[House Report 106-170]
[From the U.S. Government Publishing Office]
Union Calendar No. 95
106th Congress, 1st Session - - - - - - - - House Report 106-170
_______________________________________________________________________
MAKING THE FEDERAL GOVERNMENT ACCOUNTABLE: ENFORCING THE MANDATE FOR
EFFECTIVE FINANCIAL MANAGEMENT
__________
SECOND REPORT
by the
COMMITTEE ON GOVERNMENT REFORM
together with
MINORITY VIEWS
Available via the World Wide Web: http://www.house.gov/reform
June 7, 1999.--Committed to the Committee of the Whole House on the
State of the Union and ordered to be printed
__________
U.S. GOVERNMENT PRINTING OFFICE
56-866 CC WASHINGTON : 1999
COMMITTEE ON GOVERNMENT REFORM
DAN BURTON, Indiana, Chairman
BENJAMIN A. GILMAN, New York HENRY A. WAXMAN, California
CONSTANCE A. MORELLA, Maryland TOM LANTOS, California
CHRISTOPHER SHAYS, Connecticut ROBERT E. WISE, Jr., West Virginia
ILEANA ROS-LEHTINEN, Florida MAJOR R. OWENS, New York
JOHN M. McHUGH, New York EDOLPHUS TOWNS, New York
STEPHEN HORN, California PAUL E. KANJORSKI, Pennsylvania
JOHN L. MICA, Florida PATSY T. MINK, Hawaii
THOMAS M. DAVIS, Virginia CAROLYN B. MALONEY, New York
DAVID M. McINTOSH, Indiana ELEANOR HOLMES NORTON, Washington,
MARK E. SOUDER, Indiana DC
JOE SCARBOROUGH, Florida CHAKA FATTAH, Pennsylvania
STEVEN C. LaTOURETTE, Ohio ELIJAH E. CUMMINGS, Maryland
MARSHALL ``MARK'' SANFORD, South DENNIS J. KUCINICH, Ohio
Carolina ROD R. BLAGOJEVICH, Illinois
BOB BARR, Georgia DANNY K. DAVIS, Illinois
DAN MILLER, Florida JOHN F. TIERNEY, Massachusetts
ASA HUTCHINSON, Arkansas JIM TURNER, Texas
LEE TERRY, Nebraska THOMAS H. ALLEN, Maine
JUDY BIGGERT, Illinois HAROLD E. FORD, Jr., Tennessee
GREG WALDEN, Oregon JANICE D. SCHAKOWSKY, Illinois
DOUG OSE, California ------
PAUL RYAN, Wisconsin BERNARD SANDERS, Vermont
JOHN T. DOOLITTLE, California (Independent)
HELEN CHENOWETH, Idaho
Kevin Binger, Staff Director
Daniel R. Moll, Deputy Staff Director
David A. Kass, Deputy Counsel and Parliamentarian
Carla J. Martin, Chief Clerk
Phil Schiliro, Minority Staff Director
------
Subcommittee on Government Management, Information, and Technology
STEPHEN HORN, California, Chairman
JUDY BIGGERT, Illinois JIM TURNER, Texas
THOMAS M. DAVIS, Virginia PAUL E. KANJORSKI, Pennsylvania
GREG WALDEN, Oregon MAJOR R. OWENS, New York
DOUG OSE, California PATSY T. MINK, Hawaii
PAUL RYAN, Wisconsin CAROLYN B. MALONEY, New York
Ex Officio
DAN BURTON, Indiana HENRY A. WAXMAN, California
J. Russell George, Staff Director and Chief Counsel
Bonnie Heald, Director of Communications and Professional Staff Member
J. Lawrence Malenich, Professional Staff Member
Mason Alinger, Clerk
Faith Weiss, Minority Counsel
LETTER OF TRANSMITTAL
----------
House of Representatives,
Washington, DC, June 7, 1999.
Hon. J. Dennis Hastert,
Speaker of the House of Representatives,
Washington, DC.
Dear Mr. Speaker: By direction of the Committee on
Government Reform, I submit herewith the committee's second
report to the 106th Congress. The committee's report is based
on a study conducted by its Subcommittee on Government
Management, Information, and Technology.
Dan Burton,
Chairman.
(iii)
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
1. Material deficiencies in financial information.. 4
2. Material control weaknesses in financial systems 5
3. Noncompliance with laws and regulations......... 6
4. Year 2000 challenge............................. 6
D. Recommendations....................................... 7
1. Continued oversight............................. 7
2. Incentives...................................... 8
3. Strengthen oversight role of Inspectors General. 8
4. Strengthen President's role..................... 9
II. Report on the committee's oversight review......................10
A. Background............................................ 10
1. Need for effective financial management......... 10
2. Federal financial management legislation........ 10
3. Importance of effective internal controls....... 15
B. Results of the governmentwide and related agency
audits............................................... 17
1. Oversight hearings held by subcommittee......... 17
2. Financial management grades..................... 22
III. Conclusions.....................................................25
APPENDIXES
Appendix A.--Basis for agency financial management grades........ 27
Appendix B.--Major Federal financial management legislation...... 29
Appendix C.--Federal Financial Management Improvement Act........ 34
Appendix D.--List of witnesses................................... 40
VIEWS
Minority views of Hon. Henry A. Waxman, Hon. Jim Turner, Hon. Tom
Lantos, Hon. Robert E. Wise, Jr., Hon. Major R. Owens, Hon.
Edolphus Towns, Hon. Paul E. Kanjorski, Hon. Patsy T. Mink,
Hon. Carolyn B. Maloney, Hon. Eleanor Holmes Norton, Hon. Chaka
Fattah, Hon. Elijah E. Cummings, Hon. Dennis J. Kucinich, Hon.
Rod R. Blagojevich, Hon. Danny K. Davis, Hon. John F. Tierney,
Hon. Thomas H. Allen, Hon. Harold E. Ford, Jr., and Hon. Janice
D. Schakowsky.................................................. 42
(v)
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
(vii)
Union Calendar No. 95
106th Congress Report
HOUSE OF REPRESENTATIVES
1st Session 106-170
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MAKING THE FEDERAL GOVERNMENT ACCOUNTABLE: ENFORCING THE MANDATE FOR
EFFECTIVE FINANCIAL MANAGEMENT
_______
June 7, 1999.--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 submitted the
following
SECOND REPORT
On May 19, 1999, the Committee on Government Reform
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 (the ``committee'') has
primary legislative and oversight jurisdiction with respect to
``Government management and accounting measures generally,'' as
well as ``overall economy, efficiency, and management of
Government operations and activities, including Federal
procurement.'' \1\ The committee also has the responsibility:
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\1\ Clause 1(h) (4) and (6) rule X of the Rules of the House of
Representatives, 106th Congress.
[T]o determine whether laws and programs addressing
subjects within the jurisdiction of [the] committee are
being implemented and carried out in accordance with
the intent of Congress [through the] review and study
on a continuing basis the application, administration,
execution, and effectiveness of laws and programs
addressing subjects within its jurisdiction. [The
committee shall review and study] any conditions or
circumstances that may indicate the necessity or
desirability of enacting new or additional legislation
addressing subjects within its jurisdiction.\2\
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\2\ Ibid., Clause 2(b)(1) (A) and (C).
