        required that internal accounting and administrative controls of each      
                                     Executive agency be established in accordance with standards prescribed by 
                                     the Comptroller General, and shall provide reasonable assurance that:      
                                     obligations and costs are in compliance with applicable law; assets are    
                                     safeguarded from waste, loss, unauthorized use, or misappropriation; and   
                                     revenues and expenditures applicable to agency operations are properly     
                                     recorded and accounted for.                                                
                                     The head of each agency is required to report to the President and 
                                     Congress whether the agency's systems of internal accounting and           
                                     administrative control fully comply with the Comptroller General's         
                                     requirements. For all material weaknesses, the agency head must describe in
                                     the report the plan and schedule for correcting any such weaknesses.       
----------------------------------------------------------------------------------------------------------------
Debt Collection Act of 1982, as                                                                                 
 amended, and Debt Collection                                                                                   
 Improvement Act of 1996                                                                                        
                                     The Debt Collection Act, as amended, provides greater powers to    
(P.L. 97-365 and 104-134, sec.       Federal agencies in collecting debts owed to the Federal Government        
 31001)                              including: reporting a delinquent debtor to a consumer reporting agency;   
                                     offsetting the salary of Federal employees who are delinquent in the       
                                     payment of debts; disclosing to a Federal lending agency that an applicant 
                                     has a tax delinquency and deny such individual credit; disclosing a        
                                     taxpayer's address to an agency to use for purposes of collecting          
                                     delinquent debt; administratively offsetting all Federal payments,         
                                     including tax refunds; garnishing wages; and charging of interest and      
                                     penalties on any debt.                                                     
                                     Agencies are required to report to the Director of the Office of   
                                     Management and Budget and the Secretary of the Treasury at least once a    
                                     year information regarding its debt collection activities. Further, the    
                                     Secretary of the Treasury must report that information to Congress annually
                                     and provide a one-time report, not later than April 1999, to Congress on   
                                     the collection services provided by it and other entities collecting on    
                                     behalf of Federal agencies.                                                
----------------------------------------------------------------------------------------------------------------
                                     Agencies are required to make Federal payments to individuals by   
                                     electronic fund transfer, except for tax refunds.                          
                                     Agencies, except for the IRS, can contract with a collection       
                                     service to pursue outstanding debts of the agency or to sell debt over 90  
                                     days delinquent.                                                           
                                     Agencies are required to collect the taxpayer identification number
                                     of any individual or entity doing business with the Government.            
----------------------------------------------------------------------------------------------------------------
Chief Financial Officers Act of                                                                                 
 1990                                                                                                           
                                     The Chief Financial Officers Act of 1990 (CFO Act) creates a new   
(P.L. 101-576)                       leadership structure for Federal financial management, including the       
                                     creation of a Deputy Director of Management, a Controller who advises the  
                                     Deputy Director, and an Office of Federal Financial Management within the  
                                     Office of Management and Budget. The Deputy Director is responsible for    
                                     providing financial management leadership including the establishment and  
                                     oversight of Federal financial policies and practices.                     
                                     The Office of Management and Budget is required by the CFO Act to  
                                     prepare and submit to Congress a governmentwide five year financial        
                                     management plan. The plan describes the planned activities of OMB and the  
                                     agency CFOs over the next five years to improve financial management.      
                                     The CFO Act also requires that 24 agencies have Chief Financial    
                                     Officers and Deputy Chief Financial Officers and lays out their authorities
