[Senate Report 106-448]
[From the U.S. Government Publishing Office]



                                                       Calendar No. 894
106th Congress                                                   Report
                                 SENATE
 2d Session                                                     106-448

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



 
      DEPARTMENT OF EDUCATION INVESTIGATION AND AUDIT LEGISLATION

                                _______
                                

October 2 (legislative day, September 22), 2000.--Ordered to be printed

                                _______
                                

   Mr. Jeffords, from the Committee on Health, Education, Labor, and 
                   Pensions, submitted the following

                              R E P O R T

                             together with

                            ADDITIONAL VIEWS

                         [To accompany S. 2829]

    The Committee on Health, Education, Labor, and Pensions, to 
which was referred the bill (S. 2829) to provide for an 
investigation and audit at the Department of Education, having 
considered the same, reports favorably thereon with an 
amendment and recommends that the bill (as amended) do pass.

                                CONTENTS

                                                                   Page
  I. Purpose..........................................................1
 II. Summary..........................................................2
III. Committee views..................................................3
 IV. Senate action....................................................4
  V. Section-by-section analysis......................................5
 VI. Regulatory impact statement......................................6
VII. Application of law to the legislative branch.....................7
VIII.Unfunded mandate statement.......................................5

 IX. Cost estimate....................................................5
  X. Additional views.................................................7

                               i. purpose

    The purpose of S. 2829, which requires the Comptroller 
General to conduct an investigation for fraud at the Department 
of Education, is to enhance the detection of waste, fraud, and 
abuse at the agency.

                              ii. summary

    S. 2829 requires the Comptroller General to conduct a fraud 
audit at the Department of Education. The Comptroller General 
shall determine which accounts are particularly susceptible to 
waste, fraud, and abuse. A report setting forth the results of 
the investigation and audit shall be submitted within six 
months to the Committee on Health, Education, Labor, and 
Pensions of the Senate and the Committee on Education and the 
Workforce of the U.S. House of Representatives.