Pursuant to this authority, the Subcommittee on Government
Management, Information, and Technology (the ``subcommittee'')
convened six oversight hearings to explore:
the implementation of laws related to Federal
financial management in executive departments and
agencies and, in particular, the second year of full
implementation of the Chief Financial Officers Act of
1990 (CFO Act), as expanded by the Government
Management Reform Act of 1994 (GMRA) and as amended by
the Federal Financial Management Improvement Act of
1996 (FFMIA);
the extent to which Federal executive
departments and agencies have successfully applied 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 taxpayer-provided dollars are being lost each
year to fraud, waste, abuse, and mismanagement in hundreds of
programs within the Federal Government. Audits continue to show
that most agencies have significant weaknesses in controls and
systems. As a result of these weaknesses, Federal
decisionmakers do not have reliable and timely performance and
financial information to ensure adequate accountability, manage
for results, and make timely and well-informed judgments.
In the late 1980s, 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
within the agency. Furthermore, consolidated governmentwide
financial statements must be prepared and audited annually. In
addition, Federal agencies are required to conform to
promulgated Federal Government accounting and systems
standards, and to use the Federal standard general ledger.
Despite the passage and implementation of these laws, there
has been limited progress. 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
Chief Financial Officers Act of 1990, Public Law 101-576, as
expanded by the Government Management Reform Act of 1994,
Public Law 103-356, required--for the first time--the
preparation and audit of consolidated financial statements of
the Federal Government for fiscal year 1997, and each year
thereafter.\3\ GMRA required that the General Accounting Office
[GAO] issue an audit report no later than March 31 of each year
on the consolidated financial statements for the preceding
fiscal year.
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\3\ The consolidated financial statements of the U.S. Government
for fiscal years 1997 and 1998 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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The GMRA also required that, starting March 1, 1997, and
each year thereafter, all 24 Federal agencies that are subject
to the requirements of the CFO Act must submit audited
financial statements to the Director of OMB.\4\ These 24
agencies were responsible for approximately 97 percent of the
total Federal outlays during fiscal year 1997.
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\4\ The 24 Federal agencies covered by the requirements of the CFO
Act are the following 14 Cabinet Departments: Agriculture, Commerce,
Defense, Education, Energy, Health and Human Services, Housing and
Urban Development, Interior, Justice, Labor, State, Transportation,
Treasury, and Veterans Affairs; and various independent agencies,
including: Environmental Protection, National Aeronautics and Space,
International Development, Federal Emergency Management, General
Services, National Science, the Nuclear Regulatory Commission,
Personnel Management, the Small Business, and Social Security.
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Fiscal year 1997 also marked the first year of
implementation of the Federal Financial Management Improvement
Act of 1996, 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) \5\ in order to
provide uniform, reliable, and useful financial information.
FFMIA required that beginning with the fiscal year ending on
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, whether the agencies' financial
systems comply substantially with Federal financial systems
requirements,\6\ applicable Federal accounting standards,\7\
and the standard general ledger at the transaction level. FFMIA
also required the GAO to report on agency implementation of
FFMIA by October 1, 1997, and each year thereafter.
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\5\ 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.
\6\ 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.
\7\ The Comptroller General of the United States and the Director
of the Office of Management and Budget issued a comprehensive set of
accounting standards that became fully effective in fiscal year 1998.
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It is imperative that these acts are implemented
successfully. They form the basis for the data used in
measuring program performance under the Government Performance
and Results Act, Public Law 103-62 (Results Act). Thus, at a
minimum, strong congressional oversight is needed to achieve
the primary goal of all these laws: a Federal Government that
is accountable to the American taxpayers.
c. findings
The fiscal year 1998 annual audit reports for the 24
Federal departments and agencies, required under the CFO Act,
as expanded by GMRA, were due to be filed with the OMB on March
1, 1999. In addition, the GAO issued a second annual audit
report on the consolidated financial statements of the Federal
Government on March 31, 1999. Based on the investigation and
oversight hearings conducted by the subcommittee and the
governmentwide audit conducted by the GAO, the committee finds
as follows:
1. Material deficiencies in Federal financial information continue
Similar to the previous year, the GAO was unable to render
an opinion on the 1998 consolidated financial statements of the
Federal Government. In addition, the GAO report \8\ articulated
the broad array of financial management problems faced by the
Federal Government. It again confirmed that at least tens of
billions of taxpayer dollars are being lost each year to fraud,
waste, abuse, and mismanagement in hundreds of Federal
programs. Government financial management remains in disarray.
Its financial systems and practices are obsolete and
ineffective, and they do not provide complete, consistent,
reliable, and timely information to the President,
congressional decisionmakers, and department and agency
management.
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\8\ ``Financial Audit: 1998 Financial Report of the United States
Government,'' GAO/AIMD-99-130, Mar. 31, 1999.
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The GAO report provided a synopsis of significant
weaknesses found in 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, ``these 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 Government's
ability to accurately measure the full cost and financial
performance of programs and effectively and efficiently manage
its operations.'' \9\
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\9\ Ibid., p. 1.
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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:
account for and report on billions of dollars
worth of property, equipment, materials, supplies and
stewardship assets;
estimate the cost of most Federal credit
programs and related loans receivable, and loan
guarantee liabilities;
estimate and reliably report material amounts
of environmental and disposal liabilities, and their
related costs;
determine the amount of various reported
liabilities, including post-retirement health benefits
for military employees, 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, which are estimated to
involve billions of dollars annually;
ensure that all disbursements are properly
recorded; and
prepare the Federal Government's financial
statements, including balancing statements that involve
billions of dollars in transactions between
governmental entities, and properly and consistently
compile the information in the financial statements.
The oversight hearings held by the subcommittee on
financial management at key executive branch agencies explored
specific problems and potential solutions specific to each
agency. Based on the Inspectors General 1998 financial audit
reports of the 18 CFO Act departments and agencies that had
filed their reports as of the date of this report, only 8 could
prepare financial statements that were reliable in all material
respects based on the results of independent audits.\10\
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\10\ As of the date of this report, 6 of the 24 agencies required
to issue audited financial statements by Mar. 1, 1999, had not done so.
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2. Material control weaknesses continue to exist in Federal financial
systems
The General Accounting Office reported several pervasive
material weaknesses in internal controls across the Federal
Government.\11\ These material weaknesses contributed to the
deficiencies described above. In addition, these weaknesses
have resulted in the Federal Government's inability to
safeguard Federal assets from unauthorized acquisition, use, or
disposition; to ensure that transactions are executed in
accordance with the laws governing use of budget authority and
other laws and regulations; or to ensure the reliability of
financial statements.
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\11\ 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.
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Specifically, the GAO found widespread computer control
weaknesses and material weaknesses in controls related to the
Federal Government's tax-collection activities. The GAO stated
in its report that ``serious computer security weaknesses
expose the Government's financial and other sensitive
information to inappropriate disclosure, destruction,
modification, and fraud.''
With respect to tax collection activities, the GAO reported
that ``the Federal Government continues to have material
weaknesses in controls related to its tax-collection activities
that affect its ability to efficiently and effectively account
for and collect the Government's revenue.'' The GAO further
reported that ``serious financial management system
deficiencies affect the Federal Government'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.
This weakness has resulted in the Government pursuing
collection efforts against individual taxpayers who had already
paid their taxes in full. The Federal Government also continues
to be vulnerable to loss of tax revenue due to weaknesses in
preventive controls over disbursements of tax refunds. The
Government does not perform sufficient up-front verification
procedures to ensure the validity of amounts claimed by
taxpayers as overpayments prior to making disbursements for
refunds.'' \13\
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\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: 1998 Financial Report of the United States
Government,'' GAO/AIMD-99-130, Mar. 31, 1999, p. 32.
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The prevalence of weak internal controls in Federal
Government systems is exemplified by the fact that only 5 of
the 18 CFO Act agencies that filed reports did not have
material weaknesses found by auditors during the course of
their audits of fiscal year 1998 financial statements.
