Department of Agriculture: Status of Efforts to Address Major	 
Financial Management Challenges (10-JUN-03, GAO-03-871T).	 
                                                                 
In January, we issued our Performance and Accountability Series  
on management challenges and program risks at major agencies,	 
including the U.S. Department of Agriculture (USDA). The report  
for USDA focused on a number of major management challenges,	 
including enhancing financial management, and continued the high 
risk designation for Forest Service financial management. For	 
many years, USDA struggled to improve its financial management	 
activities, but inadequate accounting systems and related	 
procedures and controls hampered its ability to get a clean	 
opinion on its financial statements. After eight consecutive	 
disclaimers of opinion, USDA's Office of Inspector General issued
an unqualified opinion on USDA's fiscal year 2002 financial	 
statements and reported that significant progress had been made  
in improving overall financial management. For each of USDA's	 
agencies that prepared separate financial statements for fiscal  
year 2002, the audit opinions were also positive. Specifically,  
unqualified audit opinions were issued on the financial 	 
statements of the Forest Service, Federal Crop Insurance	 
Corporation/Risk Management Agency, Commodity Credit Corporation,
the Rural Development mission area, and the Rural Telephone Bank.
While we consider these clean opinions a positive step, some of  
these could not have been rendered without extraordinary efforts 
by the department and its auditors. Achieving financial 	 
accountability will require more than heroic efforts to obtain	 
year-end numbers for financial statement purposes. Without	 
reliable financial systems and sound internal controls, it is not
possible to have sound data on a timely basis for decision	 
making. Before USDA can achieve and sustain financial		 
accountability, and thus be in a position to have reliable	 
system-generated data as needed, it and its component agencies,  
particularly the Forest Service, must address a number of serious
problems that USDA's Office of the Inspector General (OIG) or we 
have reported.							 
-------------------------Indexing Terms------------------------- 
REPORTNUM:   GAO-03-871T					        
    ACCNO:   A07106						        
  TITLE:     Department of Agriculture: Status of Efforts to Address  
Major Financial Management Challenges				 
     DATE:   06/10/2003 
  SUBJECT:   Accountability					 
	     Financial management				 
	     Financial management systems			 
	     Financial records					 
	     Internal controls					 
	     Reporting requirements				 

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GAO-03-871T

Testimony Before the Subcommittee on Government Efficiency and Financial
Management, Committee on Government Reform, House of Representatives

United States General Accounting Office

GAO For Release on Delivery Expected at 2: 00 p. m., EST Tuesday, June 10,
2003 DEPARTMENT OF

AGRICULTURE Status of Efforts to Address Major Financial Management
Challenges

Statement of McCoy Williams Director, Financial Management and Assurance

GAO- 03- 871T

Page 1 GAO- 03- 871T

Mr. Chairman and Members of the Subcommittee: I am pleased to be here
today to discuss the major financial management challenges faced by the U.
S. Department of Agriculture (USDA), its progress in addressing them, and
challenges that remain.

As you know, in January we issued our Performance and Accountability
Series on management challenges and program risks at major agencies,
including USDA. 1 The report for USDA focused on a number of major
management challenges, including enhancing financial management, and
continued the high risk designation for Forest Service financial

management. For many years, USDA struggled to improve its financial
management activities, but inadequate accounting systems and related
procedures and controls hampered its ability to get a clean opinion on its
financial statements. After eight consecutive disclaimers of opinion, 2
USDA*s Office of Inspector General issued an unqualified opinion on USDA*s
fiscal year 2002 financial statements and reported that significant
progress had been made in improving overall financial management. For each
of USDA*s

agencies that prepared separate financial statements for fiscal year 2002,
the audit opinions were also positive. Specifically, unqualified audit
opinions were issued on the financial statements of the Forest Service,
Federal Crop Insurance Corporation/ Risk Management Agency, Commodity
Credit Corporation, the Rural Development mission area, and the Rural
Telephone Bank. While we consider these clean opinions a positive step,
some of these could not have been rendered without extraordinary efforts
by the department and its auditors. Achieving financial accountability
will require more than heroic efforts to obtain year- end numbers for
financial statement purposes. Without reliable financial systems and sound
internal controls, it is not possible to have sound data on a timely basis
for decision making. Before USDA can achieve and sustain financial
accountability, and thus be in a position to have reliable system-
generated data as needed, it and its component

