High-Risk Series: An Update (01-JAN-05, GAO-05-207).		 
                                                                 
GAO's audits and evaluations identify federal programs and	 
operations that, in some cases, are high risk due to their	 
greater vulnerabilities to fraud, waste, abuse, and		 
mismanagement. Increasingly, GAO also is identifying high-risk	 
areas to focus on the need for broad-based transformations to	 
address major economy, efficiency, or effectiveness challenges.  
Since 1990, GAO has periodically reported on government 	 
operations that it has designated as high risk. In this 2005	 
update for the 109th Congress, GAO presents the status of	 
high-risk areas identified in 2003 and new high-risk areas	 
warranting attention by the Congress and the administration.	 
Lasting solutions to high-risk problems offer the potential to	 
save billions of dollars, dramatically improve service to the	 
American public, strengthen public confidence and trust in the	 
performance and accountability of our national government, and	 
ensure the ability of government to deliver on its promises.	 
-------------------------Indexing Terms------------------------- 
REPORTNUM:   GAO-05-207 					        
    ACCNO:   A16097						        
  TITLE:     High-Risk Series: An Update			      
     DATE:   01/01/2005 
  SUBJECT:   Accountability					 
	     Computer matching					 
	     Contracts						 
	     Counterterrorism					 
	     Federal procurement				 
	     Financial management				 
	     Interagency relations				 
	     Intergovernmental relations			 
	     National preparedness				 
	     Personnel management				 
	     Private sector					 
	     Program abuses					 
	     Program management 				 
	     Security clearances				 
	     Terrorism						 
	     Business planning					 
	     Homeland security					 
	     High Risk Series 2003				 

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GAO-05-207

                 United States Government Accountability Office

GAO

                                  January 2005

HIGH-RISK SERIES An Update

                                       a

GAO-05-207

An Update

[IMG]

In January 2003, GAO identified 25 high-risk areas; in July 2003, a 26th
highrisk area was added to the list. Since then, progress has been made in
all areas, although the nature and significance of progress varies by
area. Federal departments and agencies, as well as the Congress, have
shown a continuing commitment to addressing high-risk challenges and have
taken various steps to help correct several of the problems' root causes.
GAO has determined that sufficient progress has been made to remove the
high-risk designation from three areas: student financial aid programs,
FAA financial management, and Forest Service financial management. Also,
four areas related to IRS have been consolidated into two areas.

This year, GAO is designating four new high-risk areas. The first new area
is establishing appropriate and effective information-sharing mechanisms
to improve homeland security. Federal policy creates specific requirements
for information-sharing efforts, including the development of processes
and procedures for collaboration between federal, state, and local
governments and the private sector. This area has received increased
attention but the federal government still faces formidable challenges
sharing information among stakeholders in an appropriate and timely manner
to minimize risk.

The second and third new areas are, respectively, DOD's approach to
business transformation and its personnel security clearance program. GAO
has reported on inefficiencies and inadequate transparency and
accountability across DOD's major business areas, resulting in billions of
dollars of wasted resources. Senior leaders have shown commitment to
business transformation through individual initiatives in acquisition
reform, business modernization, and financial management, among others,
but little tangible evidence of actual improvement has been seen in DOD's
business operations to date. DOD needs to take stronger steps to achieve
and sustain business reform on a departmentwide basis. Further, delays by
DOD in completing background investigations and adjudications can affect
the entire government because DOD performs this function for hundreds of
thousands of industry personnel from 22 federal agencies, as well as its
own service members, federal civilian employees, and industry personnel.
OPM is to assume DOD's personnel security investigative function, but this
change alone will not reduce the shortages of investigative personnel.

The fourth area is management of interagency contracting. Interagency
contracts can leverage the government's buying power and provide a
simplified and expedited method of procurement. But several factors can
pose risks, including the rapid growth of dollars involved combined with
the limited expertise of some of agencies in using these contracts and
recent problems related to their management. Various improvement efforts
have been initiated to address this area, but improved policies and
processes, and their effective implementation, are needed to ensure that
interagency contracting achieves its full potential in the most effective
and efficient manner.

  GAO's 2005 High-Risk List

2005 High-Risk Areas

              Addressing Challenges In Broad-based Transformations

o  Strategic Human Capital Managementa

o  U.S. Postal Service Transformation Efforts and Long-Term Outlooka

o  Managing Federal Real Propertya

o  Protecting the Federal Government's Information Systems and the
Nation's Critical Infrastructures

o  Implementing and Transforming the Department of Homeland Security

o  Establishing Appropriate And Effective Information-Sharing Mechanisms
to Improve Homeland Security

o  DOD Approach to Business Transformationa

o  DOD Business Systems Modernization

o  DOD Personnel Security Clearance Program

o  DOD Support Infrastructure Management

o  DOD Financial Management

o  DOD Supply Chain Management (formerly Inventory Management)

o  DOD Weapon Systems Acquisition

                 Managing Federal Contracting More Effectively

o  DOD Contract Management

o  DOE Contract Management

o  NASA Contract Management

o  Management of Interagency Contracting Assessing the Efficiency and
Effectiveness of Tax Law Administration

o  Enforcement of Tax Lawsa, b

o  IRS Business Systems Modernizationc
Modernizing and Safeguarding Insurance and Benefit Programs

o  Modernizing Federal Disability Programs a

o  Pension Benefit Guaranty Corporation Single-Employer Insurance Programa

o  Medicare Programa

o  Medicaid Programa

o  HUD Single-Family Mortgage Insurance and Rental Housing Assistance
Programs Other

o  FAA Air Traffic Control Modernization

Source: GAO.

aLegislation is likely to be necessary, as a supplement to actions by the
executive branch, in order to effectively address this high-risk area.

bTwo high-risk areas-Collection of Unpaid Taxes and Earned Income Credit
Noncompliance-have been consolidated to make this area.

cThe IRS Financial Management high-risk area has been incorporated into
this high-risk area.

Contents

                              Transmittal Letter 1

Historical Perspective

High-Risk Designations Removed

Student Financial Aid Programs 8 FAA Financial Management 10 Forest
Service Financial Management 12

  New High-Risk Areas 15

Establishing Appropriate and Effective Information-Sharing

Mechanisms to Improve Homeland Security 15 DOD Approach to Business
Transformation 21 DOD Personnel Security Clearance Program 22 Management
of Interagency Contracting 24

Emerging Areas

Progress Being Made in
Other High-Risk Areas

High-Risk Areas 37

Consolidated Collection of Unpaid Taxes and Earned Income Credit
Noncompliance 37 IRS Business Systems Modernization and IRS Financial
Management 38

Highlights for Each High-Risk Area

This is a work of the U.S. government and is not subject to copyright
protection in the United States. It may be reproduced and distributed in
its entirety without further permission from GAO. However, because this
work may contain copyrighted images or other material, permission from the
copyright holder may be necessary if you wish to reproduce this material
separately.

                       Page i GAO-05-207 High-Risk Update

Comptroller General of the United States

United States Government Accountability Office Washington, D.C. 20548

January 2005

The President of the Senate The Speaker of the House of Representatives

Since 1990, GAO has periodically reported on government operations that it
identifies as "high risk." This effort, which is supported by the Senate
Committee on Homeland Security and Governmental Affairs and the House
Committee on Government Reform, has brought a much needed focus to
problems that are impeding effective government and costing the government
billions of dollars each year. To help, GAO has made hundreds of
recommendations to improve these high-risk operations. Moreover, GAO's
focus on high-risk problems contributed to the Congress enacting a series
of governmentwide reforms to address critical human capital challenges,
strengthen financial management, improve information technology practices,
and instill a more results-oriented government.

GAO's high-risk status reports are provided at the start of each new
Congress. This update should help the Congress and executive branch in
carrying out their responsibilities while improving the government's
performance and enhancing its accountability for the benefit of the
American people. It summarizes progress made in correcting high-risk
problems, actions under way, and further actions that GAO believes are
needed. In this update, GAO has determined that sufficient progress has
been made to remove the high-risk designation from three areas, and has
designated four new areas as high risk. In addition, several prior
high-risk areas have been consolidated or modified.

GAO's high-risk program has increasingly focused on those major programs
and operations that need urgent attention and transformation in order to
ensure that our national government functions in the most economical,
efficient, and effective manner possible. Further, the Bush Administration
has looked to GAO's program in shaping governmentwide initiatives such as
the President's Management Agenda, which has at its base many of the areas
GAO had previously designated as high risk. As in prior GAO highrisk
update reports, federal programs and operations are also emphasized when
they are at high risk because of their greater vulnerabilities to fraud,
waste, abuse, and mismanagement. In addition, some of these high-risk
agencies, programs, or policies are in need of transformation, and several
will require action by both the executive branch and the Congress. Our
objective for the high-risk list is to bring "light" to these areas as
well as "heat" to prompt needed "actions."

                       Page 1 GAO-05-207 High-Risk Update

Copies of this update are being sent to the President, the congressional
leadership, other Members of the Congress, the Director of the Office of
Management and Budget, and the heads of major departments and agencies.

David M. Walker Comptroller General of the United States

                       Page 2 GAO-05-207 High-Risk Update

Historical Perspective

In 1990, GAO began a program to report 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 areas and updated our high-risk list. Our
most recent high-risk update was in January 2003.1

Overall, our high-risk program has served to identify and help resolve
serious weaknesses in areas that involve substantial resources and provide
critical services to the public. Since our program began, the government
has taken high-risk problems seriously and has made long-needed progress
toward correcting them. In some cases, progress has been sufficient for us
to remove the high-risk designation. The overall changes to our high-risk
list over the past 15 years are shown in table 1. Areas removed from the
high-risk list over that same period are shown in table 2. The areas on
GAO's 2005 high-risk list and the year each was designated as high risk
are shown in table 3.