3. A pervasive noncompliance with laws and regulations continues
Also contributing to the Federal Government's financial
management problems were instances of material noncompliance
with laws and regulations. The GAO reported that ``tests for
compliance with selected provisions of laws and regulations
related to financial reporting disclosed that . . . the Federal
Government makes improper payments on major programs such as
Medicare.'' Further, most agencies were not in compliance with
FFMIA, which requires auditors 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.
The GAO also reported that ``the majority of Federal
agencies' financial management systems do not meet systems
requirements. They cannot provide reliable financial
information for managing day-to-day Government operations or
hold managers accountable. For many agencies, the preparation
of financial statements requires considerable reliance on ad
hoc programming and analyses of data produced by inadequate
financial systems that are not integrated, reconciled, and
often require significant adjustments.''
``For example, the DOD Inspector General reported that the
Defense Department recorded more than $1.5 trillion in
adjustments to component financial statements that were not
supported by adequate audit trails or sufficient evidence to
determine their validity.'' \14\ Auditors reported that only 3
of the 18 agencies that had filed their 1998 audited financial
statements complied with FFMIA requirements.
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\14\ Ibid., pps. 33-34.
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4. Year 2000 computing challenge still poses a significant threat to
Federal financial systems
A final factor affecting financial management in the
Federal Government was the year 2000 computing crisis.\15\ This
critical issue has been the subject of extensive oversight by
the subcommittee. According to the GAO, ``while much has been
accomplished in addressing the Year 2000 challenge, risks
remain. Our reviews of Federal Year 2000 programs have found
uneven progress; some major agencies are behind schedule.
Complete and thorough Year 2000 testing is essential to
providing reasonable assurance that new or modified systems
will be able to process dates correctly and not jeopardize
agencies' ability to perform core business operations.
Moreover, adequate business continuity and contingency plans
must be successfully completed throughout Government.'' \16\
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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: 1998 Financial Report of the United States
Government,'' GAO/AIMD-99-130, Mar. 31, 1999, p. 35.
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d. recommendations
Based on the foregoing findings, the committee recommends
the following:
1. Continuation of regular congressional and Presidential oversight
Strong oversight is one of Congress's most effective tools
in the effort to ensure that executive departments and agencies
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 should provide a detailed, annual
status report on its financial management operations. When
appropriate, each department or agency should be regularly
reviewed by its relevant oversight, authorization, and
appropriations subcommittees regarding its financial management
processes. These hearings should be held annually,
semiannually, or quarterly, depending on the severity of the
financial problems within the agency or department.
Agencies with serious financial management problems are
required by the Federal Financial Management Improvement Act of
1996 to prepare a ``remediation plan.'' This plan should be a
detailed guide for agency management and staff that includes
procedures for resolving any reported problems the agency is
having in adhering to Federal Government accounting and systems
standards and the implementation of the Government standard
general ledger. The GAO is currently making its initial
evaluations of the agency remediation plans. Those evaluations
will be included in a report to be released on or before
October 1, 1999.
Congressional oversight hearings need to include a
discussion of the agency's plan, and the progress being made
toward resolving outstanding problems with various financial
systems and practices. Oversight hearings should also 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.
As previously recommended, the agency remediation plans
must provide a detailed description of planned actions with
clear and reasonable milestones, including the names of staff
members responsible for resolving particular issues. The plan
should be approved by the agency head and relevant agency
officials, such as the Chief Financial Officer, the Chief
Information Officer, and the Inspector General. A draft of the
approved plan should be sent to the Comptroller General who
would coordinate the agency's actions and related milestones in
the remediation effort. A draft of the plan should also be
available to relevant congressional committees, and the
Director of the Office of Management and Budget. These parties
must meet regularly, monitoring the agency's progress toward
meeting the objectives of the plan. This would assist Congress
in effectively monitoring agency actions and taking corrective
actions as necessary.
2. Provide incentives for implementing effective financial management
It is clear that congressional oversight alone cannot
effect the necessary change in financial management practices
at all departments and agencies. The committee again notes that
incentives are needed to prompt agencies to resolve their
outstanding financial management problems. If an agency is
unable or unwilling to effect these crucial changes, Congress
has the authority to provide the needed incentives for change.
They include: (1) redirecting a percentage of the agency's
appropriated program or administrative funding toward
correcting financial management problems; (2) restricting a
percentage of the agency's appropriated funds until the
problems are corrected; or (3) reducing various amounts of
appropriated funds until the agency has completed its
remediation efforts.
These actions are intended to provide an incentive for the
agency to resolve its financial management problems
expeditiously.
3. Strengthen the ability of Inspectors General to carry out their
financial management oversight responsibilities
Inspectors General are responsible for conducting audits of
agency and department programs and operations. Their audit
function in the executive branch is crucial. Agency audits
provide information to executive branch managers and Congress
that are necessary to uncover and resolve problems that impede
effective financial management. To ensure that Inspectors
General can provide quality audit services, it is imperative
that Congress take steps to ensure that Inspectors General are
highly qualified and have the necessary resources to oversee
agency financial management.
The Office of the Inspector General must ensure that all
candidates for Inspector General positions are qualified to
perform financial statement audits or specific segments of
audits requiring specific expertise. These qualifications
should be determined through a review by an external party and
may be incorporated into the peer review process.
As the committee suggested last year, when appointments for
the Inspector General office are being considered, a board,
which includes representatives of the President's Council on
Integrity and Efficiency [PCIE], should review the
qualifications of the Inspector General candidate before the
nomination is forwarded to the Senate for 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 of the Federal Government. Many broad
objectives--including effectively managing Federal Government
finances--are intended to make the Federal Government work
better, but they depend on the commitment of the President and
his staff in the Executive Office of the President. By
approaching the Federal Government almost exclusively from a
budgetary or policy perspective, Presidents limit their
capacity to reform management within the Federal Government.
If the financial management function is to be strengthened,
the President needs management experts. That is also true of
various other management functions. In the past, the
Subcommittee on Government Management, Information, and
Technology has recommended legislation that would form an
Office of Management, separate and distinct from the Office of
the Budget. It continues to recommend such an office. This
office could help the President and his Cabinet focus on the
critical management challenges facing the Federal Government.
Cabinet officers are not always nominated for their
managerial skills. They need assistance. Congress has provided
some of that assistance by mandating the roles of Chief
Financial Officer and Chief Information Officer. However, in a
number of departments and agencies, these dual roles have been
assigned to one person. That is not what Congress sought. The
financial and information management functions are so complex
that each one requires the full-time attention of a senior
management official.
summary of overall findings and recommendations
Findings
1. Material deficiencies continue to exist in Federal
financial information.
2. Material control weaknesses in financial systems
continue.
3. Some agencies have again failed to comply with the laws
and regulations governing Federal financial accountability.
4. The year 2000 computer problem poses a threat to Federal
financial systems.
Recommendations
1. There is a continuing need for regular congressional and
Presidential oversight.
2. Financial incentives need to be provided that will
prompt agencies and departments to resolve their financial
management problems.
3. The ability of Inspectors General to carry out their
financial management oversight responsibilities must be
strengthened.
4. The President's role as Chief Executive Officer of the
executive branch should be strengthened by establishing an
Office of Management.
II. Report on the Committee's Oversight Review
a. background
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. There 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.\17\ --Thomas Jefferson, April 1, 1802
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\17\ 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, pps. 306-309.
1. The need for effective Federal financial management
Nearly 200 years ago, President Thomas Jefferson recognized
the need for effective financial management in the Federal
Government. President Jefferson's insight on this subject is
still relevant today.
