[Senate Report 108-383]
[From the U.S. Government Publishing Office]



                                                       Calendar No. 757
108th Congress                                                   Report
 2d Session                      SENATE                         108-383
_______________________________________________________________________

    EXECUTIVE BRANCH FINANCIAL ACCOUNTABILITY REPORTING ACT OF 2004

                               __________

                              R E P O R T

                                 of the

         COMMITTEE ON GOVERNMENTAL AFFAIRS UNITED STATES SENATE

                              to accompany

                                S. 2688

 TO PROVIDE FOR A REPORT OF FEDERAL ENTITIES WITHOUT ANNUALLY AUDITED 
                          FINANCIAL STATEMENTS




                October 4, 2004.--Ordered to be printed








                   COMMITTEE ON GOVERNMENTAL AFFAIRS

                   SUSAN M. COLLINS, Maine, Chairman
TED STEVENS, Alaska                  JOSEPH I. LIEBERMAN, Connecticut
GEORGE V. VOINOVICH, Ohio            CARL LEVIN, Michigan
NORM COLEMAN, Minnesota              DANIEL K. AKAKA, Hawaii
ARLEN SPECTER, Pennsylvania          RICHARD J. DURBIN, Illinois
ROBERT F. BENNETT, Utah              THOMAS R. CARPER, Delaware
PETER G. FITZGERALD, Illinois        MARK DAYTON, Minnesota
JOHN E. SUNUNU, New Hampshire        FRANK LAUTENBERG, New Jersey
RICHARD C. SHELBY, Alabama           MARK PRYOR, Arkansas

           Michael D. Bopp, Staff Director and Chief Counsel
                Bonnie Heald, Professional Staff Member
                Heather Hogg, Professional Staff Member,
     Financial Management, the Budget, and International Security 
                              Subcommittee
      Joyce A. Rechtschaffen, Minority Staff Director and Counsel
                   Susan E. Propper, Minority Counsel
                      Amy B. Newhouse, Chief Clerk











                                                       Calendar No. 757
108th Congress                                                   Report
                                 SENATE
 2d Session                                                     108-383
======================================================================
 
    EXECUTIVE BRANCH FINANCIAL ACCOUNTABILITY REPORTING ACT OF 2004

                                _______
                                

                October 4, 2004.--Ordered to be printed

                                _______
                                

Ms. Collins, from the Committee on Governmental Affairs, submitted the 
                               following

                              R E P O R T

                         [To accompany S. 2688]

    The Committee on Governmental Affairs, to whom was referred 
the bill (S. 2688) to provide for a report of Federal entities 
without annually audited financial statements, having 
considered the same reports favorably thereon and recommends 
that the bill do pass.

                                CONTENTS

                                                                   Page
  I. Purpose & Summary................................................1
 II. Background.......................................................2
III. Legislative History..............................................4
 IV. Section-by-Section Analysis......................................4
  V. Evaluation of Regulatory Impact..................................5
 VI. CBO Cost Estimate................................................5
VII. Changes in Existing Law..........................................6

                          I. PURPOSE & SUMMARY

    S. 2688, the Executive Branch Financial Accountability 
Reporting Act of 2004, is intended to ensure that Congress 
receives information on the financial management practices of 
the Executive Branch. The legislation instructs the Director of 
the Office of Management and Budget (OMB) to list for Congress: 
(1) each Federal entity that receives an exemption or waiver 
from the statutory requirement for an annually audited 
financial statement; and (2) other Federal entities, including 
special purpose entities, that do not prepare independently 
audited annual financial statements.
    S. 2688 also requires the OMB report to include assessments 
of: (1) the capability of the listed entities to prepare annual 
financial statements and have them independently audited; (2) 
how to reduce the costs of preparing the financial statements 
and performing independent audits by grouping together smaller 
entities and other methods by which the preparation and 
independent audits of financial statements could be made cost-
effective; and (3) the benefits of improved financial oversight 
encompassing the entire Executive Branch, including 
recommendations for a plan to implement a requirement that the 
entire Executive Branch prepare annual independently audited 
financial statements.