                          iii. committee views

    The U.S. Department of Education has shown a pattern of 
financial mismanagement, disregard for statutory program 
management requirements, and susceptibility to waste, fraud, 
and abuse. For the second year in a row, the Department of 
Education has been unable to address its financial management 
problems and did not receive a clean audit in either 1998 or 
1999. The Department does not have an effective accounting 
system that complies with Federal financial management statutes 
and does not expect to have one in place until at least October 
2001.
    The Government Management Reform Act (GMRA), passed in 
1994, mandates annual audits of agency-wide financial 
statements. The Department of Education has repeatedly failed 
to receive an unqualified opinion on its financial statements 
and is routinely cited for material weaknesses in the 
management and control of its programs.
    The magnitude of the problems with the Department of 
Education's financial management first became evident when the 
fiscal year 1995 financial statements were audited. The next 
year, the independent public accountants, Price Warehouse, LLP, 
were unable to express an opinion on the fiscal year 1996 
consolidated financial statements because the Department's 
documentation of the basis for certain estimates did not 
provide the auditors with sufficient evidence to conclude 
whether amounts were materially over- or understated. These 
estimates effected the liabilities for loan guarantees under 
the Federal Family Education Loan Program, the allowance for 
defaulted loans, the allowance for direct loan subsidy costs, 
and related subsidy expenses. Importantly these same estimates 
were identified as an issue during the fiscal year 1995 audit 
and had not been corrected.
    New and additional problems arose with the audit of the 
fiscal year 1997 consolidated financial statements. When asked 
by Congress why it failed to meet its March 1, 1998 reporting 
deadline, the Department responded that a reasonable 
methodology and system still did not exist for estimating the 
losses incurred on loans made and guaranteed by the agency. The 
audit was delayed for months while the Department and auditors 
worked to obtain, validate, and analyze sufficient evidence to 
support the financial statements. The Department for the first 
and only time received an unqualified opinion on its financial 
statements. Despite the intensive manpower put into gathering 
and validating material for the audit, material weaknesses were 
once again reported affecting the internal control structure of 
the Department. These weaknesses affected the ability to 
prepare reliable loan estimates and the ability to provide 
timely and effective reconciliation of the Department's 
Clearing Account cash balance with the Treasury. Further, it 
was determined that the Department's financial management 
systems did not comply with Federal financial systems 
requirements.
    The effort to produce and support the fiscal year 1997 
financial statements diverted so much manpower that Department 
reversed the progress made during the previous year and reneged 
upon its commitment to meet its financial reporting deadlines. 
The Department failed to properly implement the EDCAPS system 
and announced in early January that it would not be ready for 
audit until February 1999. The Department of Education missed 
this deadline and did not provide trial balance and financial 
statements until April 1999. When the auditors began reviewing 
the Department's records they discovered critical limitations 
in the financial reporting systems. These weaknesses, such as 
the systems inability to perform a year-end closing process or 
produce automated consolidated financial statements, were 
significant factors in the Department's inability to prepare 
accurate consolidated financial statements. After months of 
attempting to work with the agency, the auditors reported that 
the Department could not providesufficient documentation to 
support transactions and did not adequately perform reconciliations. 
The auditors concluded that they could express no opinion regarding the 
fiscal year 1998 financial statements.
    This past year, the Department succeeded in providing 
audited financial statements to OMB in accordance with the 
statutory March 1 deadline. While they are to be commended for 
finally meeting this deadline, the Department of Education 
received only a qualified opinion from the independent auditor. 
The auditors disclaimed any opinion on the statements of 
financing and once again cited the same three material 
weaknesses in the Report on Internal Controls: financial 
reporting, reconciliations, and credit reform reporting.
    Over the years, the Department has not improved its 
financial accountability, and has shown a pattern of continued 
waste, fraud, and abuse. Beginning with its first agency-wide 
audit in 1995, auditors have reported largely the same serious 
internal control weaknesses year after year. Of the four 
material weaknesses cited in the most recent audit, three are 
repeat conditions from the previous year. The Department has 
not shown signs that it is improving its financial stewardship.
    Failure to address the financial accountability problems 
identified by the independent auditors and the General 
Accounting Office create an environment that is highly 
susceptible to mismanagement, fraud, and abuse. Independent 
auditors and officials have repeatedly testified before the 
Congress regarding numerous instances in which this failure to 
meet even the minimum standards for financial stewardship have 
encouraged waste, fraud, and abuse at the agency. A recent 
investigation uncovered a system by which a contract employee 
charged the Department for over $600,000 in false overtime and 
provided more than $300,000 in electronic equipment to a 
Department employee charged with supervising his work. The 
Department issued at least $50 million in duplicate payments to 
grantees over the past 2 years, and in 1 recent year alone, the 
agency awarded $177 million in Pell Grants to students who were 
over the income eligibility limit. In addition, a ``grant 
back'' account was discovered at the Department that contained 
over $700 million. However, only about two percent of that 
money was actually recovered grant money. The Department could 
not account for the additional $700 million or explain why it 
was in that account. The Department has since redistributed the 
money without providing evidence that it was distributed to the 
right accounts.
    The committee believes that these instances show that the 
Department is currently vulnerable to fraud, waste, and abuse. 
The House of Representatives has already indicated its support 
for a fraud audit at the Department of Education by passing its 
own version of this bill on June 13, 2000, by an overwhelming 
vote of 380-19. The committee believes that a fraud audit 
should be performed at the Department of Education to ensure 
that future instances of waste, fraud, and abuse do not occur 
at taxpayer expense.