Federal financial management continues in a state of
disarray. Billions of taxpayers' dollars are being lost each
year to fraud, waste, abuse, and mismanagement in hundreds of
Federal programs. 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.
2. 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 in the last 40 years. Other significant legislation
affecting Federal financial management includes: the Budget and
Accounting Procedures Act of 1950 [BAPA]; the Inspector General
Act of 1978, as amended by the Inspector General Act Amendments
of 1988 [IG Act]; the Federal Managers' Financial Integrity Act
of 1982 [FMFIA]; 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 are
described in detail in Appendix B of this report.
Audited financial statements
The Chief Financial Officers Act established a pilot
program that required 10 agencies to prepare financial
statements and have those statements audited. This pilot
program demonstrated the benefits of requiring Federal agencies
to prepare audited financial statements. Based on the pilot
program's success 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 within the agency. The
Director of the Office of Management and Budget is responsible
for setting the form and content of the financial statements
against which the auditor must measure an agency's financial
statements. The guidance provided by the OMB incorporates the
standards recommended by the Federal Accounting Standards
Advisory Board. These audited statements are to be sent to the
Director of the OMB no later than March 1 of the 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 the OMB. The financial
statements are to be audited by the Comptroller General of the
United States and forwarded 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 by the Hoover
Commission.\18\ 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 Executive agency.'' \19\ 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.
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\18\ 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.
\19\ The Budget and Accounting Procedures Act of 1950 (ch. 946, 64
Stat. 832, pt. II, sec. 112(a)).
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Those standards were modeled, to a large degree, after
private sector practices. They were the primary source of
accounting guidance for Federal agencies from the 1950s until
they were superseded by the Statements of Federal Financial
Accounting Standards.
The passage of the CFO Act in 1990 and its requirement for
audited financial statements focused attention on the
accounting standards to which these Federal agencies were to be
held. Consequently, the Office of Management and Budget
objected to the Comptroller General setting such policy since
the Comptroller General's Office and its General Accounting
Office 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.
To avoid constitutional intrusion by the legislative branch, as
represented by the Comptroller General, two of the board's
members represent the executive branch and one represents the
legislative branch.
The recommendations of the FASAB must be approved by the
Comptroller General, the Director 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 constitutes generally accepted
accounting principles for the Federal Government.
The FASAB is responsible for recommending accounting
standards, referred to as Statements of Federal Financial
Accounting Standards [SFFAS], after considering the financial
and budgetary information needs of Congress and executive
agencies, as well as other users of Federal financial
information.\20\ 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.
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\20\ 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.
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Federal financial reporting is intended to be used to
assess the Government's accountability, efficiency and
effectiveness, and to provide information on the economic and
social consequences of the allocations and various uses of
Federal resources. Accounting standards for the Federal
Government should result not only in understandable, relevant,
and reliable financial information, but should 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.
The FASAB completed the development of the original set of
eight accounting standards for the Federal Government in 1996.
Since that date, four additional standards have been adopted.
As of the date of this report, there are three recommended
standards, referred to as Statements of Recommended Accounting
Standards [SRAS], waiting for final approval. The existing
standards have been augmented by two Statements of Federal
Financial Accounting Concepts [SFFAC]. Also, the FASAB
currently has four exposure drafts and one invitation for views
on suggested standards outstanding, and has issued five
interpretations of standards. The following table lists the
documents issued by the FASAB. It is expected that the 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]
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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
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SFFAS 1: Accounting for Selected March 30, 1993 October 1, 1993
Assets and Liabilities
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SFFAS 2: Accounting for Direct Loans August 23, 1993 October 1, 1993
and Loan Guarantees
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SFFAS 3: Accounting for Inventory October 27, 1993 October 1, 1993
and Related Property
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SFFAS 4: Managerial Cost Accounting July 31, 1995 October 1, 1997
Concepts and Standards
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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
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SFFAS 7: Accounting for Revenue and May 10, 1996 October 1, 1997
Other Financial Sources
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SFFAS 8: Supplementary Stewardship June 11, 1996 October 1, 1997
Reporting
------------------------------------------------------------------------
SFFAS 9: Deferral of Implementation November 3, 1997 October 1, 1997
Date for SFFAS 4
------------------------------------------------------------------------
SRAS 10: Accounting for Internal Use Not Applicable Not Applicable
Software
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SFFAS 11: Amendments to Accounting December 15, October 1, 1998
for PP&E--Definitions 1998
------------------------------------------------------------------------
SFFAS 12: Recognition of Contingent February 5, 1999 October 1, 1997
Liabilities from Litigation
------------------------------------------------------------------------
SFFAS 13: Deferral of Paragraph February 5, 1999 October 1, 1998
65.2--Material Revenue-Related
Transactions Disclosures--Amending
SFFAS 7
------------------------------------------------------------------------
SRAS 14: Amendments to Deferred Not Applicable Not Applicable
Maintenance Reporting
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SRAS 15: Management Discussion and Not Applicable Not Applicable
Analysis
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Exposure Draft: Governmentwide June 1997 Not Applicable
Supplementary Stewardship Reporting
------------------------------------------------------------------------
Exposure Draft: Accounting for February 1998 Not Applicable
Social Insurance
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Exposure Draft: Amendments to February 1998 Not Applicable
Accounting for Property, Plant, and
Equipment
------------------------------------------------------------------------
Exposure Draft: Amendments to March 1999 Not Applicable
Accounting for Direct Loans and
Loans Guarantees
------------------------------------------------------------------------
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, Reporting
Pension Payments In Excess of 1997 periods ending
Pension Expense on or after
September 30,
1997
------------------------------------------------------------------------
Interpretation 5: Recognition by December 3, 1998 Effective upon
Recipient Entities of Receivable implementation
Non-exchange Revenue of SFFAS 7
------------------------------------------------------------------------
3. The Importance of Effective Internal Controls
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 controls. Their importance
cannot be overstated, especially in the large, complex
operating environment of the executive branch of the Federal
Government. Effective internal controls are the first line of
defense against fraud, waste, abuse, and mismanagement, and
help to ensure that an entity's mission is achieved in the most
effective and efficient manner. The subject of internal
controls generally surfaces--as has been the case in
subcommittee hearings--after improprieties or inefficiencies
are found. However, as has been previously noted, good managers
continually seek new ways to improve operations through
effective internal controls.
Internal controls can be simply defined as the methods by
which an organization governs its activities to accomplish its
mission effectively and efficiently. More specifically,
internal controls are concerned with stewardship and
accountability for the resources consumed in the process of
accomplishing an entity's mission with effective results. The
GAO has defined internal controls 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 controls should not be looked upon as separate,
specialized systems within an agency. Rather, they should be
recognized as an integral part of each system that management
uses to regulate and guide its operations. Internal controls
are synonymous with management controls in that the broad
objectives of internal controls cover all aspects of agency
operations. Although ultimate responsibility for good internal
controls rests with management, all employees have a role in
the effective operation of internal controls set by management.
The committee again stresses that 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,\21\ the
American Institute of Certified Public Accountants identified
internal control limitations, such as the possibility of errors
arising from such causes as misunderstanding instructions,
mistakes in 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 controls should not exceed the
benefit derived. Reasonable assurance equates to a satisfactory
level of confidence under given considerations of costs,
benefits, and risks.
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\21\ Codification of Statements on Auditing Standards (Including
Statements on Standards for Attestation Engagements), Nos. 1 to 82,
American Institute of Certified Public Accountants, as of Jan. 1, 1997.
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The full cost of fraud, waste, abuse, and mismanagement
cannot always be known in advance or 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 dollars. The trust of the citizenry in
its Government is a priceless relationship.