Table 1: Overall Changes to GAO's High-Risk List, 1990 to 2005

                       Changes, 1990-2005 Number of areas

Original high-risk list in 1990

High-risk areas added since 1990

High-risk areas removed since 1990

High-risk areas consolidated since 1990

High-risk list in 2005

                                  Source: GAO.

1 GAO, High-Risk Series: An Update, GAO-03-119 (Washington, D.C.: January
2003).

Page 3 GAO-05-207 High-Risk Update

Historical Perspective

         Table 2: Areas Removed from GAO's High-Risk List, 1990 to 2005

                                                                         Year 
                                                              Year designated 
                                                      Area removed high risk  
           Federal Transit Administration Grant Management    1995       1990 
                      Pension Benefit Guaranty Corporation    1995       1990 
                              Resolution Trust Corporation    1995       1990 
              State Department Management of Overseas Real    1995       1990 
                                                  Property         
                                       Bank Insurance Fund    1995       1991 
                      Customs Service Financial Management    1999       1991 
                                        Farm Loan Programs    2001       1990 
                                         Superfund Program    2001       1990 
                    National Weather Service Modernization    2001       1995 
                                           The 2000 Census    2001       1997 
                         The Year 2000 Computing Challenge    2001       1997 
                                 Asset Forfeiture Programs    2003       1990 
                              Supplemental Security Income    2003       1997 
                            Student Financial Aid Programs    2005       1990 
                 Federal Aviation Administration Financial    2005       1999 
                                                Management         
                       Forest Service Financial Management    2005       1999 

Source: GAO.

                       Page 4 GAO-05-207 High-Risk Update

Historical Perspective

Table 3: The Year that Areas on GAO's 2005 High-Risk List Were Designated
as High Risk

Year designated Area high risk

Medicare Program 1990

DOD Supply Chain Management 1990a

DOD Weapon Systems Acquisition 1990

DOE Contract Management 1990

NASA Contract Management 1990

Enforcement of Tax Laws 1990b

DOD Contract Management 1992

HUD Single-Family Mortgage Insurance and Rental Housing 1994
Assistance Programs

DOD Financial Management 1995

DOD Business Systems Modernization 1995

IRS Business Systems Modernization 1995c

FAA Air Traffic Control Modernization 1995

Protecting the Federal Government's Information Systems and the 1997
Nation's Critical Infrastructures

DOD Support Infrastructure Management 1997

Strategic Human Capital Management 2001

U.S. Postal Service Transformation Efforts and Long-Term Outlook 2001

Medicaid Program 2003

Managing Federal Real Property 2003

Modernizing Federal Disability Programs 2003

Implementing and Transforming the Department of Homeland Security 2003

Pension Benefit Guaranty Corporation Single-Employer Insurance 2003
Program

Establishing Appropriate and Effective Information-Sharing 2005
Mechanisms to Improve Homeland Security

DOD Approach to Business Transformation 2005

DOD Personnel Security Clearance Program 2005

Management of Interagency Contracting 2005

Source: GAO.

aThis area was formerly entitled DOD Inventory Management.

bOne of the two high-risk areas that were consolidated to make this
area-Collection of Unpaid Taxes-was designated high risk in 1990. The
other area-Earned Income Credit Noncompliance- was designated high risk in
1995.

cIRS Financial Management has been incorporated into the IRS Business
Systems Modernization high-risk area. Both areas were initially designated
as high risk in 1995.

                       Page 5 GAO-05-207 High-Risk Update

Historical Perspective

Eight of the 16 areas removed from the list over the years were among the
14 programs and operations we determined to be high risk at the outset of
our efforts to monitor such programs. These results demonstrate that the
sustained attention and commitment by the Congress and agencies to resolve
serious, long-standing high-risk problems have paid off, as root causes of
the government's exposure for half of our original high-risk list have
been successfully addressed.

Historically, high-risk areas have been so designated because of
traditional vulnerabilities related to their greater susceptibility to
fraud, waste, abuse, and mismanagement. As our high-risk program has
evolved, we have increasingly used the high-risk designation to draw
attention to areas associated with broad-based transformations needed to
achieve greater economy, efficiency, effectiveness, accountability, and
sustainability of selected key government programs and operations.
Perseverance by the executive branch is needed in implementing our
recommended solutions for addressing these high-risk areas. Continued
congressional oversight and, in some cases, additional legislative action
will also be key to achieving progress, particularly in addressing
challenges in broad-based transformations.

To determine which federal government programs and functions should be
designated high risk, we used our guidance document, Determining
Performance and Accountability Challenges and High Risks.2 In determining
whether a government program or operation is high risk, we consider
whether it involves national significance or a management function that is
key to performance and accountability. We also consider whether the risk
is

o 	an inherent problem, such as may arise when the nature of a program
creates susceptibility to fraud, waste, and abuse, or

o 	a systemic problem, such as may arise when the programmatic; management
support; or financial systems, policies, and procedures established by an
agency to carry out a program are ineffective, creating a material
weakness.

Further, we consider qualitative factors, such as whether the risk

2 GAO, Determining Performance and Accountability Challenges and High
Risks, GAO-01159SP (Washington, D.C.: November 2000).

                       Page 6 GAO-05-207 High-Risk Update

Historical Perspective

o 	involves public health or safety, service delivery, national security,
national defense, economic growth, or privacy or citizens' rights, or

o 	could result in significantly impaired service; program failure; injury
or loss of life; or significantly reduced economy, efficiency, or
effectiveness.

Before making a high-risk designation, we also consider the corrective
measures an agency may have planned or under way to resolve a material
control weakness and the status and effectiveness of these actions.

When legislative and agency actions, including those in response to our
recommendations, result in significant and sustainable progress toward
resolving a high-risk problem, we remove the high-risk designation. Key
determinants here include a demonstrated strong commitment to and top
leadership support for addressing problems, the capacity to do so, a
corrective action plan, and demonstrated progress in implementing
corrective measures.

The next section discusses how we applied our criteria in determining what
areas to remove and to add since our last update in January 2003.

                       Page 7 GAO-05-207 High-Risk Update

                         High-Risk Designations Removed

For this 2005 high-risk update, we determined that three high-risk areas
warranted removal from the list. They are the Department of Education's
(Education) Student Financial Aid Programs, Federal Aviation
Administration (FAA) Financial Management, and the Department of
Agriculture's (USDA) Forest Service Financial Management. We will,
however, continue to monitor these programs, as appropriate, to ensure
that the improvements we have noted are sustained.

Student Financial Aid Programs

In 1990, we designated student financial aid programs as high risk. Since
then, in previous high-risk updates, we reported various problems,
including poor financial management and weak internal controls, fragmented
and inefficient information systems, and inadequate attention to program
integrity as evidenced by high default rates and the numbers of ineligible
students participating in the programs. In 1998, the Congress established
Education's Office of Federal Student Aid (FSA) as the government's first
performance-based organization, thus giving it greater flexibility to
better address long-standing management weaknesses with student aid
programs. In 2001, Education created a team of senior managers dedicated
to addressing key financial and management problems throughout the agency,
and in 2002, the Secretary of Education made removal from GAO's high-risk
list a specific goal and listed it as a performance measure in Education's
strategic plan. We reported in 2003 that Education had made important
progress, but that it was too early to determine whether improvements
would be sustained and that additional steps needed to be taken in several
areas.

Since 2003, as discussed below, Education has sustained improvements in
the financial management of student financial aid programs and taken
additional steps to address our concerns about systems integration,
reporting on defaulted loans, and human capital management. Furthermore,
the agency has met many of our criteria for removing the high-risk
designation. Education has demonstrated a strong commitment to addressing
risks; developed and implemented corrective action plans; and, through its
annual planning and reporting processes, monitored the effectiveness and
sustainability of its corrective measures. Thus, while FSA needs to
continue its progress and take additional steps to fully address some of
our recommendations, we are removing the high-risk designation from
student financial aid programs.

FSA has sustained improvements to address its financial management and
internal control weaknesses. FSA received an unqualified, or "clean,"

                       Page 8 GAO-05-207 High-Risk Update

High-Risk Designations Removed

opinion on its financial statements for fiscal years 2002, 2003, and 2004.
In addition, the auditors indicated progress in addressing previously
identified internal control weaknesses, with no material weaknesses1
reported in FSA's fiscal year 2003 and 2004 audits. However, the auditors
reported that FSA should continue to further strengthen these internal
controls, which are related to the calculation and reporting of the loan
liability activity and subsidy estimates as well as its information
systems controls. FSA has also established processes to address several
previously reported internal control weaknesses that made FSA vulnerable
to improper payments in its grant and loan programs. For example, FSA has
taken steps to better ensure that grants are not awarded to ineligible
students and has implemented a process to identify and investigate schools
for possible fraudulent activities or eligibility-related violations.
Further, FSA addressed concerns we raised about students who were
underreporting family income, by working with the Office of Management and
Budget and the Department of the Treasury to draft legislation that would
permit use of tax information to verify income reported on student aid
applications.

FSA has taken further actions toward integrating its many disparate
information systems. FSA has developed an integration strategy that
focuses on achieving a seamless information exchange environment whereby
users-students, educational institutions, and lenders-would benefit from
simplified access to the agency's financial aid processes and more
consistent and accurate data across its programs. FSA also has made
progress toward establishing an enterprise architecture for guiding its
systems integration efforts and has begun three efforts for reengineering
its information-processing environment, which would consolidate and
integrate most of its systems and move it closer to a seamless information
exchange environment.