                                     and functions. It also stipulates the qualifications and responsibilities  
                                     for each of the positions.                                                 
----------------------------------------------------------------------------------------------------------------
Government Management Reform Act                                                                                
 of 1994                                                                                                        
                                     Government Management Reform Act of 1994 (GMRA) expands            
(P.L. 103-356) \2\                   requirements for Executive branch agencies contained in section 303(a) of  
                                     the CFO Act.                                                               
                                     GMRA requires all 24 agencies covered under the CFO Act to have    
                                     agency-wide audited financial statements, beginning with fiscal year 1996. 
                                     Those statements, due March 1, 1997, and each year thereafter, must cover  
                                     all accounts and associated activities.                                    
----------------------------------------------------------------------------------------------------------------
                                     GMRA provides that, for each audited financial statement required  
                                     from the agency, the auditor (the Inspector General, independent public    
                                     accountant, or GAO) must submit a report on the audit to the head of the   
                                     agency. This report is to be prepared in accordance with generally accepted
                                     government auditing standards.                                             
                                     GMRA requires that a consolidated financial statement for all      
                                     accounts and associated activities of the Executive branch be prepared by  
                                     the Secretary of the Treasury, in coordination with the Director of the    
                                     Office of Management and Budget, for fiscal year 1997 and each year        
                                     thereafter. Such statements are to be audited by the Comptroller General.  
                                     The audited financial statements must be submitted to the President and    
                                     Congress by March 31, 1998.                                                
----------------------------------------------------------------------------------------------------------------
Federal Financial Management                                                                                    
 Improvement Act of 1996                                                                                        
                                     The Federal Financial Management Improvement Act of 1996 (FFMIA)   
(Title VIII of P.L. 104-208)         requires that agencies conform to promulgated Federal Government accounting
                                     and systems standards, and use the U.S. Government Standard General Ledger.
                                     FFMIA requires auditors performing financial audits to report      
                                     whether agencies' financial management systems comply substantially with   
                                     Federal accounting standards, financial systems requirements, and the      
                                     Government's Standard General Ledger at the transaction level.             
                                     For agencies that are not in material compliance with the standards
                                     described above, the head of the agency, in consultation with the Director 
                                     of the Office of Management and Budget, must prepare a remediation plan    
                                     that addresses the problems. This plan shall include resources, remedies,  
                                     and intermediate target dates necessary to bring the agency's financial    
                                     management systems into substantial compliance. The remediation plan shall 
                                     bring the agency's financial management systems into substantial compliance
                                     within 3 years after the date a determination is made by the auditors that 
                                     the agency is not in compliance.                                           
----------------------------------------------------------------------------------------------------------------
                                     The Director of the Office of Management and Budget is required to 
                                     report to Congress, not later than March 31 of each year, regarding        
                                     implementation on FFMIA.                                                   
                                     The Comptroller General is required to report to Congress, no later
                                     than October 1 of each year, concerning compliance with the requirements of
                                     FFMIA and the adequacy of applicable accounting standards of the Federal   
                                     Government.                                                                
----------------------------------------------------------------------------------------------------------------
\1\ These laws, except FFMIA, are compiled in Laws Related to Federal Financial Management, House Report 104-   
  745. FFMIA is included in Appendix C to this report.                                                          
\2\ The section of GMRA that deals with financial management is also referred to as the ``Federal Financial     
  Management Act of 1994.''                                                                                     