1 U. S. General Accounting Office, Major Management Challenges and Program
Risks: Department of Agriculture, GAO- 03- 96 (Washington, D. C.: January
2003). 2 A disclaimer of opinion means that the auditor is unable to form
an opinion on the financial statements. A disclaimer results when a
pervasive material uncertainty exists or there is a significant
restriction on the scope of the audit.

Page 2 GAO- 03- 871T

agencies, particularly the Forest Service, must address a number of
serious problems that USDA*s OIG or we have reported.

Today I will focus my testimony on USDA*s efforts to improve its financial
management and the Forest Service*s progress toward achieving financial
accountability.

In the past, USDA had several persistent weaknesses in internal control
and in accounting and financial reporting that contributed to the OIG*s
inability to render an opinion on the department*s consolidated financial
statements. The OIG reported, among other things, that USDA was unable to:

 provide sufficient, competent evidential matter to support numerous
material line items on its financial statements including accounts
receivable, fund balance with the Department of the Treasury (Treasury), 3
and property, plant, and equipment; and

 estimate and reestimate loan subsidy costs for its net credit program
receivables, rendering it unable to implement the Federal Credit Reform
Act of 1990 and related accounting standards. 4 The OIG also identified
internal control weaknesses over USDA*s security controls for information
technology and financial management systems that do not always process and
report departmentwide financial information accurately. Further, the OIG
reported that many USDA financial management systems are not fully
integrated with other USDA systems. These are some of the factors that
required extraordinary effort to derive reliable financial information.
Further, we reported in December

3 USDA records its budget authority in asset accounts called Fund Balance
with the Department of the Treasury and increases or decreases these
accounts as it collects or disburses funds.

4 Accounting for Direct Loans and Loan Guarantees, Statement of Federal
Financial Accounting Standards (SFFAS) No. 2, as amended by Amendments to
Accounting Standards for Direct Loans and Loan Guarantees, SFFAS No. 18.
USDA*s Financial

Management

Page 3 GAO- 03- 871T

2001 that USDA had not yet fully implemented certain key provisions of the
Debt Collection Improvement Act (DCIA) of 1996. 5 I will now elaborate on
USDA*s progress in correcting these problems and

what challenges still remain. USDA has taken actions over the last several
years to improve its financial management and to address the weaknesses
identified by its OIG and us. For example, in fiscal year 2000, Food and
Nutrition Service was, for the first time, able to estimate its gross
accounts receivable and related estimate of uncollectible amounts
resulting from over- issued benefits in its Food Stamp Program. Further,
for the first time since credit reform reporting requirements were
implemented in 1994, USDA*s lending agencies were able to estimate and
reestimate loan subsidy costs for the department*s net credit program
receivables, which totaled about $74 billion as of September 30, 2001.
Because of USDA*s achievement in this area, along with that of other key
lending agencies, this item was no longer a factor contributing to our
disclaimer of opinion on the financial statements of the U. S. government.
6 The OIG also noted that USDA made significant progress during fiscal
year 2002 in reconciling its Fund Balance accounts with Treasury*s
accounts,

thus enabling the OIG to validate this line item on USDA*s fiscal year
2002 financial statements. However, the OIG continued to report this area
as a material internal control weakness in fiscal year 2002 due to
continuing

deficiencies in USDA*s reconciliation processes. For example, USDA had a
large backlog of unreconciled items that needed to be researched and
resolved. As a result, USDA adjusted its records to agree with the
Treasury without reconciling the differences. Over $180 million (net) of
year- end adjustments were not supported by transaction- level details. 5
U. S. General Accounting Office, Debt Collection Improvement Act of 1996:
Department

of Agriculture Faces Challenges Implementing Certain Key Provisions, GAO-
02- 277T (Washington, D. C.: Dec. 5, 2001). 6 U. S. General Accounting
Office, U. S. Government Financial Statements: FY2001 Results Highlight
the Continuing Need to Accelerate Federal Financial Management Reform,