FSA also included action steps for achieving default management goals in
its annual plan and has taken steps to help reduce the student loan
default rate. In 2003, FSA created a work group that identified over 60
default prevention and management initiatives and established a new
organizational unit to focus on mitigating and reducing the risk of loss
to

1 A material weakness is a condition in which the design or operation of
one or more of the internal control components does not reduce to a
relatively low level the risk that errors, fraud, or noncompliance in
amounts that would be material to the financial statements may occur and
not be detected promptly by employees in the normal course of performing
their duties.

       Page 9 GAO-05-207 High-Risk Update High-Risk Designations Removed

the taxpayer from student obligations. FSA added information to its
exitcounseling guide to help increase borrowers' awareness of the benefits
of repaying their loans through electronic debiting accounts and
prepayment options. In 2003, FSA reported a cohort default rate of 5.4
percent for 2001, and defaulted loans as a percentage of total outstanding
loans declined from 9.4 percent in 2001 to 7.6 percent in 2003.

FSA is taking steps to address its human capital challenges. It developed
a comprehensive human capital strategy that includes many of the practices
of leading organizations and has addressed many of the issues we
previously raised. For example, FSA identified challenges that it will
likely face in coming years, such as likely retirements, and discussed
recognized weaknesses, such as the need to develop the skills of staff and
maintain the focus of the agency's leadership on human capital issues. FSA
has also prepared a succession plan that addresses some of our concerns
about the pending retirement of senior employees in key positions across
the agency. Additionally, FSA has established several approaches to
support staff development by revising its Skills Catalog, which should
enable staff to independently plan their professional development;
introducing online learning tools; offering a wide variety of internal
courses; and providing funds for external courses.

FAA Financial Management

We first designated FAA financial management as high risk in 1999 because
the agency lacked accountability for billions of dollars in assets and
expenditures due to serious weaknesses in its financial reporting,
property, and cost accounting systems. These problems continued through
fiscal year 2001, when FAA's financial management system required 850
adjustments totaling $41 billion in order to prepare FAA's annual
financial statements. In addition, at that time, FAA could not accurately
and routinely account for property totaling a reported $11.7 billion, and
lacked the cost information necessary for decision making as well as to
adequately account for its activities and major projects, such as the air
traffic control modernization program. Also, while FAA received an
unqualified audit opinion on its fiscal year 2001 financial statements,
the auditor's report cited a material internal control weakness related to
FAA's lack of accountability for its property and several other internal
control weaknesses related to financial management issues.

At the time of our January 2003 high-risk report, FAA had made significant
progress in addressing its financial management weaknesses, most
importantly through ongoing efforts to develop a new financial

                      Page 10 GAO-05-207 High-Risk Update

High-Risk Designations Removed

management system called Delphi, including an integrated property
accounting system, as well as initiatives to develop a new cost accounting
system. However, these new systems were still under development and not
yet operational. Therefore, it had yet to be seen whether the new systems
would resolve the long-standing financial management issues that had
resulted in our designation of FAA financial management as high risk. As a
result, we retained FAA financial management as a high-risk area, while
noting that significant progress was being made.

FAA management has continued to make progress since our January 2003
high-risk report. Subsequent auditors' reports on FAA's financial
statements for fiscal years 2002 and 2003 were unqualified, but continued
to cite internal control weaknesses, although less severe than in prior
years, related to FAA's then existing financial management systems. In
fiscal year 2004, FAA implemented its new Delphi general ledger system,
including an integrated property accounting system. FAA management was
able to prepare financial statements for the fiscal year ended September
30, 2004, using these new systems, and FAA's auditors gave FAA an
unqualified opinion on these financial statements. While the auditors
reported several internal control weaknesses related to the implementation
of the new financial management systems, none of these were considered to
be material weaknesses, and FAA management, in responding to the auditor's
report, indicated their full commitment to addressing these issues.

While the cost accounting system is still under development, progress has
been made. The cost accounting interface with Delphi was completed in
fiscal year 2004, and the labor distribution interface is expected to be
completed in fiscal year 2005. For the first time, some cost accounting
data, while not available on a monthly basis, was available shortly after
the fiscal year end for the 12 months ended September 30, 2004. FAA
management has demonstrated its commitment to the full implementation of
this system, devoting significant planning and resources to its completion
and the monitoring of its implementation progress.

While it is important that FAA management continue to place a high
priority on the cost system and, more importantly, ultimately to use cost
information routinely in FAA decision making, FAA's progress in improving
financial management overall since our January 2003 high-risk update has
been sufficient for us to remove the high-risk designation for FAA
financial management.

       Page 11 GAO-05-207 High-Risk Update High-Risk Designations Removed

Forest Service Financial Management

We first designated USDA's Forest Service financial management as high
risk in 1999 because the agency lacked accountability over billions of
dollars in its two major assets-fund balance with the Department of the
Treasury (Treasury) and property, plant, and equipment. Since the Forest
Service is a major component of USDA, the lack of accountability over
these two major assets contributed to disclaimers of opinions on USDA's
consolidated financial statements. In addition, the Forest Service
continued to have material weaknesses in its accounting and reporting of
accounts receivable and accounts payable. This precluded the agency from
knowing costs it had incurred and amounts owed to others throughout the
year. These problems were further exacerbated by problems with the Forest
Service's partial implementation of its new financial accounting system.
This system was unable to produce certain critical budgetary and
accounting reports that track obligations, assets, liabilities, revenues,
and costs. Thus, these financial reporting weaknesses hampered
management's ability to effectively manage operations, monitor revenue and
spending levels, and make informed decisions about future funding needs.

The Forest Service's long-standing financial management deficiencies were
also evident in the repeated negative opinions on its financial
statements, including adverse opinions in fiscal years 1991, 1992, and
1995. Due to the severity of its accounting and reporting deficiencies,
the Forest Service did not prepare financial statements for fiscal year
1996, but chose instead to focus on trying to resolve these problems.
However, the Forest Service's pervasive material internal control
weaknesses continued to plague the agency. In our 2001 high-risk update,
we reported that the USDA Office of Inspector General (IG) was unable to
determine the accuracy of the Forest Service's reported $3.1 billion in
net property, plant, and equipment, which represented 51 percent of the
agency's assets. We also reported that the IG was unable to verify fund
balances with Treasury totaling $2.6 billion because the reconciliation of
agency records with Treasury records had not been completed. Because of
the severity of these and other deficiencies, the IG disclaimed from
issuing opinions on the Forest Service's financial statements for fiscal
years 1997 through 2001. In addition, we noted that the Forest Service's
autonomous field structure hampered efforts to correct these accounting
and financial reporting deficiencies. We also reported that the Forest
Service had implemented its new accounting system agencywide. However, the
system depended on and received data from feeder systems that were poorly
documented, operationally complex, deficient in appropriate control
processes, and costly to maintain.

                      Page 12 GAO-05-207 High-Risk Update

High-Risk Designations Removed

In our 2003 high-risk report, while we highlighted that the Forest Service
continued to have long-standing material control weaknesses, including
weaknesses in its fund balance with Treasury and in property, plant, and
equipment, we reported that the Forest Service had made progress toward
achieving accountability by receiving its first unqualified opinion on its
fiscal year 2002 financial statements. Although the Forest Service had
reached an important milestone, it had not yet proved it could sustain
this outcome, and had not reached the end goal of routinely producing
timely, accurate, and useful financial information. As a result, we
retained Forest Service financial management as a high-risk area.

In the past 2 years, the Forest Service has made additional progress,
especially with respect to addressing several long-standing material
internal control deficiencies. Based on our criteria for removing a
high-risk designation, which includes a demonstrated strong commitment,
corrective action plan, and progress in addressing deficiencies, we
believe the Forest Service's overall improvement in financial management
since our January 2003 high-risk update has been sufficient for us to
remove Forest Service financial management from the high-risk list at this
time. The Forest Service has resolved material deficiencies related to its
fund balance with Treasury and in property, plant, and equipment, thus
increasing accountability over its billions of dollars in assets, and USDA
and the Forest Service received unqualified opinions on their fiscal year
2004 financial statements.

This does not mean that the Forest Service has no remaining challenges.
For example, while we recognized its clean opinion for fiscal year 2002 in
our last update, subsequently, in fiscal year 2003, these financial
statements had to be restated to correct material errors. The Forest
Service also received a clean opinion for fiscal year 2003, but these
financial statements had to be restated in fiscal year 2004 to again
correct material misstatements. Frequent restatements to correct errors
can undermine public trust and confidence in both the entity and all
responsible parties. Further, the Forest Service continues to have
material internal control weaknesses related to financial reporting and
information technology security, and its financial management systems do
not yet substantially comply with the Federal Financial Management
Improvement Act of 1996.

However, the Forest Service has demonstrated a strong commitment to
efforts under way or planned, that, if effectively implemented, should
help to resolve many of its remaining financial management problems and
move it toward sustainable financial management business processes. These

                      Page 13 GAO-05-207 High-Risk Update

High-Risk Designations Removed

efforts are designed to address internal control and noncompliance issues
identified in audit reports, as well as organizational issues. For
example, during fiscal year 2004, the Forest Service began reengineering
and consolidating its finance, accounting, and budget processes. We
believe these efforts, if implemented effectively, will provide stronger
financial management, sustain positive audit results, and ensure
compliance with federal financial reporting standards. Yet, it is
important that USDA and Forest Service officials continue to place a high
priority on addressing its remaining financial management problems, and we
will continue to monitor their progress.

                      Page 14 GAO-05-207 High-Risk Update

New High-Risk Areas

GAO's use of the high-risk designation to draw attention to the challenges
associated with the economy, efficiency, and effectiveness of government
programs and operations in need of broad-based transformation has led to
important progress. We will also continue to identify high-risk areas
based on the more traditional focus on fraud, waste, abuse, and
mismanagement. Our focus will continue to be on identifying the root
causes behind vulnerabilities, as well as actions needed on the part of
the agencies involved and, if appropriate, the Congress.