     APPENDIX C--Public Law 104-208, Title VIII--Federal Financial 
                       Management Improvement Act

                                ------                                


          TITLE VIII--FEDERAL FINANCIAL MANAGEMENT IMPROVEMENT

SEC. 801. SHORT TITLE.

      This title may be cited as the ``Federal Financial 
Management Improvement Act of 1996.''

SEC. 802. FINDINGS AND PURPOSES.

      (a) Findings.--The Congress finds the following:
            (1) Much effort has been devoted to strengthening 
        Federal internal accounting controls in the past. 
        Although progress has been made in recent years, 
        Federal accounting standards have not been uniformly 
        implemented in financial management systems for 
        agencies.
            (2) Federal financial management continues to be 
        seriously deficient, and Federal financial management 
        and fiscal practices have failed to--
                    (A) identify costs fully;
                    (B) reflect the total liabilities of 
                congressional actions; and
                    (C) accurately report the financial 
                condition of the Federal Government.
            (3) Current Federal accounting practices do not 
        accurately report financial results of the Federal 
        Government or the full costs of programs and 
        activities. The continued use of these practices 
        undermines the Government's ability to provide credible 
        and reliable financial data and encourages already 
        widespread Government waste, and will not assist in 
        achieving abalanced budget.
            (4) Waste and inefficiency in the Federal 
        Government undermine the confidence of the American 
        people in the government and reduce the federal 
        Government's ability to address vital public needs 
        adequately.
            (5) To rebuild the accountability and credibility 
        of the Federal Government, and restore public 
        confidence in the Federal Government, agencies must 
        incorporate accounting standards and reporting 
        objectives established for the Federal Government into 
        their financial management systems so that all the 
        assets and liabilities, revenues, and expenditures or 
        expenses, and the full costs of programs and activities 
        of the Federal Government can be consistently and 
        accurately recorded, monitored, and uniformly reported 
        throughout the Federal Government.
            (6) Since its establishment in October 1990, the 
        Federal Accounting Standards Advisory Board 
        (hereinafter referred to as the ``FASAB'') has made 
        substantial progress toward developing and recommending 
        a comprehensive set of accounting concepts and 
        standards for the Federal Government. When the 
        accounting concepts and standards developed by FASB are 
        incorporated into Federal financial management systems, 
        agencies will be able to provide cost and financial 
        information that will assist the Congress and financial 
        managers to evaluate the cost and performance of 
        Federal programs and activities, and will therefore 
        provide important information that has been lacking, 
        but is needed for improved decision making by financial 
        managers and the Congress.
            (7) The development of financial management systems 
        with the capacity to support these standards and 
        concepts will, over the long term, improve Federal 
        financial management.
      (b) Purpose.--The purposes of this Act are to--
            (1) provide for consistency of accounting by an 
        agency from one fiscal year to the next, and uniform 
        accounting standards throughout the Federal Government;
            (2) require Federal financial management systems to 
        support full disclosure of Federal financial data, 
        including the full costs of Federal programs and 
        activities, to the citizens, the Congress, the 
        President, and agency management, so that programs and 
        activities can be considered based on their full costs 
        and merits;
            (3) increase the accountability and credibility of 
        federal financial management;
            (4) improve performance, productivity and 
        efficiency of Federal Government financial management;
            (5) establish financial management systems to 
        support controlling the cost of Federal Government;
            (6) build upon and complement the Chief Financial 
        Officers Act of 1990 (Public Law 101-576; 104 Stat. 
        2838), the Government Performance and Results Act of 
        1993 (Public Law 103-62; 107 Stat. 285) and the 
        Government Management Reform Act of 1994 (Public Law 
        103-356; 108 Stat. 3410); and
            (7) increase the capability of agencies to monitor 
        execution of the budget by more readily permitting 
        reports that compare spending of resources to results 
        of activities.

SEC. 803 IMPLEMENTATION OF FEDERAL FINANCIAL MANAGEMENT IMPROVEMENTS.