GAO- 02- 599T (Washington, D. C.: Apr. 9, 2002) and U. S. General
Accounting Office, Fiscal Year 2002 U. S. Government Financial Statements:
Sustained Leadership and Oversight Needed for Effective Implementation of
Financial Management Reform, GAO- 03- 572T (Washington, D. C.: Apr. 8,
2003).

Page 4 GAO- 03- 871T

Further, USDA will need to continue its actions in addressing weaknesses
in its financial management information systems. In its fiscal year 2002
audit report, the OIG stated that USDA made significant improvements in
its overall financial management, such as implementation of a
departmentwide standard accounting system, the Foundation Financial
Information System (FFIS). At the same time, USDA must fundamentally

improve its underlying internal controls, financial management systems,
and operations to allow for the routine production of accurate, relevant,
and timely data to support program management and accountability.
Specifically, the Federal Financial Management Improvement Act (FFMIA) of
1996 requires agencies to institute financial management systems that
substantially comply with federal financial systems requirements,
applicable federal accounting standards, and the federal government*s

Standard General Ledger (SGL). Every year since FFMIA was enacted, the OIG
has reported that USDA*s systems did not substantially comply with the
act*s requirements. The OIG reported that the lack of compliance stems
from USDA*s many disparate accounting systems that are not integrated;
material internal control weaknesses; and, as explained earlier, the
inability to prepare auditable financial statements on a routine basis.
For example, USDA and its agencies operate at least 80 program and
administrative systems that support financial management. The longstanding
problems associated with these legacy systems were caused, primarily, by
the absence of corporate level oversight and planning when these systems
were initially developed and upgraded. USDA needs to continue to address
the problems with its legacy systems to improve integration of the
financial management architecture, timely reconcile its property system
with the general ledger, and correct inconsistencies in its accounting
processes.

Additionally, the OIG continued to report that USDA*s systems are not
designed to provide the reliable and timely cost information required to
comply with Statement of Federal Financial Accounting Standards No. 4,
Managerial Cost Accounting Concepts and Standards. Specifically, the OIG*s
review of user fees disclosed that two USDA agencies were not including
the full costs of their user fee programs when determining fees and thus,
were not recovering the full costs of performing services for their
individual programs.

Under the President*s Management Agenda for improved financial management
performance, agencies are expected to improve the timeliness, enhance the
usefulness, and ensure the reliability of financial information. The
expected result is integrated financial and performance management systems
that routinely produce information that is (1) timely,

Page 5 GAO- 03- 871T

to measure and effect performance immediately, (2) useful, to make more
informed operational and investing decisions, and (3) reliable, to ensure
consistent and comparable trend analysis over time and to facilitate
better performance measurement and decision making. This result is key to
successfully achieving the goals set out by the Congress in the Chief
Financial Officers Act and other federal financial management reform
legislation.

In addition, the Joint Financial Management Improvement Program (JFMIP)
Principals have defined success measures for financial management
performance that go far beyond an unqualified audit opinion on financial
statements and include measures such as financial

management systems that routinely provide timely, reliable, and useful
financial information and no material internal control weaknesses or
material noncompliance with laws and regulations and FFMIA requirements. 7
They also significantly accelerated financial statement reporting to
improve timeliness for decision making and to discourage costly efforts
designed to obtain unqualified opinions on financial statements without
addressing underlying systems challenges.

