Department of Education: Status of Efforts to Address Major
Management Challenges (10-JUN-03, GAO-03-872T).
In its 2003 performance and accountability report on the
Department of Education, GAO identified challenges in, among
other areas, student financial aid programs and financial
management. The information GAO presents in this testimony is
intended to assist Congress in assessing Education's progress in
addressing and overcoming these challenges. GAO is not making new
recommendations in this testimony, but past reports have made
specific recommendations aimed at addressing some of these major
management challenges.
-------------------------Indexing Terms-------------------------
REPORTNUM: GAO-03-872T
ACCNO: A07140
TITLE: Department of Education: Status of Efforts to Address
Major Management Challenges
DATE: 06/10/2003
SUBJECT: Financial management
Fraud
Internal controls
Strategic planning
Student financial aid
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GAO-03-872T
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 p. m., EST Tuesday, June 10,
2003 DEPARTMENT OF
EDUCATION Status of Efforts to Address Major Management Challenges
Statement of Linda Calbom Director, Financial Management and Assurance
GAO- 03- 872T
Education has taken steps to address its continuing challenges of reducing
vulnerabilities in its student aid programs and improving its financial
management, such as establishing a senior management team to address
management problems, including financial management, throughout the
agency. And, while Education has made significant progress, weaknesses
remain that will require the continued commitment and vigilance of
Education*s management to resolve.
Reduce vulnerability of student aid programs to fraud, waste, abuse, and
mismanagement. Education has made considerable changes to address the
ongoing challenges in administering its student aid programs. However,
Education needs to continue to address systems integration issues, reduce
fraud and error in student aid
application and disbursement processes, collect on student loan defaults,
and improve its human capital management.
Improve financial management. Education has implemented many actions to
address its financial management weaknesses. Significant progress was made
earlier this year when Education received an unqualified* or *clean**
opinion on its financial statements for fiscal year 2002. While this is an
important milestone for the department, internal control and systems
weaknesses remain that impede Education*s ability to produce timely,
accurate, and useful financial information for its managers and
stakeholders.
History of Financial Management Weaknesses Fiscal year Audit opinion a
Material internal control weaknesses Noncompliance with federal
systems requirements b
1995 Disclaimer Yes N/ A 1996 Disclaimer Yes N/ A 1997 Unqualified Yes Yes
1998 Disclaimer Yes Yes 1999 Qualified Yes Yes 2000 Qualified Yes Yes 2001
Qualified Yes Yes 2002 Unqualified Yes Yes Source: Auditors* reports for
fiscal years 1995- 2002. a Auditors issue unqualified opinions when the
financial statements are presented fairly, in all
material respects. Qualified opinions are issued when the financial
statements are presented fairly, with exceptions that are specifically
disclosed and described. Disclaimers of opinion are rendered when auditors
cannot satisfy themselves as to whether the financial statements are
presented fairly. b These requirements became effective for fiscal year
1997.
In its 2003 performance and accountability report on the Department of
Education, GAO
identified challenges in, among other areas, student financial aid
programs and financial management. The information GAO presents in this
testimony is intended to assist Congress in assessing Education*s progress
in addressing and overcoming these challenges.
GAO is not making new recommendations in this testimony, but past reports
have made specific recommendations aimed at addressing some of these major
management challenges.
DEPARTMENT OF EDUCATION
Status of Efforts to Address Major Management Challenges
www. gao. gov/ cgi- bin/ getrpt? GAO- 03- 872T. To view the full
testimony, click on the link above. For more information, contact Linda
Calbom at (202) 512- 9508 or calboml@ gao. gov. Highlights of GAO- 03-
872T, a testimony
before the Subcommittee on Government Efficiency and Financial Management,
Committee on Government Reform, House of Representatives June 10, 2003
Page 1 GAO- 03- 872T
Mr. Chairman and Members of the Subcommittee: I am pleased to be here
today to discuss the major management challenges faced by the Department
of Education, its progress in addressing them, and challenges that remain.
As you know, this January, we issued our Performance and Accountability
Series on management challenges and program risks at major agencies,
including the Department of Education. 1 The report for Education focused
on a number of management challenges and continued the high risk
designation for student aid programs. You asked me to focus my testimony
on two areas in that report. These are Education*s efforts to (1) reduce
fraud, waste, abuse, and mismanagement in its student aid programs while
continuing to ensure access to postsecondary education and (2) improve its
financial management to help build a high- performing agency. Education
has taken steps to meet these challenges, such as establishing a senior
management team to address management problems, including financial
management, throughout the agency. And, while Education has made
significant progress, including receiving a clean opinion on its fiscal
year 2002 financial statements, weaknesses remain that will require the
continued commitment and vigilance of Education*s management to resolve. I
will discuss Education*s student aid programs and financial management in
turn.