                           IV. Senate Action

    On June 29, 2000, Senator Hutchinson introduced S. 2829, 
which provides for an investigation and audit at the Department 
of Education.
    On September 20, 2000, the Senate Committee on Health, 
Education, Labor, and Pensions met in Executive Session to 
consider S. 2829. The committee voted on the following 
amendment: Senator Hutchinson offered an amendment in the form 
of a substitute making technical corrections to S. 2829. The 
amendment was accepted by voice vote and was used as the 
underlying vehicle.
    The committee then voted to report the bill, as amended, by 
voice vote.

                     V. Section-by-Section Analysis

    Section 1. Provides that within 6 months after the date of 
enactment, the Comptroller General shall conduct and complete a 
fraud audit of selected accounts at the Department of 
Education, that the Comptroller General deems to be 
particularly susceptible to waste, fraud, or abuse. Requires 
the Comptroller General to submit a report setting forth the 
results of the investigation and audit to the Committee on 
Health, Education, Labor, and Pensions of the U.S. Senate and 
the Committee on Education and the Workforce of the U.S. House 
of Representatives.

                    VI. Regulatory Impact Statement

    The committee has determined that there will be minimal 
increases in the regulatory burden imposed by this bill.

           VII. Application of Law to the Legislative Branch

    Section 102(b)(3) of Public Law 104-1, the Congressional 
Accountability Act (CAA), requires a description of the 
application of this bill to the legislative branch. The purpose 
of S. 2829, which requires the Comptroller General to conduct 
an investigation for fraud at the Department of Education, is 
to enhance the detection of waste, fraud, and abuse at the 
agency. The bill does not prevent legislative branch employees 
from receiving benefits of this legislation.

                    VIII. Unfunded Mandate Statement

    Section 423 of the Congressional Budget and Impoundment 
Control Act (as amended by Section 101(a)(2) of the Unfunded 
mandates Reform Act, Public Law 104-4) requires a statement of 
whether the provisions of the reported bill include unfunded 
mandates. The purpose of S. 2829, which requires the 
Comptroller General to conduct an investigation for fraud at 
the Department of Education, is to enhance the detection of 
waste, fraud, and abuse at the agency. As such, the bill does 
not contain any unfunded mandates.

                           IX. Cost Estimate

                                     U.S. Congress,
                               Congressional Budget Office,
                                Washington, DC, September 22, 2000.
 Hon. James M. Jeffords,
 Chairman, Committee on Health, Education, Labor, and Pensions,
 U.S. Senate, Washington, DC.
    Dear Mr. Chairman: The Congressional Budget Office has 
prepared the enclosed cost estimate for S. 2829, a bill to 
provide for an investigation and audit at the Department of 
Education.
     If you wish further details on this estimate, we will be 
pleased to provide them. The CBO staff contact is Paul 
Cullinan.
             Sincerely,
                                          Barry B. Anderson
                                    (For Dan L. Crippen, Director).
     Enclosure.

 S. 2829--A bill to provide for an investigation and audit at the 
        Department of Education

     S. 2829 would direct the Comptroller General of the United 
States to conduct an audit of certain accounts at the 
Department of Education. Assuming appropriation of the 
necessary funds, CBO estimates that implementing the bill would 
cost about $1 million in 2001. Because enactment of S. 2829 
would not affect direct spending or receipts, pay-as-you-go 
procedures would not apply.
     Based on information from the General Accounting Office 
(GAO), CBO estimates that the audit would cost between $800,000 
and $1 million. Because the audit would have to be completed 
within six months of the bill's enactment, it would have a 
relatively restricted scope. It would be oriented toward the 
department's student financial aid programs and focus on 
specific areas that GAO identifies as highly susceptible to 
errors. A preliminary review by GAO staff suggests that the 
limited audit would require about three full-time equivalent 
staff-years (for example, six employees working full time for 
six months) as well as some work by outside contractors.
     S. 2829 is similar to H.R. 4079, which was passed by the 
House of Representatives on June 13, 2000. CBO's estimate for 
that bill, dated June 8, 2000, is identifical to that for S. 
2829.
     S. 2829 contains no intergovernmental or private-sector 
mandates as defined in the Unfunded Mandates Reform Act and 
would have no effect on the budgets of state, local, or tribal 
governments.
     The CBO staff contact is Paul Cullinan. This estimate was 
approved by Peter H. Fontaine, Deputy Assistant Director for 
Budget Analysis.