For 2005, we have designated the following four new areas as high risk:
Establishing Appropriate and Effective Information-Sharing Mechanisms to
Improve Homeland Security, Department of Defense (DOD) Approach to
Business Transformation, DOD Personnel Security Clearance Program, and
Management of Interagency Contracting.

Establishing Appropriate and Effective Information-Sharing Mechanisms to
Improve Homeland Security

Information is a crucial tool in fighting terrorism, and the timely
dissemination of that information to the appropriate government agency is
absolutely critical to maintaining the security of our nation. The ability
to share security-related information can unify the efforts of federal,
state, and local government agencies, as well as the private sector as
appropriate, in preventing or minimizing terrorist attacks.

The 9/11 terrorist attacks heightened the need for comprehensive
information sharing. Prior to that time, the overall management of
information-sharing activities among government agencies and between the
public and private sectors lacked priority, proper organization,
coordination, and facilitation. As a result, the existing national
mechanisms for collecting threat information, conducting risk analyses,
and disseminating warnings were at an inadequate state of development for
protecting the United States from coordinated terrorist attacks.

Information sharing for securing the homeland is a governmentwide effort
involving multiple federal agencies, including but not limited to the
Office of Management and Budget (OMB); the Departments of Homeland
Security (DHS), Justice, State, and Defense; and the Central Intelligence
Agency. Over the past several years, GAO has identified potential
informationsharing barriers, critical success factors, and other key
management issues that should be considered, including the processes,
procedures, and systems to facilitate information sharing among and
between government entities and the private sector.

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Establishing an effective two-way exchange of information to detect,
prevent, and mitigate potential terrorist attacks requires an
extraordinary level of cooperation and perseverance among federal, state,
and local governments and the private sector to establish timely,
effective, and useful communications. Since 1998, GAO has recommended the
development of a comprehensive plan for information sharing to support
critical infrastructure protection efforts. The key components of this
recommendation can be applied to broader homeland security and
intelligence-sharing efforts, including clearly delineating the roles and
responsibilities of federal and nonfederal entities, defining interim
objectives and milestones, setting time frames for achieving objectives,
and establishing performance measures.

In the absence of comprehensive information-sharing plans, many aspects of
homeland security information sharing remain ineffective and fragmented.
Accordingly, we are designating information sharing for homeland security
as a governmentwide high-risk area because this area, while receiving
increased attention, still faces significant challenges.

Since 2002, legislation,1 various national strategies, and executive
orders have specified actions to improve information sharing for homeland
security.

o 	The Homeland Security Act of 2002 (P.L. 107-296) included the following
specific mechanisms intended to improve two-way information sharing:

o 	The Critical Infrastructure Information Act of 2002 required the
establishment of uniform procedures for the receipt, care, and storage of
critical infrastructure information that is voluntarily submitted to the
federal government. In February 2004, DHS issued an interim rule for
comment.

o 	The Homeland Security Information Sharing Act required procedures for
facilitating homeland security information sharing and established
authorities to share different types of information, such as grand jury
information; electronic, wire, and oral interception information; and
foreign intelligence information. In July 2003, the President assigned
these functions to the Secretary of Homeland

1 The Homeland Security Act of 2002 (P.L. 107-296); the Intelligence
Reform and Terrorism Prevention Act of 2004 (P.L. 108-458).

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New High-Risk Areas

Security,2 but no deadline was established for developing
information-sharing procedures.

o 	In 2002 and 2003, the National Strategy for Homeland Security and its
implementing strategies, the National Strategy to Secure Cyberspace and
the National Strategy for the Physical Protection of Critical
Infrastructures and Key Assets, also highlighted federal actions to
promote two-way information sharing mechanisms.3

o 	In September 2003, Homeland Security Presidential Directive (HSPD) 6
called for the establishment of a terrorist screening center to develop,
integrate, and maintain thorough, accurate, and current information about
individuals known or appropriately suspected to be or to have been engaged
in conduct constituting, in preparation for, in aid of, or related to
terrorism.4

o 	Issued in December 2003, HSPD 7 required that DHS (1) produce a
national infrastructure protection plan summarizing initiatives for
sharing information, including providing threat warning data to state and
local governments and the private sector; and (2) establish appropriate
systems, mechanisms, and procedures to share homeland security information
with other federal departments and agencies, state and local governments,
and the private sector in a timely manner.5

o  In August 2004, the President issued executive orders

o 	strengthening terrorism information sharing by (1) requiring
establishment of common standards for the sharing of terrorism information
within and among the intelligence and counterterrorism communities and
appropriate authorities of state and local

2 Executive Order 13311: Homeland Security Information Sharing
(Washington, D.C.: July 29, 2003).

3 National Strategy for Homeland Security, July 2002; National Strategy to
Secure Cyberspace, February 2003; and National Strategy for the Physical
Protection of Critical Infrastructures and Key Assets, February 2003.

4 Homeland Security Presidential Directive 6, Integration and Use of
Screening Information (Washington, D.C.: Sept. 16, 2003).

5 Homeland Security Presidential Directive 7, Critical Infrastructure
Identification, Prioritization, and Protection (Washington, D.C.: Dec. 17,
2003).

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governments and (2) establishing a council chaired by OMB to plan for and
oversee the establishment of automated terrorism information sharing among
appropriate agencies6 and

o 	establishing a National Counterterrorism Center to serve as the primary
organization in the federal government for analyzing and integrating
intelligence possessed or acquired by the United States pertaining to
terrorism and counterterrorism.7

o 	In December 2004, the Intelligence Reform and Terrorism Prevention Act
of 2004 (P.L. 108-458) required the establishment of (1) an
information-sharing environment (ISE) as a means of facilitating the
exchange of terrorism information among appropriate federal, state, local,
and tribal entities, and the private sector; and (2) an informationsharing
council to support the President and the ISE program manager with advice
on developing policies, procedures, guidelines, roles, and standards
necessary to implement and maintain the ISE.

In addition, federal agencies have taken steps to expand the mechanisms
available for sharing information with and among key stakeholders.

o 	The Federal Bureau of Investigation (FBI) has acted to enhance its
information sharing with state and local law enforcement officials, such
as providing guidance and additional staffing. It has more than doubled
the number of its Joint Terrorism Taskforces (JTTF), from 35 prior to the
September 11 attacks to 84 as of July 2004, and state and local law
enforcement officials' participation on these task forces has also
increased. The FBI has at least one JTTF in each of its 56 field locations
and plans to expand that number to 100 JTTFs. The FBI also circulates
declassified intelligence information through a weekly bulletin and
provides threat information to state and local law enforcement officials
via various database networks.

o 	In September 2004, we reported that 9 federal agencies identified 34
major networks supporting homeland security functions-32 operational and 2
in development. For the networks for which cost

6 Executive Order 13356, Strengthening the Sharing of Terrorism
Information to Protect Americans (Washington, D.C.: Aug. 27, 2004).

7 Executive Order 13354, National Counterterrorism Center (Washington,
D.C.: Aug. 27, 2004).

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estimates were available, the cost totaled approximately $1 billion per
year for fiscal years 2003 and 2004. Among the networks identified, DHS's
Homeland Secure Data Network appears to be a significant initiative for
future sharing of classified homeland security information among civilian
agencies and DOD.

The 9/11 Commission recognized that information sharing must be "guided by
a set of practical policy guidelines that simultaneously empower and
constrain officials, telling them clearly what is and is not permitted."8
While the wide range of executive and legislative branch actions is
encouraging, significant challenges remain in developing the required
detailed policies, procedures, and plans for sharing homeland
security-related information. For example, DHS had not developed a plan
detailing how it will manage its information-sharing responsibilities and
relationships, including consideration of appropriate incentives for
nonfederal entities to increase information sharing with the federal
government, expand participation, and perform other specific tasks such as
protecting critical infrastructure.9 HSPD 7 required that DHS develop such
a plan by December 2004, however the plan remains under development.

The absence of such plans is exacerbated by the lack of established
processes and procedures for disseminating homeland security information
to the private sector. For example, without clear processes and procedures
for rapidly sharing appropriate information, the ability of private sector
entities to effectively design facility security systems and protocols can
be impeded. In addition, the lack of sharing procedures can also limit the
federal government's accurate assessment of nonfederal facilities'
vulnerability to terrorist attacks.

Detailed plans are essential. For example, DHS has developed an initial
version of an enterprise architecture to assist its efforts to integrate
and share information among and between federal agencies and other
entities; version 1.0 of its architecture does not, however, include many
of the 34 networks that we identified as supporting homeland security
information sharing.

8 National Commission on Terrorist Attacks, The 9/11 Commission Report:
Final Report of the National Commission on Terrorist Attacks upon the
United States (Washington, D.C.: Government Printing Office, July 22,
2004).

9 GAO, Critical Infrastructure Protection: Improving Information Sharing
with Infrastructure Sectors, GAO-04-780 (Washington, D.C.: July 9, 2004).

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Improving the standardization and consolidation of data can also promote
better sharing. For example, in 2003 we found that goals, objectives,
roles, responsibilities, and mechanisms for information sharing had not
been consistently defined by the 9 federal agencies that maintain 12 key
terrorist and criminal watch list systems. As a result, efforts to
standardize and consolidate appropriate watch list data would be impeded
by the existence of overlapping sets of data, inconsistent agency policies
and procedures for the sharing of those data, and technical
incompatibilities among the various watch list information systems. In
addition, 2004 reports from the inspectors general at DHS and the
Department of Justice highlight the challenges and slow pace of
integrating and sharing information between fingerprint databases.10

We have made numerous recommendations related to information sharing,
particularly as they relate to fulfilling federal critical infrastructure
protection responsibilities.11 For example, we have reported on the
practices of organizations that successfully share sensitive or
time-critical information, including establishing trust relationships,
developing information-sharing standards and protocols, establishing
secure communications mechanisms, and disseminating sensitive information
appropriately. Federal agencies have concurred with our recommendations
that they develop appropriate strategies to address the many potential
barriers to information sharing. However, many federal efforts remain in
the planning or early implementation stages.