Ensuring access to postsecondary education while reducing vulnerability of
student financial aid programs to fraud, waste, abuse, and mismanagement
is one of the key management challenges Education faces. Education helps
millions of students enroll in higher education programs by providing for
more than $50 billion in grants and loans annually. The department is
responsible for ensuring that these programs are efficiently managed,
establishing procedures to ensure that loans are repaid, and preventing
fraud and abuse. Since 1990, we have identified Education*s grant and loan
programs as high risk for fraud, waste, abuse,
and mismanagement. Both Education and Congress have made changes to
address management challenges in the student financial aid programs.
Congress established
1 U. S. General Accounting Office, Major Management Challenges and Program
Risks: Department of Education, GAO- 03- 99 (Washington, D. C.: January
2003). Student Aid Programs
Page 2 GAO- 03- 872T
Education*s Office of Federal Student Aid (FSA) as a performance- based
organization in 1998. Its purpose is to increase accountability of
officials, provide greater flexibility in management, integrate
information systems, reduce costs, and develop and maintain a system that
contains complete,
accurate and timely data that can ensure program integrity. In 2001,
Education established a Management Improvement Team (MIT) of senior
managers to formulate strategies to address key management problems
throughout the department. According to Education, MIT has developed a
system to identify, track, and resolve audit and management issues both
agencywide and in the student financial aid programs.
Education has faced challenges in four areas related to its grant and loan
programs. These are (1) financial aid system integration issues, (2) fraud
and error in student aid application and disbursement processes, (3)
defaulted student loans, and (4) human capital management. I would now
like to briefly discuss each of these challenges.
Education has spent millions of dollars to integrate and modernize its
many financial aid systems in an effort to provide more information and
better service to students, parents, institutions, and lenders.
Effectively and efficiently investing in information technology requires,
among other things, an institutional blueprint that defines in both
business and technical terms the organization*s current and target
operating environments and provides a transition road map. Because
Education did not have this blueprint, commonly called an enterprise
architecture, we
recommended in 1997 that the department develop an architecture and
establish standard reporting formats and data definitions. 2 In September
2002, Education*s Office of the Inspector General (OIG) reported that the
department had made progress in taking specific actions to lay the
groundwork for an enterprise architecture. Still, critical elements need
to be completed, including integrating separate architectures into a
departmentwide architecture and fully implementing common identifiers for
students and institutions to use in departmentwide system applications. As
part of our review of the progress federal agencies have made to
effectively develop, implement, and maintain their enterprise
architectures, we are currently evaluating the management of Education*s
enterprise architecture efforts.
2 U. S. General Accounting Office, Student Financial Aid Information:
Systems Architecture Needed to Improve Programs* Efficiency, AIMD- 97- 122
(Washington, D. C.: July 29, 1997).
Page 3 GAO- 03- 872T
With respect to modernization plans, we reported in November 2001 that FSA
selected a viable, industry- accepted means of integrating its existing
data on student loans and grants. 3 FSA has made progress in implementing
this approach for its Common Origination and Disbursement process, which
includes the implementation of a common record that institutions can use
to submit student financial aid data for Pell Grant and Direct Loan
programs. The ultimate success of this process, however, hinges on
addressing serious postimplementation operational problems and helping
thousands of schools implement the common record. Further, as we reported
in December 2002, 4 FSA has not completed a number of elements that are
important for managing any information technology investment. These
include determining whether expected benefits are being achieved and
tracking lessons learned related to schools* implementation of the
common record. We have recommended that FSA develop metrics, baseline
data, and a tracking process for certain benefits expected from the
system, and that it develop and implement a process for capturing and
disseminating lessons learned to schools that have not yet implemented the
common record. FSA has begun acting on both of these issues.
Education has also faced challenges in ensuring that information reported
on student aid applications is correct and that adequate internal controls
are in place to prevent improper payments of grants and loans. The
department has taken steps, in two pilot programs with the Internal
Revenue Service (IRS), to match income reported on student aid
applications with federal tax returns. 5 To continue this income match and
implement it on a broader scale, legislation to allow IRS to release the
information is necessary. Education has worked with the Department of the
Treasury and the Office of Management and Budget to ask that Congress
enact such legislation. The department also verifies income information by
asking 30 percent of applicants to provide copies of their tax returns to
their student financial aid offices. In addition to strengthening its
controls over student aid applications, we found that
Education also needed to address institutions that were disbursing grants
3 U. S. General Accounting Office, Student Financial Aid: Use of
Middleware for Systems Integration Holds Promise, GAO- 02- 7 (Washington,
D. C.: Nov. 30, 2001). 4 U. S. General Accounting Office, Federal Student
Aid: Progress in Integrating Pell Grant and Direct Loan Systems and
Processes, but Critical Work Remains, GAO- 03- 241 (Washington, D. C.:
Dec. 31, 2002).