The OIG reported that the Office of the Chief Financial Officer has
developed plans to review USDA*s legacy systems, and consolidate and
update the systems to meet present accounting standards and

management needs. Further, USDA*s September 30, 2002, FFMIA Remediation
Plan discussed a number of remedial actions that the department expects to
complete by the end of fiscal year 2006.

Another financial management challenge for USDA is federal nontax
delinquent debt collection. USDA reported holding $6.9 billion of federal
nontax debt that was delinquent more than 180 days as of September 30,
2002. The Debt Collection Improvement Act of 1996 (DCIA) gave federal
agencies a full array of tools to collect such delinquent debt. Among
other

things, DCIA provides (1) a requirement for federal agencies to refer
eligible debts delinquent more than 180 days to the Department of the
Treasury for collection action, and (2) authorization for agencies to
administratively garnish the wages of delinquent debtors.

7 FFMIA requires auditors, as part of CFO Act agencies* financial
statement audits, to report whether agencies* financial management systems
substantially comply with (1) federal financial management systems
requirements, (2) applicable federal accounting standards (U. S. generally
accepted accounting principles), and (3) federal government*s

SGL at the transaction level.

Page 6 GAO- 03- 871T

In December 2001, we reported that two USDA agencies, Rural Development*s
Rural Housing Service (RHS) and the Farm Service Agency (FSA) had failed
to make DCIA a priority since its enactment in 1996. 8 Specifically, RHS
had not implemented an effective and complete process

to refer debts to Treasury mainly because of systems limitations, debt
reporting problems, and lack of regulations needed to refer losses
resulting from claims paid under its guaranteed single family housing loan
program. FSA lacked effective procedures and controls to identify and
promptly refer eligible delinquent debts to Treasury. Moreover, USDA had

not utilized administrative wage garnishment to collect delinquent nontax
debts. Consequently, opportunities for maximizing the collection of
delinquent nontax debts as contemplated by DCIA were being missed.

USDA officials made a commitment in December 2001 to substantially improve
the department*s implementation of DCIA by December 2002. In November
2002, we testified that USDA had made progress in addressing previously
identified problems. 9 For example, RHS began referring all reported
eligible debt to Treasury. Further, FSA had developed an action plan to
improve its process and controls for identifying and referring

eligible debts to Treasury. However, at the date of our testimony,
challenges remained that will require sustained commitment and priority
from top management. For example, RHS still had to complete regulations to
refer losses related to its guaranteed single family housing loans to
Treasury and an automated process for such referrals, and FSA needed to
complete actions needed to ensure that all of its eligible debt is
promptly referred to Treasury. In addition, USDA needed to complete
regulations that are required to implement administrative wage garnishment
department wide and get all of its component agencies to begin using this
debt collection tool to the fullest extent practicable. The OIG reported

material noncompliance with the DCIA in its fiscal year 2002 financial
statement audit report, reiterating the need for sustained commitment and
priority by top management.

Now I would like to discuss the progress that the Forest Service has made
toward achieving financial accountability and remaining challenges.

8 U. S. General Accounting Office, Debt Collection Improvement Act of
1996: Department of Agriculture Faces Challenges Implementing Certain Key
Provisions, GAO- 02- 277T (Washington, D. C.: Dec. 5, 2001).

9 U. S. General Accounting Office, Debt Collection: Agriculture Making
Progress in Addressing Key Challenges, GAO- 03- 202T (Washington, D. C.:
Nov. 13, 2002).

Page 7 GAO- 03- 871T

An area of particular concern within USDA continues to be the Forest
Service. Historically, the Forest Service*s financial management systems
have not generated timely and accurate financial information for its
annual audit and for effectively managing operations, monitoring revenue
and

spending levels, and making informed decisions about future funding needs
for its program. In addition, the Forest Service has had longstanding
material weaknesses with regard to its two major assets* fund balance with
Treasury and property, plant, and equipment. In 1999, we first designated
financial management at the Forest Service to be *high risk* on the basis
of serious financial and accounting weaknesses that had been identified,
but not corrected, in the agency*s financial statements for a number of
years.