Management executives at most Federal agencies are faced
with tight budgets and, thus, limited in human, information,
and financial resources. In such an environment, especially
given the diverse and complex nature of Federal operations,
weak control environments can provide fertile ground for fraud,
waste, abuse, and mismanagement.
Effective financial management practices and timely,
reliable financial information enable senior management to make
decisions that will result in effective and efficient
operations. This belief is reflected in the Government
Performance and Results Act passed by Congress in 1993. The act
sought 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.'' The act was also designed to aid the legislative
branch and improve congressional 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, neither agency decisionmakers nor Congress can
determine the real costs and benefits of Federal programs.
Thus, it is imperative that Federal agencies and departments
produce reliable financial information in a timely and
efficient manner.
b. results of the fiscal year 1998 governmentwide financial statement
audit and related agency audits
1. Oversight hearings held by the subcommittee
On March 31, 1999, 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 second annual report again
provided a concise description of the myriad problems faced by
the executive branch. The subcommittee held a hearing on March
31, 1999 to examine the results of this audit.
The subcommittee hearings focused on the status of
financial management at the Internal Revenue Service, the
Federal Aviation Administration, the Department of Justice, the
Health Care Financing Administration, and the Department of
Defense. Collectively, these agencies account for more than 98
percent of the Federal Government's annual revenue and a
majority of the costs (excluding interest on the national debt
held by the public and the Social Security program). In
addition, the Department of Defense accounts for a significant
portion of the assets held by the Federal Government.
Consequently, these agencies play a significant role in the
production of governmentwide statements, and significantly
affect the audit results. All of these agencies have
experienced problems with their financial management, and have
had varying degrees of success in resolving those problems.
Each agency and department is required to issue a separate
audited financial statement. The subcommittee held hearings to
explore specific issues at each of these agencies.
These hearings held by the Subcommittee on Government
Management, Information, and Technology:
explored the results of the financial audits
for the second year of full implementation of the GMRA
throughout the Federal Government, and in particular at
the five agencies noted above;
considered the need for congressional action
to improve financial management in the executive
branch; and
reviewed options for possible congressional
actions needed to ensure the successful implementation
of Federal 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. In fiscal year
1998, the IRS issued its first set of financial statements
covering both its custodial and administrative activities.
Prior to 1998, the IRS had issued two sets of financial
statements; one set for its custodial operations--the revenues
collected, refunds paid, and related taxes receivable and
payable--and another for its appropriated funds. The IRS's
financial data were 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 the agency has long been criticized for
the perceived abuse of its broad enforcement powers. In
response to this criticism, Congress established the Commission
on the Restructuring of the IRS. Led by Representative Rob
Portman of Ohio and Senator Bob Kerrey of Nebraska, the
bipartisan commission released a comprehensive report in June
1997, proposing several changes in the IRS's management. The
Commission's recommendations were the basis of H.R. 2676, the
Internal Revenue Service Restructuring and Reform Act of 1997,
which was signed into law by the President on July 22, 1998.
The underlying theme of the act is one of creating a cultural
change within the IRS. In the broadest terms, the act shifts
the emphasis within the IRS from its self-defined role as an
enforcement agency to a role more closely resembling a
financial service organization.
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 exceeds the changes mandated in
the legislation. Testifying before the subcommittee,
Commissioner Rossotti stated that he plans on ``shifting the
entire focus of the agency from one which focuses solely on
conducting our own internal operations to one which puts far
more emphasis on trying to see things from the point of view of
taxpayers and emphasizing service and fairness to taxpayers.''
For the second consecutive year, the IRS was able to
reliably report on its financial activity covering the
collection and refunds of taxes in 1998. This achievement,
however, required extensive, costly, and time-consuming ad hoc
procedures to overcome pervasive internal controls and systems
weaknesses. The ability to provide reliable year-end data is an
important first step for the IRS, but it is not an end in
itself. The GAO audit report stated that the ``IRS continues to
face significant financial and other management challenges and
risks.'' \22\ These weaknesses must be addressed before the IRS
can make any significant improvement in the area of financial
management.
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\22\ ``Financial Audit: IRS' Fiscal Year 1998 Financial
Statements,'' GAO/AIMD-99-75, p. 6.
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The IRS was unable to report on its administrative
activities in fiscal year 1998. The GAO report found that
``pervasive weaknesses in the design and operation of IRS's
financial management systems, accounting procedures,
documentation, recordkeeping, and internal controls prevented
IRS from reliably reporting on the results'' of these
activities.
The subcommittee's oversight hearing on March 1, 1999
highlighted the need for better computer systems to improve the
IRS's debt management. At the time of the hearing, the IRS
estimated that it collects only 11 percent of the $222 billion
in debts the agency claims are owed by delinquent taxpayers.
The hearing also illustrated the need for better controls over
refunds. According to the GAO, the IRS doesn't have the
preventive controls it needs to reduce the amount of
inappropriate payments being disbursed for tax refunds.
Department of Defense [DOD]
The General Accounting Office, the Defense Inspector
General, and the department's audit agencies have long reported
problems in the DOD's financial management systems and
practices. Each year, numerous reports are issued with
virtually the same problems as the prior years. The DOD's
reported financial management problems include: inadequate
control over assets such as real property, capital leases,
construction in progress, and inventories; the understatement
of costs associated with environmental clean-ups; liabilities,
including military retiree benefits, that are not covered by
current budgetary resources; and instances of noncompliance
with laws and regulations. Because of these problems, the
Inspector General was unable to render an opinion on the DOD's
financial statements for fiscal year 1998. The GAO disclaimed
an opinion on the Consolidated Governmentwide Financial
Statements of the Federal Government, largely due to the
Defense Department's inability to provide complete and
verifiable information on its finances.
The issues that need to be resolved cross operational lines
within the DOD and the military services. Thus, action is
needed from the top levels of DOD management to ensure that
these long-standing problems are resolved.
On May 4, 1999, the subcommittee examined the results of
the fiscal year 1998 audits of the DOD, and the status of the
Department's plans to address its long-standing and severe
problems. The GAO and DOD's Acting Inspector General
highlighted the most serious financial management weaknesses at
the Department. The subcommittee heard that the DOD remains
unable to:
account for and properly report on billions of
dollars worth of inventory and property, plants,
equipment, and national defense assets, primarily
weapons systems and support equipment;
estimate and report material amounts of
environmental and disposal liabilities, and their
related costs;
determine the liability associated with post-
retirement health benefits for military employees;
report the net costs of its operations;
produce accurate budget data; and
determine the full extent of improper
payments.
These weaknesses in the DOD's financial management
operations continue to result in wasted resources. Furthermore,
they undermine the DOD's ability to manage an estimated $250
billion budget and $1 trillion in assets, all of which limit
the reliability of financial information provided to Congress.
During 1998, the Department of Defense adressed these
weaknesses more seriously than in previous years. The GAO
testified before the subcommittee on March 4, stating that
``while in the past we have questioned the department's
commitment to fixing these long-standing problems, DOD has
started to devote additional resources to correct its financial
management weaknesses. The atmosphere of `business as usual' at
DOD has changed to one of marked effort at real reform.'' The
GAO went on to say, ``this commitment is imperative, as it will
take considerable effort, time, and sustained top management
attention to turn reform efforts into day-to-day management
reality.''
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. The growth of HCFA's Medicare and
Medicaid payments has exceeded the growth in the Consumer Price
Index for medical goods and services. Yet the agency is unable
to provide timely or reliable financial information. The GAO
has cited HCFA's Medicare program as a high-risk area for
fraud, waste, and abuse.\23\
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\23\ High Risk Series: GAO/HR-99-1, January 1999.