A great deal of work remains to effectively implement the many actions
called for to improve homeland security information sharing, including
establishing clear goals, objectives, and expectations for the many
participants in information-sharing efforts; and consolidating,
standardizing, and enhancing federal structures, policies, and
capabilities for the analysis and dissemination of information.

10 U.S. Department of Homeland Security, Office of Inspector General,
Major Management Challenges Facing the Department of Homeland Security,
OIG-05-06 (Washington D.C.: December 2004); and U.S. Department of
Justice, Office of Inspector General, Semiannual Report to the Congress:
Top Management Challenges (Washington, D.C.: Nov. 22, 2003).

11 GAO, Homeland Security: Information Sharing Responsibilities,
Challenges, and Key Management Issues, GAO-03-1165T (Washington, D.C.:
Sept. 17, 2003); and Homeland Security: Information-Sharing
Responsibilities, Challenges, and Key Management Issues, GAO-03-715T
(Washington, D.C.: May 8, 2003).

            Page 20 GAO-05-207 High-Risk Update New High-Risk Areas

DOD Approach to Business Transformation

DOD spends billions of dollars each year to sustain key business
operations that support our forces, including systems and processes
related to acquisition and contract management, financial management,
supply chain management, business systems modernization, and support
infrastructure management-all of which appear individually on GAO's
high-risk list. Recent and ongoing military operations in Afghanistan and
Iraq and new homeland defense missions have led to newer and higher
demands on our forces in a time of growing fiscal challenges for our
nation. In an effort to better manage DOD's resources, the Secretary of
Defense has appropriately placed a high priority on transforming force
capabilities and key business processes.

For years, GAO has reported on inefficiencies and the lack of adequate
transparency and appropriate accountability across DOD's major business
areas, resulting in billions of dollars of wasted resources annually.
Although the Secretary of Defense and senior leaders have shown commitment
to business transformation, as evidenced by individual key initiatives
related to acquisition reform, business modernization, and financial
management, among others, little tangible evidence of actual improvement
has been seen in DOD's business operations to date. Improvements have
generally been limited to specific business process areas, such as DOD's
purchase card program, and have resulted in the incorporation of many key
elements of reform, such as increased management oversight and monitoring
and results-oriented performance measures. However, DOD has not taken the
steps it needs to take to achieve and sustain business reform on a broad,
strategic, departmentwide and integrated basis. Among other things, it has
not established clear and specific management responsibility,
accountability, and control over overall business transformation-related
activities and applicable resources. In addition, DOD has not developed a
clear strategic and integrated plan for business transformation with
specific goals, measures, and accountability mechanisms to monitor
progress, or a well-defined blueprint, commonly called an enterprise
architecture, to guide and constrain implementation of such a plan. For
these reasons, GAO, for the first time, is designating DOD's lack of an
integrated strategic planning approach to business transformation as high
risk.

DOD's current and historical approach to business transformation has not
proven effective in achieving meaningful and sustainable progress in a
timely manner. As a result, change is necessary in order to expedite the
effort and increase the likelihood of success. For DOD to successfully

            Page 21 GAO-05-207 High-Risk Update New High-Risk Areas

transform its business operations, it will need a comprehensive and
integrated business transformation plan; people with needed skills,
knowledge, experience, responsibility, and authority to implement the
plan; an effective process and related tools; and results-oriented
performance measures that link institutional, unit, and individual
performance goals and expectations to promote accountability for results.
Over the last 3 years, GAO has made several recommendations that, if
implemented effectively, could help DOD move forward in establishing the
means to successfully address the challenges it faces in transforming its
business operations. For example, GAO believes that DOD needs a full-time
chief management officer (CMO) position, created through legislation, with
responsibility and authority for DOD's overall business transformation
efforts. This is a "good government" matter that should be addressed in a
professional and nonpartisan manner. The CMO must be a person with
significant authority and experience who would report directly to the
Secretary of Defense. Given the nature and complexity of the overall
business transformation effort, and the need for sustained attention over
a significant period of time, this position should be a term appointment
(e.g., 7 years) and the person should be subject to a performance
contract. DOD has agreed with many of our recommendations and launched
efforts intended to implement many of them, but progress to date has been
slow.

DOD Personnel Security Clearance Program

Delays in completing hundreds of thousands of background investigations
and adjudications (a review of investigative information to determine
eligibility for a security clearance) have led us to add the DOD personnel
security clearance program to our 2005 high-risk list. Personnel security
clearances allow individuals to gain access to classified information
that, in some cases, could reasonably be expected to cause exceptionally
grave damage to national defense or foreign relations through unauthorized
disclosure. Worldwide deployments, contact with sensitive equipment, and
other security requirements have resulted in DOD having approximately 2
million active clearances. Problems with DOD's personnel security
clearance process can have repercussions throughout the government because
DOD conducts personnel security investigations and adjudications for
industry personnel from 22 other federal agencies, in addition to
performing such functions for its own service members, federal civilian
employees, and industry personnel. While GAO's work on the clearance
process has focused on DOD, clearance delays in other federal agencies
suggest that similar impediments and their effects may extend beyond DOD.

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Since at least the 1990s, GAO has documented problems with DOD's personnel
security clearance process, particularly problems related to backlogs and
the resulting delays in determining clearance eligibility. Since fiscal
year 2000, DOD has declared its personnel security clearance
investigations program to be a systemic weakness-a weakness that affects
more than one DOD component and may jeopardize the department's
operations-under the Federal Managers' Financial Integrity Act of 1982. An
October 2002 House Committee on Government Reform report also recommended
including DOD's adjudicative process as a material weakness. As of
September 30, 2003 (the most recent data available), DOD could not
estimate the full size of its backlog, but we identified over 350,000
cases exceeding established time frames for determining eligibility.

The negative effects of delays in determining security clearance
eligibility are serious and vary depending on whether the clearance is
being renewed or granted to an individual for the first time. Delays in
renewing previously issued clearances can lead to heightened risk of
national security breaches because the longer individuals hold a
clearance, the more likely they are to be working with critical
information and systems. Delays in issuing initial clearances can result
in millions of dollars of additional costs to the federal government,
longer periods of time needed to complete national securityrelated
contracts, lost-opportunity costs if prospective employees decide to work
elsewhere rather than wait to get a clearance, and diminishing quality of
the work because industrial contractors may be performing government
contracts with personnel who have the necessary security clearances but
are not the most experienced and best-qualified personnel for the
positions involved.

DOD has taken steps-such as hiring more adjudicators and authorizing
overtime for adjudicative staff-to address the backlog, but a significant
shortage of trained federal and private-sector investigative personnel
presents a major obstacle to timely completion of cases. Other impediments
to eliminating the backlog include the absence of an integrated,
comprehensive management plan for addressing a wide variety of problems
identified by GAO and others. In addition to matching adjudicative staff
to workloads and working with the Office of Personnel Management (OPM) to
develop an overall management plan, DOD needs to develop and use new
methods for forecasting clearance needs and monitoring backlogs, eliminate
unnecessary limitations on reciprocity (the acceptance of a clearance and
access granted by another department, agency, or military service),
determine the feasibility of implementing

            Page 23 GAO-05-207 High-Risk Update New High-Risk Areas

initiatives that could decrease the backlog and delays, and provide better
oversight for all aspects of its personnel security clearance process.

The National Defense Authorization Act for Fiscal Year 2004 authorized the
transfer of DOD's personnel security investigative function and over 1,800
investigative employees to OPM. The transfer is scheduled to take place in
February 2005. While the transfer would eliminate DOD's responsibility for
conducting the investigations, it would not eliminate the shortage of
trained investigative personnel needed to address the backlog. Although
DOD would retain the responsibility for adjudicating clearances, OPM would
be accountable for ensuring the investigations are completed in a timely
manner.

Management of Interagency Contracting

In recent years, federal agencies have been making a major shift in the
way they procure many goods and services. Rather than spending a great
deal of time and resources contracting for goods and services themselves,
they are making greater use of existing contracts already awarded by other
agencies. These contracts are designed to leverage the government's
aggregate buying power and provide a much-needed simplified method for
procuring commonly used goods and services. Thus, their popularity is
gaining quickly. The General Services Administration (GSA) alone, for
example, has seen a nearly tenfold increase in interagency contract sales
since 1992, pushing the total sales mark up to $32 billion (see fig. 1).
Other agencies, such as the Department of the Treasury and the National
Institutes of Health, also sponsor interagency contracts.

            Page 24 GAO-05-207 High-Risk Update New High-Risk Areas

Figure 1: Multiple Award Schedule Sales, Fiscal Years 1992 through 2004

Note: Dollars amounts are then-year dollars.

These contract vehicles offer the benefits of improved efficiency and
timeliness; however, they need to be effectively managed. If not properly
managed, a number of factors can make these interagency contract vehicles
high risk in certain circumstances: (1) they are attracting rapid growth
of taxpayer dollars; (2) they are being administered and used by some
agencies that have limited expertise with this contracting method; and (3)
they contribute to a much more complex environment in which accountability
has not always been clearly established. Use of these contracts,
therefore, demands a higher degree of business acumen and flexibility on
the part of the federal acquisition workforce than in the past. This risk
is widely recognized, and the Congress and executive branch agencies have
taken several steps to address it. However, the challenges associated with
these contracts, recent problems related to their management, and the need
to ensure that the government effectively implements measures to bolster
oversight and control so that it is well positioned to realize the value
of these contracts warrants designation of interagency contracting as a
new high-risk area.