                             II. BACKGROUND

Financial statement audit requirements
    Congressional efforts to improve financial management and 
the efficiency of government spending began almost 25 years ago 
with the enactment of the Federal Managers Financial Integrity 
Act of 1982, which strengthened internal controls and 
accounting systems. Since that time, Congress has passed 
several other financial management reforms, including the Chief 
Financial Officers Act (CFO) of 1990 and the Accountability of 
Tax Dollars Act (ATDA) of 2002. Together, these reform 
initiatives established important financial management 
positions in Cabinet departments and most major Federal 
agencies. In addition, the Government Management and Reform Act 
of 1994 substantially expanded the CFO Act by requiring the 24 
CFO Act agencies to produce annually audited financial 
statements for all their accounts and associated activities.
    The CFO Act, among other things, created 24 Chief Financial 
Officer (CFO) and deputy CFO positions in Cabinet departments 
\1\ and major Executive Branch agencies.
---------------------------------------------------------------------------
    \1\ The Department of Homeland Security (DHS) is currently not 
subject to the CFO Act. However, Congress currently is considering 
legislation to apply the CFO Act to DHS. The Federal Emergency 
Management Agency (FEMA) was one of the original 24 agencies covered, 
but is no longer since it is now part of the DHS.
---------------------------------------------------------------------------
    The Accountability of Tax Dollars Act (ATDA) of 2002 \2\ 
amended the CFO Act to extend its requirements regarding the 
preparation and audit of financial statements to most Executive 
Branch agencies. According to OMB, the ATDA required an 
additional 76 agencies to prepare annual financial statements 
and have them audited. Currently, all Cabinet-level departments 
and most Executive Branch agencies are required by the ATDA to 
conduct annual audits of their financial statements.
---------------------------------------------------------------------------
    \2\ Public Law No. 107-289.
---------------------------------------------------------------------------
    Provisions of the ATDA permitted the Director of OMB to 
exempt non-CFO Act entities from this requirement under certain 
conditions. The ATDA provided the OMB Director with the 
authority to exempt an agency with budget authority of $25 
million or less if it is determined that an audited financial 
statement is not warranted ``due to the absence of risks 
associated with the agency's operations, the agency's 
demonstrated performance, or other factors that the Director 
considers relevant.'' \3\ During the first two years of 
implementation, the Director could also waive the requirement 
to prepare an audited financial statement for any non-CFO Act 
agency.
---------------------------------------------------------------------------
    \3\ Id.
---------------------------------------------------------------------------
    The ATDA required the OMB Director to notify Congress 
annually of each agency that has been exempted from its 
requirements, including the reason for such exemption. For FY 
2003, 21 agencies received an exemption due to: the need for 
additional time to develop sound financial practices; the lack 
of budgeted funds and a lack of alternative sources; and the 
need formore time to implement new financial systems.\4\
---------------------------------------------------------------------------
    \4\ Agencies receiving a waiver or exemption included: Broadcasting 
Board of Governors, Central Intelligence Agency, Commission of Fine 
Arts, Court Services and Offender Supervision Agency for the District 
of Columbia, Defense Nuclear Facilities Safety Board, Federal Labor 
Relations Authority, Federal Maritime Commission, Japan-U.S. Friendship 
Commission, National Archives and Records Administration, National 
Endowment for the Humanities, National Labor Relations Board, Office of 
Special Counsel, Peace Corps, Securities and Exchange Commission, 
Selective Service System, U.S. Commission on Civil Rights, U.S. 
Commission for the Preservation of America's Heritage Abroad, U.S. 
Commodity Futures Trading Commission, U.S. Consumer Product Safety 
Commission, and U.S. International Trade Commission. See Letter from 
OMB Director Joshua Bolten to the Senate Governmental Affairs Committee 
and the House Government Reform Committee dated October 23, 2003.
---------------------------------------------------------------------------
    The reforms made by the CFO Act and the ATDA have improved 
the oversight and accountability of most Executive Branch 
departments and agencies. There currently are entities in the 
Executive Branch, however, that do not prepare financial 
statements, or if they do, their financial statements are not 
being audited. Some agencies, for example, have received an 
exemption from this requirement under provisions of the ATDA. 
In addition, Executive Branch agencies are increasingly 
establishing special purpose entities \5\ that are not included 
in the agencies' budgets and, therefore, are not subject to the 
scrutiny provided by an annual financial statement audit.
---------------------------------------------------------------------------
    \5\ According to a February 2003 report entitled ``The Budgetary 
Treatment of Leases and Public/Private Ventures,'' the Congressional 
Budget Office defines a special purpose entity (SPE) as ``a 
corporation, partnership, limited liability company, grantor trust, or 
other trust * * * that is created by public and private parties for a 
single specified purpose and whose activities are predetermined by the 
contracts and other arrangements between the parties involved.'' A 
memorandum prepared by the Congressional Research Service (CRS) states 
that, in some instances, Federal agencies may use SPEs to keep a 
transaction off-budget, which may mask government liability. See CRS 
memorandum of February 10, 2004, which was prepared at the request of 
the Governmental Affairs Subcommittee on Financial Management, the 
Budget, and International Security of which Senators Peter G. 
Fitzgerald and Daniel K. Akaka are Chairman and Ranking Member, 
respectively.
---------------------------------------------------------------------------
    The Committee believes it is imperative that every effort 
be made to ensure the financial integrity of all Executive 
Branch departments and agencies. Therefore, S. 2688 would 
require the Office of Management and Budget (OMB) to conduct a 
thorough assessment and submit a report to Congress regarding 
those Federal entities that are not currently required to 
prepare audited financial statements. The Committee further 
believes this study is necessary to ensure that OMB and 
Congress have an accurate and complete picture of the breadth 
and depth of the gaps in financial accountability within the 
Executive Branch to determine whether additional legislation is 
needed to close those gaps.