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HCFA's fiscal year 1998 financial statements received a
qualified opinion. The Inspector General of HHS was unable to
find sufficient documentation to complete the Medicare accounts
receivable. HCFA released its audited financial statements for
fiscal year 1998 at the subcommittee's March 26, 1999 hearing.
Based on the last 2 years of audit results, the hearing
focused on actions HCFA is taking to resolve its financial
management problems, including excessive Medicare payments.
There has been marked improvement in the agency's annual
overpayments, but the amounts are still unacceptable. The
estimated amount of overpayments for Medicare dropped from
$23.2 billion in 1996 to $20.6 billion in 1997 and $12.6
billion in 1998. The 1998 amount represents approximately 7.1
percent of the total Medicare fee-for-service benefit payments
made that year.
The subcommittee found that, while progress has been made,
much more is needed to ensure that the Medicare and Medicaid
programs--critical to the security of 73 million elderly and
impoverished Americans--are fiscally sound.
Specific issues disclosed in the auditor's report on the
1998 financial statements included the following:
Medicare contractors did not maintain the
support needed to determine the accuracy of reported
collections of accounts receivable. Auditors were
unable to determine if records maintained by the
contractors included all the amounts owed to HCFA.
Medicare contractors did not adequately
control cash, including collection of outstanding
accounts receivable. During 1998, Medicare contractors
reported more than $7.5 billion in collections.
Auditors reported serious breakdowns in controls in
this area, including the fact that, in many cases,
Medicare contractors failed to prepare bank
reconciliations in a timely manner. When
reconciliations were prepared, they were not adequately
documented. In addition, at one location visited by
auditors the same individual was responsible for
receiving and endorsing incoming checks, preparing and
recording deposits, and performing bank
reconciliations. This situation greatly increases the
risk that the money collected by this contractor could
be misappropriated. The segregation of these duties is
a common internal control adhered to by even the
smallest private entities.
Department of Justice
The Department of Justice, under the direction of the
Attorney General, is charged with protecting society against
criminals and subversion, and upholding the civil rights of all
Americans. In addition, the department is responsible for
ensuring healthy competition among businesses, safeguarding the
consumer, enforcing environmental, drug, immigration, and
naturalization laws, and representing the American people in
all legal matters involving departments and agencies within the
executive branch of Government.
In 1998, the Department of Justice was again unable to
provide reliable financial information to decisionmakers. For
the third consecutive year, auditors were unable to render an
opinion on Justice's financial statements. In addition,
auditors reported significant weaknesses in internal controls
and cases in which the law-enforcement department failed to
comply with financial laws and regulations.
At the subcommittee's hearing on March 18, 1999, we learned
that the weaknesses reported in the Department's consolidated
financial statements were also prevalent in most of the
Department's component entities. The audit report stated that
weaknesses exist in the controls over computer security at the
U.S. Marshals Service, the Federal Bureau of Investigation, the
Drug Enforcement Administration, and the Immigration and
Naturalization Service.
Federal Aviation Administration
The Federal Aviation Administration [FAA] operates the
Nation's air traffic control system and regulates aviation
safety, security, and the U.S. commercial space industry. In
its position on the front line of aviation safety, the FAA
works with the air transportation industry, other agencies at
the Federal, State, and local level, and with its international
counterparts.
Due to long-standing and unresolved problems, the GAO
designated financial management at the FAA as a high-risk area
in its January 1999 report. The GAO report stated that
``financial management weaknesses continue to render FAA
vulnerable to waste, fraud, and abuse; undermine its ability to
manage its operations; and limit the reliability of financial
information provided to the Congress.'' \24\
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\24\ High Risk Series: GAO/HR-99-1, January 1999.
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The subcommittee examined these weaknesses at a hearing on
March 18, 1999. Because of the results of the Department's 1998
financial statement audit, the subcommittee also discussed the
findings with the Inspector General of the Department of
Transportation. The Inspector General was unable to render an
opinion on the 1998 financial statements. In addition, the
Inspector General reported significant weaknesses in the FAA's
internal controls. These weaknesses included more than $9
billion in property, plant and equipment that could not be
verified. The FAA also could not reliably report on the costs
of its operations. The combination of poor accounting and
control over assets and costs are especially troubling,
considering that the agency has an air traffic control
modernization plan that is projected to cost more than $42
billion by the year 2004.
In 1981, the FAA had initiated an earlier air traffic
control modernization program. This effort involved acquiring
new air traffic control facilities and a vast network of radar,
automated data processing navigation, and communications
equipment. The program, which was poorly managed, was shutdown,
costing taxpayers $4 billion for a system that didn't work. The
FAA's current modernization program has been put on the GAO
high-risk list, due in large part to the agency's financial
management problems, such as poor cost-accounting practices and
lack of accountability over acquisitions.
2. Federal department and agency financial management grades
On March 31, 1999, the subcommittee released its second
annual report card measuring the effectiveness of financial
management in the 24 Cabinet departments and independent
agencies with audited financial statements. The grades were
based on the results of the audits prepared by the agencies'
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 prod agencies
toward getting their financial affairs in order.
The National Aeronautics and Space Administration and the
National Science Foundation demonstrated they could effectively
manage their finances. Both agencies received ``A's.''
The General Services Administration, the Department of
Labor, and the Social Security Administration all earned
commendable ``B's.''
These agencies were the exception rather than the rule; 7
of the 24 agencies--29 percent--had not filed reports by the
subcommittee's March 31 hearing, 1 month after their March 1
reporting deadline established by the Government Management
Reform Act of 1994, and 6 months after the close of the
Government's fiscal year. As of the publication of this report,
six agencies--the Department of Commerce, the Department of
Education, the Environmental Protection Agency, the Department
of the Interior, the Small Business Administration and the
Department of State--had not submitted financial statements.
Six other agencies could not pass muster and earned a
failing grade of ``F.'' They are: the Agency for International
Development, the Department of Agriculture, the Department of
Defense, the Department of Justice, the Department of
Transportation, and the Office of Personnel Management.
These audits were required by the Government Management
Reform Act of 1994, which intended to provide a more effective,
efficient, and responsive Federal Government. To that end, the
act specifically requires that consolidated governmentwide
financial statements be prepared and audited, and that each
executive branch agency prepare and have audited a financial
statement covering all accounts and associated activities of
each office, bureau, and activity within the agency. The grades
are as follows:
Federal Financial Management Status Report--Federal Departments and Agencies
----------------------------------------------------------------------------------------------------------------
Reliable
Financial Effective Compliance with
Department/Agency Information Internal Laws and Grade FY Grade FY Grade FY
(yes/qualified/ Control (yes/ Regulations 96 97 98
no) no) (yes/no)
----------------------------------------------------------------------------------------------------------------
National Aeronautics and Space YES YES YES A A A
Administration
----------------------------------------------------------------------------------------------------------------
National Science Foundation YES YES YES D B+ A
================================================================================================================
General Services Administration YES YES NO D+ B- B-
----------------------------------------------------------------------------------------------------------------
Department of Labor YES YES NO D B- B-
----------------------------------------------------------------------------------------------------------------
Social Security Administration YES YES NO A B- B-
================================================================================================================
Department of Energy Qualified NO YES A A C
================================================================================================================
Federal Emergency Management YES NO NO F D- D+
Agency
----------------------------------------------------------------------------------------------------------------
Department of Housing and Urban YES NO NO D- D- D+
Development
----------------------------------------------------------------------------------------------------------------
Nuclear Regulatory Commission YES NO NO A B- D+
----------------------------------------------------------------------------------------------------------------
Health and Human Services Qualified NO NO F D- D-
----------------------------------------------------------------------------------------------------------------
Department of the Treasury Qualified NO NO F D- D-
----------------------------------------------------------------------------------------------------------------
Department of Veterans Affairs Qualified NO NO F D- D-
================================================================================================================
Agency for International NO NO NO F F F
Development
----------------------------------------------------------------------------------------------------------------
Department of Agriculture NO NO NO F F F
----------------------------------------------------------------------------------------------------------------
Department of Defense NO NO NO F F F
----------------------------------------------------------------------------------------------------------------
Department of Transportation NO NO NO F F F
----------------------------------------------------------------------------------------------------------------
Department of Justice NO NO NO F F F
----------------------------------------------------------------------------------------------------------------
Office of Personnel Management NO NO NO F F F
----------------------------------------------------------------------------------------------------------------
Department of Commerce No Report No Report No Report F F F *
----------------------------------------------------------------------------------------------------------------
Department of Education No Report No Report No Report D+ D+ F *
----------------------------------------------------------------------------------------------------------------
Environmental Protection Agency No Report No Report No Report C D+ F *
----------------------------------------------------------------------------------------------------------------
Department of the Interior No Report No Report No Report D+ B- F *
----------------------------------------------------------------------------------------------------------------
Small Business Administration No Report No Report No Report B- D+ F *
----------------------------------------------------------------------------------------------------------------
Department of State No report No report No report D- D- F *
----------------------------------------------------------------------------------------------------------------
* Indicates that the Agency did not submit its FY98 financial statements report as of the date of this report.