The Forest Service received its first- ever unqualified opinion on its
fiscal year 2002 financial statements, which represents noteworthy
progress from prior years when the OIG was unable to express an opinion.
To achieve its unqualified opinion, the Forest Service*s top management
dedicated considerable resources and focused staff efforts to address
accounting and reporting deficiencies that had prevented a favorable
opinion in the past. For example, during fiscal year 2002 the Forest
Service formed a reconciliation strike team to resolve long- standing real
and personal property accounting deficiencies. The property, plant, and
equipment reconciliation team analyzed transaction data to identify
inaccurate records and reconciled the general ledger to its supporting
detailed records. In addition, the strike team, in cooperation with the
USDA Office of the Chief Financial Officer, the USDA OIG, and consultants,
worked to ensure that property documentation supported property records,
inventories were complete, and property was valued correctly. Further, the
team worked with USDA on modifications and enhancements to certain
property feeder systems. Because the Forest Service property comprises 80
percent of the $4.2 billion line item on USDA*s financial statements, the
OIG was able to validate this number for its fiscal year 2002 opinion.

However, material deficiencies in the controls related to the accurate
recording of property, plant, and equipment transactions remain. For
example, the financial statement auditor reported instances in which
recorded amounts did not agree with supporting documentation and
inappropriate payroll expenses were included in property values instead of
being recorded as expenses, resulting in an overstatement of property and
an understatement of expenses. Further, the Forest Service did not have
effective controls over the initial recording of acquisition costs, in-
service Forest Service Financial

Management

Page 8 GAO- 03- 871T

date, and useful life of property items. Because the Forest Service did
not require reviews of data input for property transactions by a
supervisor, another independent person, or by automated system edit checks
within property systems, certain property items were not recorded
properly.

While the Forest Service made significant progress in fiscal year 2002 to
reconcile its fund balance with Treasury accounts, the financial statement
auditor noted significant control deficiencies in its reconciliation
processes. For example, the Forest Service needs to research a large
backlog of unreconciled items and take corrective actions. In order to
bring the Forest Service*s fund balance with Treasury accounts into
balance with Treasury records as of September 30, 2002, the Forest Service
recorded an adjustment of $107 million.

Although the Forest Service reached an important milestone by attaining a
clean audit opinion on its financial statements, it has not yet proven it
can sustain this outcome, and it has not reached the end goal, as
envisioned by the President*s Management Agenda for improved financial
management

and the JFMIP Principals, of routinely having timely, accurate, and useful
financial information. The Forest Service continues to commit considerable
resources to correcting its financial management weaknesses; however, much
work remains. In our January 2003 high- risk update, we again designated
financial management at the Forest Service as *high risk* on the basis of
its serious internal control weaknesses. 10 In closing, Mr. Chairman, I
want to emphasize that USDA has made

significant progress in addressing its major challenges related to
financial management and continues to do so. At the same time, before USDA
is able to sustain financial accountability and produce relevant,
reliable, and timely information to effectively manage the department, it
and its

component agencies, particularly the Forest Service, must resolve some
very difficult issues.

This concludes my statement. I would be happy to answer any questions you
or other members of the subcommittee may have. 10 U. S. General Accounting
Office, High- Risk Series: An Update, GAO- 03- 119 (Washington D. C.:
January 2003).

Page 9 GAO- 03- 871T

For information about this statement, please contact McCoy Williams,
Director, Financial Management and Assurance, at (202) 512- 6906, or Alana
Stanfield, Assistant Director, at (202) 512- 3197. You may also reach them
by e- mail at williamsm1@ gao. gov or stanfielda@ gao. gov. Individuals
who made key contributions to this testimony include Lisa Crye and Jeff
Isaacs. Contact and

Acknowledgments

(195016)

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