Interagency contracts are awarded under various authorities and can take
many forms. Typically, they are used to provide agencies with commonly
used goods and services, such as office supplies or information technology
services. Agencies that award and administer interagency contracts

                      Page 25 GAO-05-207 High-Risk Update

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usually charge a fee to support their operations. These types of contracts
have allowed customer agencies to meet the demands for goods and services
at a time when they face growing workloads, declines in the acquisition
workforce, and the need for new skill sets.

Our work and that of some agency inspectors general has revealed instances
of improper use of interagency contracts. For example, we recently
reviewed contracts and task orders awarded by DOD and found some task
orders under the GSA schedules that did not satisfy legal requirements for
competition because the work was not within the scope of the underlying
contracts.12 Similarly, the inspector general for the Department of the
Interior found that task orders for interrogators and other intelligence
services in Iraq were improperly awarded under a GSA schedule contract for
information technology services.13 More broadly, the GSA inspector general
conducted a comprehensive review of the contracting activities of GSA's
Federal Technology Service (FTS), an entity that provides contracting
services for agencies across the government, and reported that millions of
dollars in fiscal year 2003 awards did not comply with laws and
regulations.14 Administration officials have acknowledged that the
management of interagency contracting needs to be improved.

Interagency contracting is being used more with regard to purchases of
services, which have increased significantly over the past several years
and now represent over half of federal contract spending. Agencies also
are buying more sophisticated or complex services, particularly in the
areas of information technology and professional and management support.
In many cases, interagency contracts provide agencies with easy access to
these services, but purchases of services require different approaches in
describing requirements, obtaining competition, and overseeing contractor
performance than purchases of goods. In this regard, we and others have
reported on the failure to follow prescribed procedures designed to ensure
fair prices when using schedule contracts to acquire services. At DOD, the

12 GAO, Rebuilding Iraq: Fiscal Year 2003 Contract Award Procedures and
Management Challenges, GAO-04-605 (Washington, D.C.: June 1, 2004).

13 U.S. Department of the Interior, Office of the Inspector General,
Review of 12 Procurements Placed Under General Services Administration
Federal Supply Schedules 70 and 871 by the National Business Center
(Washington, D.C.: 2004).

14 U.S. General Services Administration, Office of the Inspector General,
Compendium of Audits of the Federal Technology Service's Regional Client
Support Centers (Washington, D.C.: 2004).

                      Page 26 GAO-05-207 High-Risk Update

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largest customer for interagency contracts, we found that competition
requirements were waived for a significant percentage of supply schedule
orders we reviewed, frequently based on an expressed preference to retain
the services of incumbent contractors. DOD concurred with our
recommendations to develop guidance for the conditions under which waivers
of competition may be used, require documentation to support waivers, and
establish approval authority based on the value of the orders.15

There are several causes of the deficiencies we and others have found with
the use of interagency contracts, including the increasing demands on the
acquisition workforce, insufficient training, and in some cases inadequate
guidance. Two additional factors are worth noting. First, the
fee-forservice arrangement creates an incentive to increase sales volume
in order to support other programs of the agency that awards and
administers an interagency contract. This may lead to an inordinate focus
on meeting customer demands at the expense of complying with required
ordering procedures. Second, it is not always clear where the
responsibility lies for such critical functions as describing
requirements, negotiating terms, and conducting oversight. Several
parties-the requiring agency, the ordering agency, and in some cases the
contractor-are involved with these functions. But, as the number of
parties grows, so too does the need to ensure accountability.

The Congress and the administration have taken several steps to address
the challenges of interagency contracting. In 2003, the Congress sought to
improve contract oversight and execution by enacting the Services
Acquisition Reform Act. The Act created a new chief acquisition officer
position in many agencies and enhanced workforce training and recruitment.
More recently, the Congress responded to the misuse of interagency
contracting by requiring more intensive oversight of purchases under these
contracts. In July 2004, GSA launched "Get It Right," an oversight and
education program, to ensure that its largest customer, DOD, and other
federal agencies properly use GSA's interagency contracts and its
acquisition assistance services. Through this effort, GSA seeks to
demonstrate a strong commitment to customer agencies' compliance with
federal contracting regulations and, among other things, improve processes
to ensure competition, integrity, and transparency. Additionally, to
address

15 GAO, Contract Management: Guidance Needed to Promote Competition for
Defense Task Orders, GAO-04-874 (Washington, D.C.: July 30, 2004).

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workforce issues, OMB, GSA, and DOD officials have said they are
developing new skills assessments, setting standards for the acquisition
workforce, and coordinating training programs aimed at improving the
capacity of the federal acquisition workforce to properly handle the
growing and more complex workload of service acquisitions.

These recent actions are positive steps toward improving management of
interagency contracting, but, as with other areas, some of these actions
are in their early stages and others are still under development. In
addition, it is too early to tell whether all of the corrective actions
will be effectively implemented, although a recent limited review by the
GSA Inspector General found some improvement at FTS from enhanced
management controls. Our work on major management challenges indicates
that specific and targeted approaches are also needed to address
interagency contracting risks across the government. Ensuring the proper
use of interagency contracts must be viewed as a shared responsibility of
all parties involved. But this requires that specific responsibilities be
more clearly defined. In particular, to facilitate effective purchasing
through interagency contracts, and to help ensure the best value of goods
and services, agencies must clarify roles and responsibilities and adopt
clear, consistent, and enforceable policies and processes that balance the
need for customer service with the requirements of contract regulations.
Internal controls and appropriate performance measures help ensure that
policies and processes are implemented and have the desired outcomes.

In addition, to be successful, efforts to improve the contracting function
must be linked to agency strategic plans. As with other governmentwide
high-risk areas, such as human capital and information security,
effectively addressing interagency contract management challenges will
require agency management to commit the necessary time, attention, and
resources, as well as enhanced executive branch and congressional
oversight. Making these investments has the potential to improve the
government's ability to acquire high-quality goods and services in an
efficient and effective manner, resulting in reduced costs, improved
service delivery, and strengthened public trust.

                      Page 28 GAO-05-207 High-Risk Update

Emerging Areas

In addition to specific areas that GAO has designated as high risk, there
are other important broad-based challenges facing our government that are
serious and merit continuing close attention. One area of increasing
concern involves the need for the completion of comprehensive national
threat and risk assessments in a variety of areas. For example, emerging
requirements from the changing security environment, coupled with
increasingly limited fiscal resources across the federal government,
emphasize the need for agencies to adopt a sound approach to establishing
realistic goals, evaluating and setting priorities, and making difficult
resource decisions. GAO has advocated a comprehensive threat and/or risk
management approach as a framework for decision making that fully links
strategic goals to plans and budgets, assesses values and risks of various
courses of actions as a tool for setting priorities and allocating
resources, and provides for the use of performance measures to assess
outcomes. Most prominently, two federal agencies with significant national
security responsibilities-DHS and DOD-are still in the beginning stages of
adopting a risk-based strategic framework for making important resource
decisions involving billions of dollars annually. This lack of a strategic
framework for investment decisions is one of the reasons that implementing
and transforming DHS, and DOD's approach to business transformation, have
been designated as high-risk areas. At the same time, this threat/risk
assessment concept can be applied to a broad range of existing federal
government programs, functions, and activities.

The relatively new DHS, with an annual budget of over $40 billion, has not
completed risk assessments mandated by the Homeland Security Act of 2002
to set priorities to help focus its resources where most needed. In
performing its duties to protect the nation's critical infrastructure, DHS
has not made clear the link between risk assessment and resource
allocation, for example, what criteria it initially used to select assets
of national importance and the basic strategy it uses to determine which
assets warrant additional protective measures, and by how much these
measures could reduce the risk to the nation. GAO has reviewed the work of
several of DHS's component agencies that have taken some initial steps
towards risk management, but much remains to be done. DHS's Immigration
and Customs Enforcement (ICE), as a first step toward developing budget
requests and workforce plans for fiscal year 2007 and beyond, has had its
Office of Investigations field offices conduct baseline threat assessments
to help identify risks. However, performance measures to assess how well a
particular threat has been addressed were not used for workforce planning
in ICE's fiscal year 2006 budget request. DHS's Customs and Border
Protection (CBP) has taken steps to address the terrorism risks posed by

                      Page 29 GAO-05-207 High-Risk Update

Emerging Areas

oceangoing cargo containers. However, CBP has not performed a
comprehensive set of assessments vital for determining the level of risk
for oceangoing cargo containers and the types of responses necessary to
mitigate that risk. The need to use a risk management approach has been a
recurring theme in our previous work in transportation security. We
reported in 2003 that DHS's Transportation and Security Administration
(TSA) planned to adopt a risk management approach. To date, including in
our most recent work on general aviation security, we have found that TSA
has not fully integrated this approach, which includes assessments of
threat, vulnerability, and criticality, to help it prioritize its efforts.
As a result, we have recommended that TSA continue its efforts to
integrate a risk management approach into its processes.

DOD, with a budget of over $400 billion a year, exclusive of supplemental
funding, is in the process of transforming its force capabilities and
business processes. GAO has reported on limitations in DOD's strategic
planning and budgeting, including the use of overly optimistic assumptions
in estimating funding needs, often resulting in a mismatch between
programs and budgets. In its strategic plan-the September 2001 Quadrennial
Defense Review-DOD outlined a new risk management framework consisting of
four dimensions of risk-force management, operational, future challenges,
and institutional-to use in considering trade-offs among defense
objectives and resource constraints. According to DOD, these risk areas
are to form the basis for DOD's annual performance goals. They will be
used to track performance results and will be linked to planning and
resource decisions. As of December 2004, DOD was still in the process of
implementing this approach departmentwide. It also remains unclear how DOD
will use this approach to measure progress in achieving business and force
transformation.