      (a) In General.--Each agency shall implement and maintain 
financial management systems that comply substantially with 
Federal financial management systems requirements, applicable 
Federal accounting standards, and the United States Government 
Standard General Ledger at the transaction level.
      (b) Audit Compliance Finding.--
            (1) In general.--Each audit required by section 
        3521(e) of title 31, United States Code, shall report 
        whether the agency financial management systems comply 
        with the requirements of subsection (a).
            (2) Content of Reports.--When the person performing 
        the audit required by section 3521(e) of title 31, 
        United States Code, reports that the agency financial 
        management systems do not comply with the requirements 
        of subsection (a), the person performing the audit 
        shall include in the report on the audit--
                    (A) the entity or organization responsible 
                for the financial management systems that have 
                been found not to comply with the requirements 
                of subsection (a);
                    (B) all facts pertaining to the failure to 
                comply with the requirements of subsection (a), 
                including--
                            (i) the nature and extent of the 
                        noncompliance including areas in which 
                        there is substantial but not full 
                        compliance;
                            (ii) the primary reason or cause of 
                        the noncompliance;
                            (iii) the entity or organization 
                        responsible for the non-compliance; and
                            (iv) any relevant comments from any 
                        responsible officer or employee; and
                    (C) a statement with respect to the 
                recommended remedial actions and the time 
                frames to implement such actions.
      (c) Compliance Implementation.--
            (1) Determination.--No later than the date 
        described under paragraph (2), the Head of an agency 
        shall determine whether the financial management 
        systems of the agency comply with the requirements of 
        subsection (a). Such determination shall be based on--
                    (A) a review of the report on the 
                applicable agency-wide audited financial 
                statement;
                    (B) any other information the Head of the 
                agency considers relevant and appropriate.
            (2) Date of determination.--The determination under 
        paragraph (1) shall be made no later than 120 days 
        after the earlier of--
                    (A) the date of the receipt of an agency-
                wide audited financial statement; or
                    (B) the last day of the fiscal year 
                following the year covered by such statement.
            (3) Remediation plan.--
                    (A) If the Head of an agency determines 
                that the agency's financial management systems 
                do not comply with the requirements of 
                subsection (a), the head of the agency, in 
                consultation with the Director, shall establish 
                a remediation plan that shall include 
                resources, remedies, and intermediate target 
                dates necessary to bring the agency's financial 
                management systems into substantial compliance.
                    (B) If the determination of the head of the 
                agency differs from the audit compliance 
                findings required in subsection (b), the 
                Director shall review such determinations and 
                provide a report on the findings to the 
                appropriate committees of the Congress.
            (4) Time period for compliance.--A remediation plan 
        shall bring the agency's financial management systems 
        into substantial compliance no later than 3 years after 
        the date a determination is made under paragraph (1), 
        unless the agency, with concurrence of the Director--
                    (A) determines that the agency's financial 
                management systems cannot comply with the 
                requirements of subsection (a) within 3 years;
                    (B) specifies the most feasible date for 
                bringing the agency's financial management 
                systems into compliance with the requirements 
                of subsection (a); and
                    (C) designates an official of the agency 
                who shall be responsible for bringing the 
                agency's financial management systems into 
                compliance with the requirements of subsection 
                (a) by the date specified under subparagraph 
                (B).

SEC. 804. REPORTING REQUIREMENTS.

      (a) Reports by the Director.--No later than March 31 of 
each year, the Director shall submit a report to the Congress 
regarding implementation of this Act. The Director may include 
the report in the financial management status report and the 5-
year financial management plan submitted under section 
3512(a)(1) of title 31, United States Code.
      (b) Reports by the Inspector General.--Each Inspector 
General who prepares a report under section 5(a) of the 
Inspector General Act of 1978 (5 U.S.C. App.) shall report to 
Congressinstances and reasons when an agency has not met the 
intermediate target dates established in the remediation plan required 
under section 3(c). Specifically the report shall include--
            (1) the entity or organization responsible for the 
        non-compliance;
            (2) the facts pertaining to the failure to comply 
        with the requirements of subsection (a), including the 
        nature and extent of the non-compliance, the primary 
        reason or cause for the failure to comply, and any 
        extenuating circumstances; and
            (3) a statement of the remedial actions needed to 
        comply.
      (c) Reports by the Comptroller General.--No later than 
October 1, 1997, and October 1, of each year thereafter, the 
Comptroller General of the United States shall report to the 
appropriate committees of the Congress concerning--
            (1) compliance with the requirements of section 
        3(a) of this Act, including whether the financial 
        statements of the Federal Government have been prepared 
        in accordance with applicable accounting standards; and
            (2) the adequacy of applicable accounting standards 
        for the Federal Government.

SEC. 805. CONFORMING AMENDMENTS.