III. Conclusions
Poor financial management has been a long-recognized
problem within the Federal Government. Congress has developed a
strong legislative framework that if properly implemented,
would significantly improve the Government's financial
management. This, in turn, would lead to more efficient and
effective Government operations, and more informed
decisionmaking. Despite these efforts, however, many executive
branch departments and agencies have been overly slow in
implementing the financial management legislation.
Some progress was made during the Government's 1998 fiscal
year. Nevertheless, most Federal agencies still cannot account
for billions of dollars in Federal spending in an accurate and
timely manner.
Subcommittee hearings over the last 2 months and the 1998
audit reports raise serious questions about the soundness of
the Government's fundamental financial information.
To make informed decisions, Congress, the President, and
his Cabinet must have reliable data on a timely basis. Without
such information, both the quality of Government services and
the fiscal health of this Nation are at risk.
The Federal Government must get its financial house in
order. 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, provides
the foundation for the successful implementation of the
Government Performance and Results Act of 1993. However,
further legislation is now necessary to penalize recalcitrant
agencies and departments that fail to comply with Federal
financial management laws. Furthermore, the President needs the
appropriate staff to focus on management problems within the
executive branch of the Government. An Office of Management
whose Director reports to the President would enable the
President, his Cabinet officers, and agency administrators to
focus on improved financial management, as well as improved
general management and information management.
Without such a governmentwide management structure, other
departments and agencies will not learn from past management
failures, such as the computer debacles of the early 1990s. The
Federal Aviation Administration's $4 billion was matched by a
similar failure when the Internal Revenue Service sought to
improve its information systems. Together, these programs cost
taxpayers $8 billion before they were stopped.
Congress and the President must ensure that Federal
agencies and departments place adequate attention to financial
management. The framework is in place for these Federal
departments and agencies to step up to their fundamental
responsibility: to be financially accountable to the American
taxpayer.
APPENDIX A--Basis For Agency Financial Management Grades
------
The grades for each of the 24 departments and agencies are
based on the results of the financial statement audits. These
audits were performed by the agency's Inspector General, an
independent public accounting firm, and the General Accounting
Office. All 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 for audits of private sector entities.
However, GAGAS adds 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 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.\25\ These reports are an opinion of the financial
statements, a report on internal controls structure, and a
report on compliance with laws and regulations.
---------------------------------------------------------------------------
\25\ 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 signifies 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 controls that
surfaced during the course of the audit. The American Institute
of Certified Public Accountants defines a material weakness in
internal controls 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.'' \26\
---------------------------------------------------------------------------
\26\ Codification of Statements on Auditing Standards (Including
Statements on Standards for Attestation Engagements), Nos. 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 in which the
agency did not follow or conform materially to requirements of
the 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
regarding which general laws and regulations need to be
considered during the audit.
Starting in fiscal year 1997, an agency's adherence to the
Federal Financial Management Improvement Act of 1996 [FFMIA]
requirements must be assessed in the report on compliance with
laws and regulations, in accordance with OMB guidance.\27\
FFMIA specifically requires that agencies conform to
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.
---------------------------------------------------------------------------
\27\ 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 reviewed each financial report on an
absolute scale 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, when 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, 1997 or 1998, however, an
adverse opinion would have also received an ``F.''
If no material weaknesses in internal controls were
reported, the agency received an ``A'' (4 points). Conversely,
if material weaknesses were reported, the agency received an
``F'' (0 points) in this category.
Similarly, if the auditor reported that the agency had no
known instances of non-compliance with laws and regulations an
``A'' (4 points) was awarded. 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 or provided prior to March 31,
1999, the agency was initially assessed as ``incomplete.'' When
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 for the
fiscal year to the Director of OMB by March 1 of the succeeding
year. This date is 5 months after the close of the Federal
Government's fiscal year on September 30.
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
(Public Laws 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]
(Public Law 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
(Public Laws 97-365 and 104-134, Federal agencies in collecting debts owed to the Federal Government
sec. 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
(Public Law 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 5-year financial management
plan. The plan describes the planned activities of OMB and agency's CFO
over the next 5 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
The Government Management Reform Act of 1994 [GMRA] expands
(Public Law 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
agencywide 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 the 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 Public Law 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 of 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 a balanced 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
Congress instances 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
------
APP, Steven, Deputy Chief Financial Officer, Department of
Treasury, March 1, 1999.
BROMWICH, Michael, Inspector General, Department of
Justice, March 18, 1999.
BROWN, June Gibbs, Inspector General, Department of Health
and Human Services, March 26, 1999.
CALBOM, Linda, Director, RCED Accounting and Financial
Management, U.S. General Accounting Office, March 18, 1999.
COLGATE, Stephen, Assistant Attorney General for
Administration, Department of Justice, March 18, 1999.
CUNNINGHAME, Donna, Chief Financial Officer, Internal
Revenue Service, March 1, 1999.
DESEVE, G. Edward, Deputy Director for Management, Office
of Management and Budget, March 31, 1999.
DODARO, Gene, Assistant Comptroller General for Accounting
and Information Management, U.S. General Accounting Office,
March 31, May 4, 1999.
HAMMOND, Donald V., Fiscal Assistant Secretary, Department
of Treasury, March 31, 1999.
HASH, Michael M., Deputy Administrator, Health Care
Financing Administration, Department of Health and Human
Services, March 26, 1999.
HAWKINS, Joan B., Assistant Director, Governmentwide
Accounting and Information Management, U.S. General Accounting
Office, March 1, 1999.
JACOBSON, Lisa, Director of Defense Audits, Accounting and
Information Management Division, U.S. General Accounting
Office, May 4, 1999.
KESSINGER, Marilyn, Director of Financial Statement Audits,
Office of Inspector General, Department of Justice, March 18,
1999.
KLEINBERG, David, Deputy Chief Financial Officer,
Department of Transportation, March 18, 1999.
KUTZ, Gregory D., Associate Director, Governmentwide
Accounting and Information Management Division, U.S. General
Accounting Office, March 1, 1999.
LEE, Diedre A., Administrator, Office of Federal
Procurement Policy, Office of Management and Budget, March 31,
1999, April 15, 1999.
LIEBERMAN, Robert, Assistant Inspector General for Audit,
Department of Defense, May 4, 1999.