5 U. S. General Accounting Office, Major Management Challenges and Program
Risks: Department of Education, GAO- 01- 245 (Washington, D. C.: Jan.
2001).
Page 4 GAO- 03- 872T
to ineligible students. 6 The department has taken steps to analyze
student data to identify high concentrations of students over age 65 and
eligible noncitizens at individual institutions to determine whether
problems exist that warrant further review. These actions are encouraging,
and if properly implemented, should improve controls over these payments.
A continuing challenge for Education and FSA is preventing and collecting
defaulted student loans. While the national student loan default rate has
decreased from 11.6 percent in fiscal year 1993 to 5.9 percent in fiscal
year 2000, the cumulative amount of defaulted student loans has increased
by almost $10 billion over the same period. Education and FSA have
implemented several default management strategies, such as establishing
electronic debiting as a repayment option, and working with some guaranty
agencies to set up alternatives to service and process claims for
defaulted loans. Our analysis of FSA*s internal documents indicated that
for fiscal years 2000 through 2002, FSA met or exceeded many of the goals
related to these strategies. However, neither Congress nor the public can
determine whether FSA*s default management goals have been met because
Education did not prepare performance reports that conform to the
requirements in the Higher Education Act. 7 FSA*s report to Congress on
its performance in fiscal years 2000 and 2001 was not timely nor did it
indicate whether FSA met established performance goals. We have
recommended that Education and FSA prepare and issue reports to Congress
on FSA*s performance that are timely and clearly identify whether
performance goals were met. 8 Like other federal agencies, Education must
address serious human
capital issues, such as succession planning, because about one- third of
Education*s workforce is eligible to retire. In June 2001, we recommended
that the department develop human capital goals and measures for its
6 U. S. General Accounting Office, Education Financial Management: Weak
Internal Controls Led to Instances of Fraud and Other Improper Payments,
GAO- 02- 406 (Washington, D. C.: Mar. 28, 2002).
7 The requirements are in the amendments to the Higher Education Act that
established FSA as a performance- based organization. Pub. L. No. 105-
244, Title I, S: 101( a), 112 Stat. 1581, 1604- 1610 (1998).
8 U. S. General Accounting Office, Federal Student Aid: Timely Performance
Plans and Reports Would Help Guide and Assess Achievement of Default
Management Goals,
GAO- 03- 348 (Washington, D. C.: Feb. 14, 2003).
Page 5 GAO- 03- 872T
performance plans. 9 In April 2002, we recommended that the department and
FSA coordinate closely to develop and implement a comprehensive human
capital strategy. 10 Education added a specific objective to its strategic
plan, and in 2002, issued a comprehensive 5- year human capital plan that
incorporates FSA. This plan outlines steps and time frames for improving
human capital management and specifies four critical areas where
improvements should be made: (1) top leadership commitment, (2)
performance management, (3) workforce skills enhancement, and (4)
leadership and succession planning. It will be important that Education
focus continually on implementation of the plan to achieve results.
Now, Mr. Chairman, I would like to discuss Education*s financial
management challenges and the progress Education has made in addressing
them.
Weaknesses in Education*s financial management and information systems
have limited its ability to achieve one of its key goals* improving
financial management to help build a high- performing agency. Significant
progress towards this goal was made earlier this year when Education
received an unqualified* or *clean** opinion on its financial statements.
Prior to this, with the exception of 1997, Education had not received a
clean opinion since its first agencywide audit in 1995. While this is an
important milestone for the department, significant management weaknesses
remain that must be addressed for Education to meet its goal in this area.
Beginning with the department*s first agencywide audit in 1995,
Education*s auditors have repeatedly identified significant financial
management weaknesses. These weaknesses included Education*s inability to
provide the auditors with sufficient evidence to satisfy themselves about
the accuracy or completeness of certain amounts included in the financial
statements, including billions of dollars of adjustments to amounts
reported in previous years* financial statements.
9 U. S. General Accounting Office, Department of Education: Status of
Achieving Key Outcomes and Addressing Major Management Challenges, GAO-
01- 827 (Washington, D. C.: June 29, 2001).