Lack of financial information regarding all federal entities

    ATDA does not require the OMB Director to provide further 
information regarding the financial management practices of 
agencies receiving an exemption from the requirement for an 
annual financial statement audit; nor is the Director required 
to submit a comprehensive list of all entities in the Executive 
Branch--including temporary commissions, task forces, advisory 
boards, or special purpose entities--that do not prepare 
audited financial statements. This information would assist 
congressional efforts to review implementation of the ATDA and 
to improve the financial management of Federal entities within 
the Executive Branch.
    S. 2688 would require OMB to submit a comprehensive list of 
entities that do not prepare audited financial statements. S. 
2688 specifically requests information regarding entities, such 
as special purpose entities, that currently are not considered 
by OMB in its implementation of the ATDA. S. 2688 would also 
require OPM to provide additional information, such as budget 
and cost information for small Executive Branch entities, and 
would direct OMB to assess ways to improve financial reporting 
by these entities. This information is important to ensure that 
Federal funds are subject to the oversight provided by Federal 
financial management statutes.

                        III. LEGISLATIVE HISTORY

    S. 2688, the Executive Branch Financial Accountability 
Reporting Act of 2004, was introduced by Senators Fitzgerald 
and Akaka on July 19, 2004, and was referred to the Committee 
on Governmental Affairs.
    On July 21, 2004, the Committee met to consider pending 
legislation, including S. 2688. At that time, the Committee 
ordered the bill reported by voice vote without amendment. The 
following Senators were present: Collins, Voinovich, Specter, 
Fitzgerald, Lieberman, Akaka, Durbin, Carper, and Lautenberg.

                    IV. SECTION-BY-SECTION ANALYSIS

Section 1--Short title

    This section provides that the Act may be cited as the 
``Executive Branch Financial Accountability Reporting Act of 
2004.''

Section 2--Definition

    This section defines the term ``Federal entity'' as any 
entity that is established in the Executive Branch, and 
includes any entity that administers a special purpose program 
or any other entity that is established by presidential or 
departmental directive.