LYNN, William, Under Secretary of Defense, Chief Financial
Officer, Department of Defense, May 4, 1999.
MANCUSO, Donald, Acting Inspector General, Department of
Defense, May 4, 1999.
MECHE, John, Deputy Assistant Inspector General for
Financial, Economic, and Information Technology, Department of
Transportation, March 18, 1999.
ROSSOTTI, Charles, Commissioner, Internal Revenue Service,
Department of the Treasury, April 15, 1999.
SCHELLENBERG, Carl, Chief Financial Officer, Federal
Aviation Administration, March 18, 1999.
SEBASTIAN, Steven J., Assistant Director, Governmentwide
Accounting and Information Management, U.S. General Accounting
Office, March 1, 1999.
STEVENS, Nye, Director, Federal Management and Workforce
Issues, U.S. General Accounting Office, April 15, 1999.
TOYE, Nelson, Deputy Chief Financial Officer, Department of
Defense, May 4, 1999.
VENGRIN, Joseph, Assistant Inspector General for Audit
Operations and Financial Statement Activity, Department of
Health and Human Services, March 26, 1999.
WALKER, David M., Comptroller General of the United States,
U.S. General Accounting Office, March 31, 1999.
WHITE, James, Director, Tax Policy and Administration
Issues, U.S. General Accounting Office, April 15, 1999.
MINORITY VIEWS OF HON. HENRY A. WAXMAN, HON. JIM TURNER, HON. TOM
LANTOS, HON. ROBERT E. WISE, JR., HON. MAJOR R. OWENS, HON. EDOLPHUS
TOWNS, HON. PAUL E. KANJORSKI, HON. PATSY T. MINK, HON. CAROLYN B.
MALONEY, HON. ELEANOR HOLMES NORTON, HON. CHAKA FATTAH, HON. ELIJAH E.
CUMMINGS, HON. DENNIS J. KUCINICH, HON. ROD R. BLAGOJEVICH, HON. DANNY
K. DAVIS, HON. JOHN F. TIERNEY, HON. THOMAS H. ALLEN, HON. HAROLD E.
FORD, JR., AND HON. JANICE D. SCHAKOWSKY
The Subcommittee on Government Management, Information, and
Technology held a series of oversight hearings on financial
management and reviewed the audits of several important Federal
agencies, including the Internal Revenue Service, the Federal
Aviation Administration, the Health Care Financing
Administration, and the Departments of Justice and Defense.
Audits of these agencies, and others, demonstrate that not all
components of the Federal Government can produce reliable and
timely financial information on a continuing basis. These
audits also provide useful information on whether the
government is managing its financial responsibilities well.
Last year, President Clinton challenged Federal agencies to
ensure that the Federal Government receives an unqualified
audit opinion on its fiscal year 1999 consolidated financial
statements. Attempts to achieve this ambitious goal have
resulted in significant attention to financial reforms and
improvements at agencies like the Department of Defense, which
has some of the greatest deficiencies in its financial
management systems.
Modernization of financial management systems that are
outdated and inadequate for fulfilling current audit
requirements will take years. Congress passed a crucial
financial management reform law in 1990, which required
financial audits of certain Federal agencies for the first
time. Since that time, Congress has enacted a number of other
financial management laws that together provide a strong
legislative framework to assure financial accountability in the
Federal Government. The current system provides the opportunity
to identify and resolve the most significant financial problems
existing in the Federal Government.
It may take some time before every agency can produce the
timely, reliable financial information that it must produce
under the current requirements; however, Federal agencies are
headed in the correct direction. Many Federal agencies have
made steady progress improving their financial management
recently.
While many of the report's findings and recommendations are
valid, we reluctantly oppose this financial management report.
Unfortunately, the majority report has turned financial
management into a partisan issue by grading agencies in a
manner that unfairly portrays the state of agencies' financial
affairs. While the majority believes that these grades provide
a ``gauge for Congress to see where attention is needed,''
these grades are misleading and partisan by their nature.
The majority assigned numerous D's and F's to Federal
agencies to convey the impression that the administration is
failing to take financial management seriously. In fact, just
the opposite is true. This administration has done more than
any other to improve the financial accountability of the
Federal Government. The Clinton administration is resolving
financial management problems that have existed for decades.
The Comptroller General noted on March 31, 1999, that it is
clear that the President was making financial management a
priority and setting goals for clean audit opinions at Federal
agencies and that the Office of Management and Budget has been
actively following agency progress. He concludes that progress
is being made and ``steady improvements in financial
accountability are occurring.''
The partisan nature of the grades is apparent when one
compares what the majority says about the administration with
what the majority says about financial management in the House
of Representatives. Republicans say that the grades show ``very
little improvement'' in the Federal agencies and that if these
agencies were schoolchildren ``and that was their report card,
they would be grounded.'' At the same time, they praise the
House of Representatives for conducting the first audit of the
House in 1995.
Yet, under the majority's own grading system, the results
from the last House audit--which indicate the unreliability of
some of the House accounts, internal control weaknesses, and
noncompliance with House rules--would have received an overall
grade of a D-. Under this year's newest criteria, which is
timeliness, the House would have received an F.
This example illustrates the problems with the grading
scheme, because the House did not deserve a D- or an F for last
year's financial audit, given its progress in financial
management. As the Inspector General for the House of
Representatives stated about the House's audit last year,
``It's definitely improving and is almost there.'' Similarly,
the low grades received by the Federal agencies unfairly skew
perception of the progress being made by the administration.
The majority simply refuses to credit the administration with
progress--awarding more low grades this year than last year.
Second, we question the recommendation that Federal
agencies be financially penalized if they fail to produce
timely and reliable financial information. Positive incentives
for agencies to implement reforms in their financial systems
would be helpful. However, depriving agencies of their needed
funds may hinder substantial financial reforms. Faced with a
potential loss of appropriations, agencies may be inclined to
implement ``band-aid'' repairs to their financial systems
rather than making the appropriate long-term system
modifications. Moreover, it will be difficult to assess when an
agency's reforms are adequate. Some agencies simply have much
further to go, and some have fewer resources to allocate. The
majority's own faulty grades demonstrate how difficult it is to
assess financial progress fairly.
Finally, we also question whether there is a need for a
statutorily-mandated Office of Management within the executive
branch. It is unclear whether creating a new management agency
will improve government management or whether separating
management functions from budget functions will backfire and
result in less attention being placed on management reform at
Federal agencies. Presidents can create organizations within
the executive branch that focus on management reform. For
example, the Clinton administration has achieved a number of
fundamental government management reforms and brought
innovative ideas to the Federal Government through the National
Partnership for Reinventing Government. In addition, a number
of high-level interagency working groups focused on improving
government management have taken hold, such as the Chief
Financial Officers Council and the Chief Information Officers
Council. Alternative approaches to improving management should
be encouraged and explored. An Office of Management is just one
approach.
Hon. Henry A. Waxman.
Hon. Jim Turner.
Hon. Tom Lantos.
Hon. Robert E. Wise, Jr.
Hon. Major R. Owens.
Hon. Edolphus Towns.
Hon. Paul E. Kanjorski.
Hon. Patsy T. Mink.
Hon. Carolyn B. Maloney.
Hon. Eleanor Holmes Norton.
Hon. Chaka Fattah.
Hon. Elijah E. Cummings.
Hon. Dennis J. Kucinich.
Hon. Rod R. Blagojevich.
Hon. Danny K. Davis.
Hon. John F. Tierney.
Hon. Thomas H. Allen.
Hon. Harold E. Ford, Jr.
Hon. Janice D. Schakowsky.