10 U. S. General Accounting Office, Federal Student Aid: Additional
Management Improvements Would Clarify Strategic Direction and Enhance
Accountability,
GAO- 02- 255 (Washington, D. C.: April 30, 2002). Financial
Management
Page 6 GAO- 03- 872T
According to Education*s auditor, these adjustments were to correct
*unnatural account balances* or otherwise adjust balances to the amount
management*s analysis supported. The auditor reported that in many cases,
the cause of the incorrect balances could not be definitively determined,
and the adjusting entry prepared by management was a reasoned judgment of
how to correct its accounts. Education*s auditors have also consistently
reported major internal control weaknesses related to financial management
systems and financial reporting. These weaknesses included (1) the absence
of a fully integrated financial management system, (2) deficiencies in
financial management practices that require extensive analysis of accounts
to resolve errors through manual adjustments, (3) the lack of a rigorous
review of interim financial data for timely identification and correction
of errors, (4) the inability to accumulate, analyze, and present reliable
financial information in the form of financial statements, (5) the
dependence on a variety of stopgap
measures to prepare financial statements, (6) the insufficiency of
compensating controls, such as top- level reviews to address and try to
compensate for systemic control weaknesses, and (7) the lack of a review
to identify and quantify improper payments. Education*s auditors also
reported that internal controls needed strengthening in numerous areas
relating to Education*s investment of millions of dollars in property and
equipment.
Education has taken actions over the last several years to improve its
financial management and to address the weaknesses identified. For
example, during 2001, Education*s MIT developed specific actions to
address issues raised in previous financial statement audits. According to
a MIT report on its accomplishments, Education began performing certain
critical reconciliations monthly and began preparing interim financial
statements, which helped identify areas needing further study. Education
also improved its internal controls over property and equipment, and its
auditor did not report this area as a weakness in fiscal year 2002. In
addition, according to Education*s auditor, during fiscal year 2002, the
department implemented a new general ledger software package and FSA
implemented a new financial management system to support management
information reporting needs. The auditor also reported that the department
implemented several processes during fiscal year 2002 to improve its
financial management, including
convening the Accounting Integrity Board, the Audit Steering Committee,
and the Accounting Assurance Group to plan, implement and manage quality
accounting change control;
Page 7 GAO- 03- 872T
establishing the Financial Statement Committee and continuing the
Financial Statement Preparation Team and other special task force teams
all of which are designed to improve the financial statement processes;
and developing and implementing reconciliation work plans, policies, and
procedures; specialized teams; regular management reviews of the final
work products; and management review for process improvement.
While Education has made progress in addressing many of its weaknesses, in
fiscal year 2002, the auditor again reported that significant financial
management issues continued to impair the department*s ability to
accumulate, analyze, and present reliable financial information. These
problems, in part, resulted from inadequate internal controls over
Education*s financial management systems and financial reporting process.
The auditor also reported that weaknesses in the department*s ability to
report accurate financial information on a timely basis were due to
deficiencies in certain of the department*s financial management
practices, including inadequate reconciliations and account analysis early
in fiscal year 2002. The auditor added that issues associated with the
transition to a new financial management system in fiscal year 2002 also
contributed to the department*s difficulties in these areas. While the
auditor reported that it noted improvements in the latter part of the
fiscal year, it reported that it continues to believe that the department
needs to focus more on reconciliation procedures, account analysis, and
financial
reporting. Until these issues are fully resolved, Education*s ability to
produce timely, accurate, and useful financial information for its
managers and stakeholders will be greatly impeded. In addition, beginning
with fiscal year 2004, Education and other major government agencies will
be required to produce audited financial statements within 45 days after
the end of the fiscal year compared to 120 days for fiscal years 2002 and
2003. According to Education*s Fiscal Year 2004 Annual Plan, the
department plans to implement this accelerated reporting date for its
fiscal year 2003 financial statements* a year earlier than required. This
action will be a good *test* of Education*s new financial system and other
financial management reforms.
As we testified before the Subcommittee on Select Education in April 2002,
we identified other internal control weaknesses that make Education
Page 8 GAO- 03- 872T
vulnerable to improper payments and lost assets. 11 In our testimony and
related report, 12 we stated that for May 1998 through September 2000,
weak internal controls over the (1) grants and loan disbursement process
failed to detect certain improper payments, (2) third party draft
processes increased Education*s vulnerability to improper payments, and
(3) government purchase cards resulted in some fraudulent, improper, and
questionable purchases. We also reported that Education lacked adequate
internal controls over computers acquired with purchase cards and third
party drafts. Among other things, we found that computer purchases valued
at almost $400,000 were not recorded in Education*s property records, and
$200,000 of that computer equipment could not be located.