      (a) Audits by Agencies.--Section 3521(f)(1) of title 31, 
United States Code, is amended in the first sentence by 
inserting ``and the Controller of the Office of Federal 
Financial Management'' before the period.
      (b) Financial Management Status Report.--Section 
3512(a)(2) of title 31, United States Code, is amended by--
            (1) in subparagraph (D) by striking ``and' after 
        the semicolon;
            (2) by redesignating subparagraph (E) as 
        subparagraph (F); and
            (3) by inserting after subparagraph (D) the 
        following:
                    ``(E) a listing of agencies whose financial 
                management systems do not comply substantially 
                with the requirements of Section 3(a) the 
                Federal Financial Management Improvement Act of 
                1996, and a summary statement of the efforts 
                underway to remedy the noncompliance; and''
      (c) Inspector General Act of 1978.--Section 5(a) of the 
Inspector General Act of 1978 is amended--
            (1) in paragraph (11) by striking ``and'' after the 
        semicolon;
            (2) in paragraph (12) by striking the period and 
        inserting ``; and''; and
            (3) by adding at the end the following new 
        paragraph:
            ``(13) the information described under section   
        05(b) of the Federal Financial Management Improvement 
        Act of 1996.''

SEC. 806. DEFINITIONS.

      For purposes of this title:
            (1) Agency.--The term ``agency'' means a department 
        or agency of the United States Government as defined in 
        section 901(b) of title 31, United States Code.
            (2) Director.--The term ``Director'' means the 
        Director of the Office of Management and Budget.
            (3) Federal Accounting Standards.--The term 
        ``Federal accounting standards'' means applicable 
        accounting principles, standards, and requirements 
        consistent with section 902(a)(3)(A) of title 31, 
        United States Code.
            (4) Financial management systems.--The term 
        ``financial management systems'' includes the financial 
        systems and the financial portions of mixed systems 
        necessary to support financial management, including 
        automated and manual processes, procedures, controls, 
        data, hardware, software, and support personnel 
        dedicated to the operation and maintenance of system 
        functions.
            (5) Financial system.--The term ``financial 
        system'' includes an information system, comprised of 
        one or more applications, that is used for--
                    (A) collecting, processing, maintaining, 
                transmitting, or reporting data about financial 
                events;
                    (B) supporting financial planning or 
                budgeting activities;
                    (C) accumulating and reporting costs 
                information; or
                    (D) supporting the preparation of financial 
                statements.
                    (6) Mixed system.--The term ``mixed 
                system'' means an information system that 
                supports both financial and nonfinancial 
                functions of the Federal Government or 
                components thereof.

SEC. 807. EFFECTIVE DATE.

      This title shall take effect for the fiscal year ending 
September 30, 1997.

SEC. 808. REVISION OF SHORT TITLES.

      (a) Section 4001 of Public Law 104-106 (110 Stat. 642; 41 
U.S.C. 251 note) is amended to read as follows:

``SEC. 4001. SHORT TITLE.

      ``This division and division E may be cited as the 
`Clinger-Cohen Act of 1996'.''.
      (b) Section 5001 of Public Law 104-106 (110 Stat. 679; 40 
U.S.C. 1401 note) is amended to read as follows:

``SEC. 5001. SHORT TITLE.

      ``This division and division D may be cited as the 
`Clinger-Cohen Act of 1996'.''
      (c) Any reference in any law, regulation, document, 
record, or other paper of the United States to the Federal 
Acquisition Reform Act of 1996 or to the Information Technology 
Management Reform Act of 1996 shall be considered to be a 
reference to the Clinger-Cohen Act of 1996.
      This Act may be cited as the ``Treasury, Postal Service, 
and General Government Appropriations Act, 1997''.