We believe that instilling a disciplined approach to identifying and
managing risk has broad applicability across a wide range of federal
programs, operations, and functions across the federal government. This
will be a continuing focus of our work in the future. More generally, we
will also continue to monitor other management challenges identified
through our work, including those discussed in our January 2003
Performance and Accountability Series: Major Management Challenges and
Program Risks

(GAO-03-95 through GAO-03-118). While not high risk at this time, these
challenges warrant continued attention. For example, at the U.S. Census
Bureau, a number of operational and managerial challenges loom large as
the Bureau approaches its biggest enumeration challenge yet, the 2010
Census. The Census Bureau will undertake an important census test and

                      Page 30 GAO-05-207 High-Risk Update

Emerging Areas

make critical 2010 Census operational and design decisions in the coming
months-and we will continue to closely monitor these challenges to assist
the Congress in its oversight and the Bureau in its decision making.

                      Page 31 GAO-05-207 High-Risk Update

For other areas that remain on our 2005 high-risk list, there has been
important but varying levels of progress, although not yet enough progress
to remove these areas from the list. Top administration officials have
expressed their commitment to maintaining momentum in seeing that highrisk
areas receive adequate attention and oversight. Since our 2003 highrisk
report, the Office of Management and Budget (OMB) has worked closely with
a number of agencies that have high-risk issues, in many cases
establishing action plans and milestones for agencies to complete needed
actions to address areas that we have designated as high risk. Such a
concerted effort by agencies and ongoing attention by OMB are critical;
our experience over the past 15 years has shown that perseverance is
required to fully resolve high-risk areas. The Congress, too, will
continue to play an important role through its oversight and, where
appropriate, through legislative action targeted at the problems and
designed to address highrisk areas.

Examples of progress in other programs or operations that were previously
designated as high risk are discussed below and in the highlights pages
that follow this report section.

o 	Recognizing that federal agencies must transform their organizations to
meet the new challenges of the 21st century and that their most important
asset in this transformation is their people, GAO first added human
capital management as a governmentwide high-risk issue in January 2001 to
help focus attention and resources on the need for human capital reform.
Since then, the Congress and the agencies have made more progress in
revising and redesigning human capital policies, processes, and systems
than in the past quarter century. The Congress called on agencies to do a
better and faster job of hiring the right people with the right skills to
meet their critical missions, such as protecting the homeland, and gave
the agencies new flexibilities to meet this challenge. The Congress also
granted agencies, such as DOD and DHS, unprecedented flexibility to
redesign their human capital systems, including designing new
classification and compensation systems, which could serve as models for
governmentwide change. However, effectively designing and implementing any
resulting human capital systems will be of critical importance not just
for these agencies, but for overall civil service reform. As part of the
President's Management Agenda, the administration also made strategic
human capital management one of its top five priorities and established a
system for holding agencies accountable for achieving this change. Some
agencies have begun to assess their future workforce needs and implement

                      Page 32 GAO-05-207 High-Risk Update

Progress Being Made in Other High-Risk Areas

available flexibilities to meet those needs. As a result of the ongoing
significant changes in how the federal workforce is managed, there is
general recognition that there should be a framework to guide human
capital reform built on a set of beliefs that entail fundamental
principles and boundaries that include criteria and processes that
establish checks and limitations when agencies seek and implement their
authorities.

o 	The Postal Service (the Service) has made significant progress in
improving its financial situation and implementing transformation
initiatives to improve its financial viability since its transformation
efforts and long-term outlook was designated as high risk in 2001. Several
of its key achievements in the last 2 years include debt reduction of $9.3
billion, net income of $7 billion, productivity gains of 4.2 percent, the
elimination of accumulated deficits, and reductions of about 45,000 in
career employees. In addition, postal pension reform legislation was
enacted to address a projected overfunding of the Service's pension
obligation. The Congress also made progress in considering postal reform
legislation, which, although not yet enacted, was approved by House and
Senate oversight committees. However, key challenges remain, including
generating revenues to offset declines in First-Class Mail volume, which
generates revenues covering most of the Service's institutional costs;
addressing large financial liabilities and obligations; achieving cost
savings and productivity improvements, in part by restructuring its
infrastructure and workforce; and addressing human capital challenges,
such as succession planning and credible performance-based compensation
systems. Further, postal reform remains a challenge that will require
enactment of legislation by the Congress and leadership by the Service to
effectively carry out its transformation.

o 	Since January 2003, the administration has taken several key steps to
address long-standing problems in managing federal real property. First,
in an effort to provide a governmentwide focus on federal real property
issues, the President added the Federal Asset Management Initiative to the
President's Management Agenda and signed Executive Order 13327 in February
2004. Under the order, agencies are to designate a senior real property
officer to, among other things, identify and categorize owned and leased
real property managed by the agency and develop agency asset management
plans. Agencies such as DOD and the Department of Veterans Affairs (VA)
have taken other actions-DOD is preparing for a round of base realignments
and closures in 2005, and in May 2004, VA announced a wide range of asset
realignment decisions.

                      Page 33 GAO-05-207 High-Risk Update

Progress Being Made in Other High-Risk Areas

These and other efforts are positive steps, but it is too early to judge
whether the administration's focus on this area will have a lasting
impact. The underlying conditions and related obstacles that led to GAO's
high-risk designation continue to exist. Remaining obstacles include
competing stakeholder interests in real property decisions, various legal
and budget-related disincentives to optimal, businesslike, real property
decisions, and the need for better capital planning among agencies.

o 	Since GAO designated modernizing federal disability programs as a
high-risk area in 2003, the Social Security Administration (SSA) and VA
have made some progress toward improving their disability programs. A key
initiative involves SSA's proposal to improve the timeliness and accuracy
of disability decisions and to foster return to work at all stages of the
decision-making process. In addition, the Congress established a
commission to study the appropriateness of veterans' benefits. Moreover,
SSA and VA have both made some gains in timeliness in their disability
claims decisions. While these actions have yielded some progress, SSA's
and VA's disability programs still face significant challenges. For
example, despite the slowdown in workforce growth nationwide, increased
employment opportunities for persons with disabilities have been afforded
by advances in medicine and technology and the growing expectation that
people with disabilities can and do want to work. Nevertheless, federal
disability programs remain grounded in outmoded concepts that equate
medical conditions with work incapacity. In addressing these challenges,
GAO believes that SSA and VA should take the lead in examining the
fundamental causes of program problems and seek both the management and
legislative solutions needed to transform their programs so that they are
in line with the current state of science, medicine, technology, and labor
market conditions. At the same time, these agencies should continue to
develop and implement strategies for improving the accuracy, timeliness,
and consistency of disability decision making.

o 	The Department of Health and Human Services and its Centers for
Medicare & Medicaid Services (CMS) have made some progress to improve the
fiscal integrity and oversight of the Medicaid program, which was
designated high risk in 2003. For example, CMS has strengthened oversight
of state financing schemes that have inappropriately boosted the federal
share of Medicaid spending, by centralizing its review process and
conducting targeted financial management reviews of states' programs. CMS
also proposed last year

                      Page 34 GAO-05-207 High-Risk Update

Progress Being Made in Other High-Risk Areas

that Medicaid payments to government facilities be limited to their actual
costs-a recommendation that GAO earlier made to the Congress and that
remains open. The results of these actions will need to be assessed to
determine their effectiveness in improving the program's fiscal integrity,
and more action is needed before the program's high-risk designation can
be removed. For example, CMS did not take action in response to our
recommendations intended to better ensure that state Medicaid
demonstration programs, to expand coverage to certain populations, do not
increase the federal government's costs beyond what they would have been
without the demonstrations, a long-standing administration policy.

o 	The Department of Housing and Urban Development (HUD) has demonstrated
commitment to and progress in addressing weaknesses in its Single-Family
Mortgage Insurance and Rental Housing Assistance program areas.
Specifically, HUD has acted to reduce the risk of financial loss by
improving its oversight of lenders and appraisers and by increasing its
use of foreclosure prevention tools. Further, HUD has continued to
implement measures to reduce errors in rental subsidy payments and to
improve the physical condition of HUD-assisted housing. However, HUD needs
to continue strengthening the management and oversight of its
single-family mortgage insurance programs to reduce the risk of insurance
losses and its vulnerability to questionable payments for property
management services. Further, it needs to continue in its efforts to
ensure that rental housing assistance program subsidy payments are
accurate and that subsidy recipients are eligible.

o 	Since the agency's inception in March 2003, DHS leadership has provided
a foundation to maintain critical operations while undergoing
transformation. DHS has worked to protect the homeland and secure
transportation and borders, funded emergency preparedness improvements and
emerging technologies, assisted law enforcement activities against
suspected terrorists, and issued its first strategic plan. DHS has taken
initial steps to address financial management weaknesses and is acquiring
an integrated financial enterprise solution, recognized the need for and
has begun to institutionalize a strategic management framework that
addresses key information technology disciplines; and initiated strategic
human capital planning efforts and published proposed regulations for a
modern human capital management system. Concurrently, DHS is initiating
corrective actions on a broad array of programmatic challenges that
require sustained

                      Page 35 GAO-05-207 High-Risk Update

Progress Being Made in Other High-Risk Areas

effort in areas such as transportation, cargo, and border security;
tracking visitors; consolidating border security functions; updating
outmoded capabilities in the Coast Guard fleet; and balancing homeland
security with other missions, such as law enforcement and disaster
planning. DHS must now follow through on these initial actions.
Furthermore, in managing its transformation, DHS must overcome a number of
significant challenges that as yet have not been adequately addressed. For
example, annual goals and time frames are vague or missing; the capacity
to achieve them is uncertain; and performance measures and plans to
monitor, assess, and independently evaluate the effectiveness of
corrective measures are not fully developed. Also, progress in forming
effective partnerships with other governmental and private sector entities
remains challenged in several critical areas, such as improving critical
infrastructure protection and emergency preparedness. Importantly, DHS has
also not completed legislatively mandated comprehensive threat and risk
assessments to set priorities and to focus its limited resources to
mitigate the greatest risk. DHS needs sustained leadership and a
commitment to a strategy that incorporates accountability and oversight to
succeed in its multiyear transformation. Failure to effectively address
its management challenges and program risks could have serious
consequences for our national security.

