Response to the Department of Education's Request to Reconsider  
the High-Risk Designation of Federal Student Aid Programs	 
(09-JUN-03, GAO-03-885R).					 
                                                                 
This letter is in response to the Secretary of Education's May 2,
2003, letter requesting that we make a commitment to reconsider  
by early this summer our high-risk designation of the Department 
of Education's Student Financial Aid (SFA) programs. In that	 
letter, the Secretary of Education outlined how the department	 
has addressed many of the concerns we have identified and the	 
plans it has underway for continued improvements, as well as its 
plans to update Federal Student Aid's (FSA) Five-Year Performance
Plan. In order to help ensure that planned and completed actions 
address the issues raised in our recent High-Risk and Performance
and Accountability reports, Education offered to provide a series
of briefings to our key managers on: plans and progress for	 
sustaining the clean opinion on the department's financial	 
statements; FSA progress on its modernization efforts and FSA	 
Data Strategies Framework; FSA program integrity initiatives,	 
including FSA default prevention and collection strategies; and  
progress on One-ED (the department's human capital planning	 
initiative).							 
-------------------------Indexing Terms------------------------- 
REPORTNUM:   GAO-03-885R					        
    ACCNO:   A07130						        
  TITLE:     Response to the Department of Education's Request to     
Reconsider the High-Risk Designation of Federal Student Aid	 
Programs							 
     DATE:   06/09/2003 
  SUBJECT:   Financial management				 
	     Financial management systems			 
	     Financial statement audits 			 
	     Financial statements				 
	     Internal controls					 
	     Strategic planning 				 
	     Dept. of Education Student Financial Aid		 
	     Program						 
                                                                 

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GAO-03-885R

GAO- 03- 885R Education*s High Risk Designation

United States General Accounting Office Washington, DC 20548

June 9, 2003 The Honorable Rod Paige The Secretary of Education

Subject: Response to the Department of Education*s Request to Reconsider
the High- Risk Designation of Federal Student Aid Programs

Dear Mr. Secretary: This letter is in response to your May 2, 2003, letter
requesting that we make a commitment to reconsider by early this summer
our high- risk designation of the Department of Education*s Student
Financial Aid (SFA) programs. In that letter you outlined how the
department has addressed many of the concerns we have identified and the
plans it has underway for continued improvements, as well as its plans to
update Federal Student Aid*s (FSA) Five- Year Performance Plan. In order
to help ensure that planned and completed actions address the issues
raised in our recent High- Risk and Performance and Accountability
reports, you offered to provide a series of briefings to our key managers
on:

plans and progress for sustaining the clean opinion on the department*s
financial statements;

FSA progress on its modernization efforts and FSA Data Strategies
Framework; FSA program integrity initiatives, including FSA default
prevention and

collection strategies; and

progress on One- ED (the department*s human capital planning initiative).
We accept the offer to attend these briefings and look forward to the
opportunity to keep informed of significant progress toward resolving
management issues and sustaining improvement in SFA programs.

In 1990, we began our program of reporting on government operations that
we identified as high risk. Since then, generally coinciding with the
start of each new Congress, we have periodically reported on the status of
progress to address high- risk

GAO- 03- 885R Education*s High Risk Designation Page 2 areas and updated
our high- risk list. In our January 2003 update 1 for the new 108th

Congress, we identified the following actions related to SFA programs as
remaining to be completed by the department:

continue with systems integration and improve plans and reports to better
demonstrate progress,

make comprehensive improvements to address financial management and
internal control weaknesses,

improve plans and reports to clearly explain strategies for achieving
default management goals, and

continue implementation of strategic human capital measures, including
succession planning and staff development.

Previously, at the department*s request, specific actions needed to
address each of these areas were provided to the department in the
attached copy of our letter of August 1, 2001, to Deputy Secretary William
Hansen. In that letter we compiled a summary of major actions that are
critical in addressing the underlying root causes that have resulted in
the high- risk designation of SFA programs measured against criteria we
use for designation of programs as high risk. For example, the attachment
to that letter lays out the following three key measurements of sound
financial management for the department and FSA:

an unqualified audit opinion on the department*s financial statements,

full compliance with the Federal Financial Management Improvement Act
(FFMIA) of 1996, and

correction of material internal control weaknesses identified in the
financial statement audit

The department has taken actions over the last several years to improve
its financial management and the weaknesses identified. Significant
progress was made recently when the department received an unqualified *
or *clean* * opinion on its financial statements for fiscal year 2002.
While this is an important milestone, significant management weaknesses
remain that must be addressed in the other two key measurements we
identified, which are discussed in more detail below. In addition, it is
important that the department demonstrate that it can sustain the clean
opinion, as well as other improvements that are made. As you know, the
department first received an unqualified audit opinion on its fiscal year
1997 financial statements, but was not able to sustain that result, nor
repeat it until this year.