In response to our work, Education made several changes to its policies
and procedures to improve internal controls and program integrity. These
changes were a step in the right direction; but in many cases, our
followup work indicated that they had not been effectively implemented. In
March 2002, we reported that vulnerabilities remained in all areas we
reviewed, except for third party drafts, which were discontinued
altogether. 13 For example, we reported that Education developed a new
approval process for its purchase card program; however, our testing of 3
months of purchase card statements under the new process found that
over 20 percent lacked proper support for the items purchased. In October
2002, Education told us that new policies and procedures were implemented
and aimed at reducing the department*s vulnerability to future improper
use of purchase cards. These new policies and procedures relate to
reviewing and approving purchase card transactions and providing related
training. Further, the department told us that misuse of purchase and
travel cards is now specifically included in the department*s Table of
Penalties with the desired effect of reducing misuse and abuse of
government issued credit cards. Education also told us that it recognizes
that reviewing and improving internal controls is an ongoing task and that
it intends to remain vigilant in this area. These are positive steps that
should help reduce the instances of improper purchases.
11 U. S. General Accounting Office, Education Financial Management: Weak
Internal Controls Led to Instances of Fraud and Other Improper Payments,
GAO- 02- 513T (Washington, D. C.: Apr. 10, 2002).
12 GAO- 02- 406. 13 GAO- 02- 406, 30.
Page 9 GAO- 03- 872T
Finally, Education will need to continue its actions in addressing
weaknesses in its financial management information systems. The Federal
Financial Management Improvement Act (FFMIA) of 1996 requires
agencies to institute financial management systems that substantially
comply with federal financial management systems requirements, applicable
accounting standards, and the U. S. Government Standard General Ledger.
Every year since FFMIA was enacted, Education*s auditors have reported
that Education*s systems did not substantially comply with the act*s
requirements. In previous years, the auditors reported that without a
fully integrated financial management system, deficiencies in the general
ledger system, deficiencies in the manual adjustment process, and the need
to strengthen other financial management controls such as reconciliation
processes, collectively impair Education*s ability to accumulate, analyze,
and present reliable financial information. In addition, according to
Education*s auditor, although the
department implemented a new financial management system during fiscal
year 2002, issues associated with the transition to the new system
contributed to difficulties in providing reliable, timely information for
managing current operations and timely reporting of financial information
to central agencies; therefore, Education still did not substantially
comply with FFMIA*s requirements.
Education also needs to address identified computer security weaknesses in
its financial management and other information systems. In September 2001,
we reported that Education had made progress in correcting certain
information system control weaknesses. 14 At the same time, we identified
weaknesses in Education*s systems that place critical financial and
sensitive grant information at risk of unauthorized access and disclosure,
and key operations at risk of disruption. We recommended that Education
correct certain information system control weaknesses and fully implement
a comprehensive departmentwide computer security management program. In
response, Education stated that it had developed a corrective action plan
and is taking steps to further strengthen and develop a more comprehensive
information security program. In addition, Education*s auditor reported
that for fiscal year 2002, the department made progress in strengthening
controls over its information technology processes but needs to continue
efforts to develop, implement, and
14 U. S. General Accounting Office, Education Information Security:
Improvements Made, but Control Weaknesses Remain, GAO- 01- 1067
(Washington, D. C.: Sept. 12, 2001).
Page 10 GAO- 03- 872T
maintain an agencywide risk- based information security plan, programs,
and practices to provide security throughout the life cycle of all
systems. In closing, Mr. Chairman, I want to reiterate that Education is
taking
actions and making substantial progress in addressing major challenges
related to its student aid programs and financial management. At the same
time, some difficult issues remain that must be resolved before Education
is able to produce relevant, reliable, and timely information to
efficiently and effectively manage the department and provide full
accountability to its stakeholders.
Mr. Chairman, this concludes my statement. I would be happy to answer any
questions you or other members of the Subcommittee may have.
For information about this statement, please contact Linda Calbom,
Director, Financial Management and Assurance, at (202) 512- 9508, or
Robert Owens, Assistant Director, at (202) 512- 8579. You may also reach
them by E- mail at calboml@ gao. gov or owensr@ gao. gov. Individuals who
made key contributions to this testimony include Lisa Crye and Diane
Morris. Numerous other individuals made contributions to the work
supporting this testimony. Contact and
Acknowledgments
(190097)
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