                     APPENDIX D--Index of Witnesses

                                ------                                


    BROWN, June Gibbs, Inspector General, Department of Health 
and Human Services, April 21/24.
    CALBOM, Linda M., Director, Civil Audits, Accounting and 
Information Management Division, U.S. General Accounting 
Office, April 1.
    CALDER, Philip T., Chief Accountant, Accounting and 
Information Management Division, U.S. General Accounting 
Office, April 1/June 18.
    CLARK Jr., David L., Director, Audit Oversight and Liaison, 
Accounting and Information Management Division, U.S. General 
Accounting Office, April 21.
    COLLINS, Susan, Senator, chairman of the Permanent 
Subcommittee on Investigations, U.S. Senate, April 21.
    DACEY, Robert F., Director, Consolidated Audit and Computer 
Security Issues, Accounting and Information Management 
Division, April 1.
    DeSEVE, G. Edward, Controller and Acting Deputy Director 
for Management, Office of Management and Budget, April 1.
    DEVLIN, Daniel R., Deputy Assistant Inspector General for 
Audit, Social Security Administration, April 17.
    DODARO, Gene L., Assistant Comptroller General, Accounting 
and Information Management Division, U.S. General Accounting 
Office, April 1/15/16/June 18.
    DYER, John R., Acting Principal Deputy Commissioner, Social 
Security Administration, April 17.
    FUNK, Sherman M., former Inspector General, Department of 
State and Department of Commerce, April 21.
    GAFFNEY, Susan M., Inspector General, Department of Housing 
and Urban Development, April 21.
    GARDINER, Pamela, Assistant Inspector General for Audit, 
Social Security Administration.
    HARPER, Edwin L., Former Deputy Director, Office of 
Management and Budget, April 21.
    HAWKE, John D., Undersecretary for Domestic Finance, 
Department of the Treasury, April 1.
    HILL, Eleanor, Inspector General, Department of Defense, 
April 16/21.
    JACOBSON, Lisa G., Director of Defense Audits, Accounting 
and Information Management Division, U.S. General Accounting 
Office, April 16.
    JASPER, Herbert N., member, Standing Panel on Executive 
Organization and Management, National Academy of Public 
Administration, April 15.
    KUTZ, Gregory D., Associate Director, Governmentwide 
Accounting and Financial Management, Accounting and Information 
Management Division, U.S. General Accounting Office, April 15.
    LAYTON, John C., former Inspector General, Department of 
Energy, April 21.
    LIEBERMAN, Robert J., Assistant Inspector General for 
Auditing, Department of Defense, April 16.
    LIGHT, Paul C., director, Public Policy Program, the Pew 
Charitable Trusts, April 21.
    MARES, Michael E., chair, Tax Executive Committee, American 
Institute of Certified Public Accountants, April 15.
    MIN DEPARLE, Nancy-Ann, Administrator, Health Care 
Financing Administration, April 24.
    MURPHY, Gerald, Senior Advisor to the Undersecretary for 
Domestic Finance, Department of the Treasury, April 1.
    MUSICK, Anthony, former Chief Financial Officer, Internal 
Revenue Service, April 15.
    NAUGHTON, James R., former professional staff and counsel, 
Committee on Government Operations, U.S. House of 
Representatives, April 21.
    ROSSOTTI, Charles O., Commissioner of Internal Revenue, 
Internal Revenue Service, April 15.
    SEBASTIAN, Steven J., Assistant Director, Governmentwide 
Accounting and Financial Management, Accounting and Information 
Management Division, U.S. General Accounting Office, April 15.
    SCHATZ, Thomas, president, Citizens Against Government 
Waste, June 18.
    SPECTOR, Eleanor, Director of Defense Procurement, 
Department of Defense, April 16.
    STANTON, Thomas H., chair, Standing Panel on Executive 
Organization and Management, National Academy of Public 
Administration, April 15.
    STEINHOFF, Jeffrey C., Director of Planning and Reporting, 
Accounting and Information Management Division, U.S. General 
Accounting Office, June 18.
    TOYE, Nelson, Deputy Chief Financial Officer, Department of 
Defense, April 16.
    TUCKER, Stefan, chairman-elect, Section on Taxation, 
American Bar Association, April 15.
    WARREN, David R., Director of Defense Management, National 
Security and International Affairs Division, U.S. General 
Accounting Office, April 16.
    WILLIAMS, David C., Inspector General, Social Security 
Administration, April 17.
    WILLIS, Lynda D., Director, Tax Policy and Administration 
Issues, General Government Division, U.S. General Accounting 
Office, April 15.

                                
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