The first key measure that remains a weakness is compliance with FFMIA.
FFMIA requires agencies to institute financial management systems that
substantially comply with federal financial management systems
requirements, applicable accounting standards, and the federal
government*s Standard General Ledger. Every year since FFMIA was enacted,
the department*s auditors have reported that the department*s 1 U. S.
General Accounting Office, High- Risk Series: An Update, GAO- 03- 119
(Washington, D. C.: January 2003).

GAO- 03- 885R Education*s High Risk Designation Page 3 systems did not
substantially comply with the act*s requirements. This continued for

fiscal year 2002. According to the auditors, 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. The auditors also reported that the department needs to
address identified computer security weaknesses in its financial
management and other information systems.

The second key measure that remains uncorrected is material internal
control weaknesses identified in the financial statement audits. The
department*s auditors have consistently reported major internal control
weaknesses related to financial management systems and financial
reporting. 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. While the auditor reported improvements in the
latter part of the fiscal year, they reported that they continue to
believe that the department needs to place additional focus on
reconciliation procedures, account analysis, and financial reporting.
Until these issues are fully resolved, the department*s ability to produce
timely, accurate, and useful financial information for its managers and
stakeholders will be greatly impeded.

Designations of programs as high risk because of their greater
vulnerabilities to waste, fraud, abuse, and mismanagement, as well as
removal of programs* high- risk designations, are the independent and
objective judgment of GAO professionals. One of the key factors that
enters into the judgment regarding removal of the designation is whether
the corrective measures are effective and can be sustained. We have
developed and will continue to refine the criteria we use to form
judgments on removing high- risk designations. At the time of our January
2003 update to the Congress, agencies were required to have accomplished
the following steps before a program*s high- risk designation could be
removed:

a demonstrated strong commitment and top leadership support to address the
risk( s);

the capacity (that is, the people and other resources) to resolve the
risk( s);

a corrective action plan( s) that defines the root causes, identifies
effective solutions, and provides for substantially completing corrective
measures near term, including but not limited to, steps necessary to
implement solutions we recommended;

a program to monitor and independently validate the effectiveness and
sustainability of corrective measures; and

the ability to demonstrate progress in implementing corrective measures.
We are impressed with the level of commitment to addressing the factors
that resulted in this high- risk designation, and progress has clearly
been made. However, in our independent and professional judgment as of
January 2003, the SFA programs did not fully satisfy the criteria for
removal from the high- risk list, largely because of

GAO- 03- 885R Education*s High Risk Designation Page 4 the remaining
financial management issues. In addition, it is not our policy to

address high- risk designations *out of cycle." One key reason for this is
to allow enough time between assessments to demonstrate the sustainability
of corrective measures. Furthermore, providing for an out of cycle
assessment for the Department of Education would set a precedent that
would result in other agencies asking for such interim determinations.
This would result in a significant unplanned use of resources that would
adversely affect our ability to meet congressional mandates and requests
on time.

Thus, although we decline to commit to reconsider our January 2003
decision to classify the SFA program as high risk at this time, we will
continue to work with the department to ensure that we are informed about
and have validated the progress made in resolving these issues and
sustaining improvement in all three areas. This proactive approach, which
includes consideration of our ongoing work as well as that of the
department*s outside auditors and the Inspector General, will enable us to
promptly assess progress made and challenges that remain in preparation
for the next high- risk cycle. In this regard, our next high- risk list is
scheduled for publication in January 2005.

We are sending copies of this report to the Secretary of Education and the
department*s congressional oversight committees. We are also sending
copies to the Subcommittee on Government Efficiency and Financial
Management, House Committee on Government Reform, the Senate Committee on
Governmental Affairs, and other interested parties.

We remain encouraged by the department*s commitment to addressing these
important challenges. We look forward to continuing to work with you in
the future on these very important issues.

Sincerely yours, David M. Walker Comptroller General

of the United States Enclosure

(190099)

Enclosure GAO- 03- 885R Education*s High Risk Designation Page 5

Enclosure GAO- 03- 885R Education*s High Risk Designation Page 6

Enclosure GAO- 03- 885R Education*s High Risk Designation Page 7

Enclosure GAO- 03- 885R Education*s High Risk Designation Page 8

Enclosure GAO- 03- 885R Education*s High Risk Designation Page 9

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