Section 3--Report of Federal entities without annually audited 
        financial statements

    Subsection (a) requires the Director of the Office of 
Management and Budget within 60 days after the date of 
enactment of the Act to submit a report to the Senate Committee 
on Governmental Affairs and the House Committee on Government 
Reform.
    Paragraph (1) of subsection (b) requires the report in 
subsection (a) to include a list of each Federal entity that 
receives an exemption from the requirement for an annually 
audited financial statement under the Accountability of Tax 
Dollars Act. This list would include the entity's budget 
authority and outlays for the previous and current fiscal 
years, as well as theprojected budget authority for the 
upcoming year.
    Paragraph (2) requires the report to list any other Federal 
entities, including temporary commissions, advisory boards, 
task forces, or special purpose entities, that do not prepare 
annual financial statements and have them independently 
audited. This provision also requires the list to include the 
budget authority and outlays of these entities for the previous 
and current fiscal years, and the projected budget authority 
for the upcoming fiscal year.
    Paragraph (3) states that the report shall include an 
assessment of the capability of the entities listed under 
paragraphs (1) and (2) to prepare annual financial statements 
and have them independently audited, as well as the costs that 
would be incurred to do so.
    Paragraph (4) requires the report to assess how the costs 
of preparing the financial statements and performing 
independent audits of those statements for the entities listed 
under paragraphs (1) and (2) may be reduced by grouping smaller 
entities together for the purpose of preparing and auditing the 
entities' financial statements. This paragraph also requires an 
assessment of other means by which the preparation and audit of 
financial statements could be made cost-effective for the 
entities listed.
    Paragraph (5) requires the report to provide an assessment 
of the benefits of improved financial oversight of the entire 
Executive Branch, including the entities listed under 
paragraphs (1) and (2). This paragraph also requires the report 
to include recommendations for a plan to implement a 
requirement that the entire Executive Branch have annual 
financial statement audits.

Section 4--Authorization of appropriations

    This section authorizes such sums as may be necessary to 
carry out the Act.

                   V. EVALUATION OF REGULATORY IMPACT

    Paragraph 11(b)(1) of rule XXVI of the Standing Rules of 
the Senate requires that each report accompanying a bill 
evaluate the ``regulatory impact which would be incurred in 
carrying out this bill.'' The enactment of S. 2688 would have 
no regulatory impact.

                         VI. CBO COST ESTIMATE

                                     U.S. Congress,
                               Congressional Budget Office,
                                    Washington, DC, August 4, 2004.
Hon. Susan M. Collins,
Chairman, Committee on Governmental Affairs,
U.S. Senate, Washington, DC.
    Dear Madam Chairman: As you requested, the Congressional 
Budget Office has prepared the enclosed cost estimate for S. 
2688, the Executive Branch Financial Accountability Reporting 
Act of 2004.
    If you wish further details on this estimate, we will be 
pleased to provide them. The CBO staff contact is Matthew 
Pickford.
            Sincerely,
                                         Elizabeth Robinson
                               (For Douglas Holtz-Eakin, Director).
    Enclosure.

S. 2688--Executive Branch Financial Accountability Reporting Act of 
        2004

    S. 2688 would direct the Office of Management and Budget 
(OMB) to prepare a report on all executive branch entities and 
activities that are exempt from the requirement to undergo an 
annual financial audit. Such entities would include many 
federal commissions, task forces, advisory boards, and other 
special groups. The report on those entities would include 
budget information and an assessment of cost to prepare 
independent audits for these entities. The bill would require 
OMB to submit the report to the Congress within 60 days of 
enactment.
    The cost to conduct such a study could vary depending on 
the level of detail included and the comprehensiveness of the 
analysis. Based on information from OMB, and the cost to 
prepare similar reports with short deadlines, CBO estimates 
that preparing and distributing this report would cost less 
than $500,000 in fiscal year 2005, assuming the availability of 
appropriated funds. This estimate excludes any additional costs 
to prepare audits for entities that are currently exempt from 
auditing requirement. Subsequent legislation would be needed to 
authorize such audits. Enacting S. 2688 would not affect direct 
spending or revenues.
    S. 2688 contains no intergovernmental or private-sector 
mandates as defined in the Unfunded Mandates Reform Act, and 
would not affect the budgets of state, local, or tribal 
governments.
    The CBO staff contact for this estimate is Matthew 
Pickford. This estimate was approved by Robert A. Sunshine, 
Assistant Director for Budget Analysis.

                      VII. CHANGES TO EXISTING LAW

    In compliance with paragraph 12 of rule XXVI of the 
Standing Rules of the Senate, there are no changes in existing 
law made by S. 2688 as reported.

                                  
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