   X. ADDITIONAL VIEWS OF SENATORS KENNEDY, DODD, HARKIN, BINGAMAN, 
                  MIKULSKI, WELLSTONE, MURRAY AND REED

    We support S. 2829 because we believe in good government 
and good fiscal management of federal funds. But, we also 
believe that we need to give credit to the accomplishments in 
improving the efficiency of the Department of Education over 
the last seven years.
    The Department has an important role in helping states and 
communities improve American education, helping all children 
reach high standards, and opening the doors to college. Under 
the leadership of Secretary of Education Richard W. Riley, the 
Department has emphasized quality management to ensure that the 
federal investment in education is used as efficiently and 
effectively as possible.
    A key goal in the Department's management plan is to obtain 
a uniformly positive audit opinion every year. The Department 
has made substantial progress in addressing each of the 
problems outlined by its independent auditor. It is important 
to note that all of these issues have been technical accounting 
matters. Not one dime of taxpayers' money has been lost or 
misplaced.
    The Department can now automatically produce all of its 
financial statements. It provided its auditors within interim 
sets of statements for March and June. The Department has 
changed its procedures to ensure that accounting adjustments 
are recorded in the proper accounting period. The independent 
auditor can now be certain that transactions are reflected in 
the appropriate financial statement line. The Department 
continues to develop subsidiary reports that will enable it to 
determine whether a transaction was money that flowed to 
another federal agency or non-governmental entity.
    Another sign of progress is the Department's effort to 
implement its auditor's financial management recommendations. 
Today the Department has completed action on 112 of 139 
recommendations--over 80%. Of the remaining 27 recommendations, 
Secretary Riley has made their resolution a top priority. He 
anticipates that work on these items will be quickly completed.
    The Department has also made significant progress in other 
areas that have increased its effectiveness and saved taxpayers 
billions of dollars. The student loan default rate has now been 
reduced to a record-low of 6.9 percent, after declining each 
year from 22.4 percent 8 years ago. As a result, taxpayers have 
saved billions of dollars. Collections on defaulted loans have 
tripled, from $1 billion in fiscal year 1993 to over $3 billion 
in fiscal year 1999.
    The Direct Student Loan program has saved taxpayers over $4 
billion in the last 5 years, compared to the cost of guaranteed 
loans. The creation of the National Student Loan Data System 
has enabled the Department to identify prior defaulters, and 
prevent the disbursement of as much as $1 billion in grants and 
loans to ineligible students.
    The Department has also down-sized to reduce waste. It now 
has only two-thirds as many employees administering its 
programs as in 1980, even though its budget has more than 
doubled. It has trimmed regulations by one-third, reduced grant 
application paperwork, and effectively implemented the waivers 
authorized to remove roadblocks to reform. Customer service 
ratings for the Department's document distribution center now 
match those of premier corporations like Federal Express and 
Nordstrom.
    The reality is, most federal agencies are doing a good job. 
Much of the progress made in recent years is the result of Vice 
President Gore's reinventing government initiative. He's 
streamlined the federal workforce, reduced the bureaucracy, and 
eliminated significant amounts of waste and duplication. The 
Department of Education and many other federal agencies have 
benefitted significantly from their efforts, and so have 
American taxpayers. We should continue to build on these 
successes in the future.

                                   Ed Kennedy.
                                   Tom Harkin.
                                   Jeff Bingaman.
                                   Patty Murray.
                                   Chris Dodd.
                                   Barbara A. Mikulski.
                                   Paul Wellstone.
                                   Jack Reed.

                                  
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