                      Page 36 GAO-05-207 High-Risk Update

                          High-Risk Areas Consolidated

Collection of Unpaid Taxes and Earned Income Credit Noncompliance

We have combined our previous Collection of Unpaid Taxes and Earned Income
Credit Noncompliance high-risk areas into an area titled Enforcement of
Tax Laws. Collection of unpaid taxes was included in the first high-risk
series report in 1990, with a focus on the backlog of uncollected debts
owed by taxpayers. In 1995, we added Filing Fraud as a separate high-risk
area, narrowing the focus of that high-risk area in 2001 to Earned Income
Credit Noncompliance because of the particularly high incidence of fraud
and other forms of noncompliance in that program. We expanded our concern
about the Collection of Unpaid Taxes in our 2001 high-risk report to
include not only unpaid taxes (including tax evasion and unintentional
noncompliance) known to the Internal Revenue Service (IRS), but also the
broader enforcement issue of unpaid taxes that IRS has not detected. We
made this change because of declines in some key IRS collection actions as
well as IRS's lack of information about whether those declines had
affected voluntary compliance. Although the Congress dedicated a specific
appropriation for Earned Income Credit compliance initiatives (both to
curb noncompliance and encourage participation) in fiscal years 1998
through 2003, with the 2004 budget the Congress returned to appropriating
a single amount for IRS to allocate among its various tax law enforcement
efforts.

In recent years, the resources IRS has been able to dedicate to enforcing
the tax laws have declined, while IRS's enforcement workload-measured by
the number of taxpayer returns filed-has continually increased.
Accordingly, nearly every indicator of IRS's coverage of its enforcement
workload has declined in recent years. Although in some cases workload
coverage has increased, overall IRS's coverage of known workload is
considerably lower than it was just a few years ago. Although many suspect
that these trends have eroded taxpayers' willingness to voluntarily
comply-and survey evidence suggests this may be true-the cumulative effect
of these trends is unknown because new research into the level of taxpayer
compliance is only now being completed by IRS after a long hiatus.
Further, IRS's workload has grown ever more complex as the tax code has
grown more complex. Complexity creates a fertile ground for those
intentionally seeking to evade taxes and often trips others into
inadvertent noncompliance. IRS is challenged to administer and explain
each new provision, thus absorbing resources that otherwise might be used
to enforce the tax laws.

Concurrently, other areas of particularly serious noncompliance have
gained the attention of IRS and the Congress-such as abusive tax shelters

        Page 37 GAO-05-207 High-Risk Update High-Risk Areas Consolidated

and schemes employed by businesses and wealthy individuals that often
involve complex transactions that may span national boundaries. Given the
broad declines in IRS's enforcement workforce, IRS's decreased ability to
follow up on suspected noncompliance, the emergence of sophisticated
evasion concerns, and the unknown effect of these trends on voluntary
compliance, IRS is challenged on virtually all fronts in attempting to
ensure that taxpayers fulfill their obligations. IRS's success in
overcoming these challenges becomes ever more important in light of the
nation's large and growing fiscal pressures. Accordingly, we believe the
focus of concern on the enforcement of tax laws is not confined to any one
segment of the taxpaying population or any single tax provision. Our
designation of the enforcement of tax laws as a high-risk area embodies
this broad concern.

                              IRS Business Systems
                             Modernization and IRS
                              Financial Management

IRS has long relied on obsolete automated systems for key operational and
financial management functions, and its attempts to modernize these aging
computer systems span several decades. This long history of continuing
delays and design difficulties and their significant impact on IRS's
operations led GAO to designate IRS's systems modernization activities and
its financial management as high-risk areas in 1995. Since that time, IRS
has made progress in improving its financial management, such as enhancing
controls over hard copy tax receipts and data and budgetary activity, and
improving the accuracy of property records. Additionally, for the past 5
years, IRS has received clean audit opinions on its annual financial
statements and, for the past 3 years, has been able to achieve this within
45 days of the end of the fiscal year. However, IRS still needs to replace
its outdated financial management systems, which is part of its business
systems modernization program. Accordingly, since the resolution of IRS's
remaining most serious and intractable financial management problems
largely depends upon the success of IRS's business systems modernization
efforts, and since we have continuing concerns related to this program, we
are combining our two previous high-risk areas into one Business Systems
Modernization high-risk area.

                      Page 38 GAO-05-207 High-Risk Update

                       Highlights for Each High-Risk Area

Overall, the government continues to take high-risk problems seriously and
is making long-needed progress toward correcting them. The Congress has
also acted to address several individual high-risk areas through hearings
and legislation. Continued perseverance in addressing high-risk areas will
ultimately yield significant benefits. Lasting solutions to high-risk
problems offer the potential to save billions of dollars, dramatically
improve service to the American public, strengthen public confidence and
trust in the performance and accountability of our national government,
and ensure the ability of government to deliver on its promises.

We have prepared highlights of each of the 25 high-risk areas on our
updated list, showing (1) why the area is high risk, (2) the actions that
have been taken and that are under way to address the problem since our
last update report as well as the issues that are yet to be resolved, and
(3) what remains to be done to address the risk. These highlights are
presented on the following pages.

Finally, we have compiled lists of GAO products issued since January 2003
related to the major management challenges identified in the 2003
Performance and Accountability Series. These lists, accompanied by
narratives describing the related major management challenges, are
available on our Web site at www.gao.gov/pas/2005.

                      Page 39 GAO-05-207 High-Risk Update

Strategic Human Capital Management

The executive branch and the Congress have taken a number of steps to
address the federal government's human capital shortfalls. For example, in
2001, the President's Management Agenda identified human capital
management as a top priority, and recently the Office of Management and
Budget reported that agencies are making improvements in addressing key
human capital challenges. The Congress also sought to elevate human
capital issues within federal agencies in part by creating the Chief Human
Capital Officer positions and a Council to advise and assist agency
leaders in their human capital efforts. The Congress has provided several
agencies- most notably the Departments of Homeland Security and Defense-
authorities to design and manage their human capital systems. Effective
design and implementation of any resulting new policies and procedures is
of critical importance. The Congress also recently provided agencies
across the executive branch with additional human capital flexibilities,
such as specific hiring authorities, and the Office of Personnel
Management is working with the agencies to make the government more
competitive for top talent by speeding up the hiring process. In addition,
the Congress and the administration together have reformed the performance
management and compensation systems for senior executives to better link
the institutional, unit, and individual performance and reward systems.

While more progress in addressing human capital challenges has been made
in the last few years than in the previous 25, ample opportunities exist
for agencies to improve their strategic human capital management to
achieve results and respond to current and emerging challenges:

o  	Leadership: Agencies need sustained leadership to provide the focused
attention essential to completing multiyear transformations.

o  	Strategic Human Capital Planning: Agencies need effective strategic
workforce plans to identify and focus their human capital investments on
the long-term issues that best contribute to results.

o  	Acquiring, Developing, and Retaining Talent: Agencies need to continue
to create effective hiring processes and use flexibilities and incentives
to retain critical talent and reshape their workforces.

o  	Results-Oriented Organizational Cultures: Agencies need to reform
their performance management systems so that pay and awards are linked to
performance and organizational results.

Significant changes in how the federal workforce is managed are under way,
and, consequently, there is general recognition that there needs to be a
framework to guide human capital reform built on a set of beliefs and
boundaries. Beliefs entail the fundamental principles that should govern
all approaches to human capital reform and should not be altered or waived
by agencies seeking human capital authorities. Boundaries include the
criteria and processes that establish the checks and limitations when
agencies seek and implement human capital authorities.

Related Products

Strategic Human Capital Management

Leadership

Highlights of a GAO and National Commission on the Public Service
Implementation Initiative Forum on Human Capital: Principles, Criteria,
and Processes for Governmentwide Federal Human Capital Reform.
GAO-05-69SP. Washington, D.C.: December 1, 2004.

Intelligence Reform: Human Capital Considerations Critical to 9/11
Commission's Proposed Reforms. GAO-04-1084T. Washington, D.C.: September
14, 2004.

Human Capital: Building on the Current Momentum to Transform the Federal
Government. GAO-04-976T. Washington, D.C.: July 20, 2004.

Human Capital: Observations on Agencies' Implementation of the Chief Human
Capital Officers Act. GAO-04-800T. Washington, D.C.: May 18, 2004.

Strategic Human Capital Planning

Human Capital: Key Principles for Effective Strategic Workforce Planning.
GAO-04-39. Washington, D.C.: December 11, 2003.

Human Capital: Succession Planning and Management Is Critical Driver of
Organizational Transformation. GAO-04-127T. Washington, D.C.:
October 1, 2003.

Human Capital: Insights for U.S. Agencies from Other Countries'
Succession Planning and Management Initiatives. GAO-03-914. Washington,
D.C.: September 15, 2003.

Acquiring, Developing, and Retaining Talent

Human Capital: Increasing Agencies' Use of New Hiring Flexibilities.
GAO-04-959T. Washington, D.C.: July 13, 2004.

Human Capital: Additional Collaboration Between OPM and Agencies Is Key to
Improved Federal Hiring. GAO-04-797. Washington, D.C.: June 7, 2004.

Human Capital: A Guide for Assessing Strategic Training and Development
Efforts in the Federal Government. GAO-04-546G. Washington, D.C.: March
2004.

Results-Oriented Organizational Cultures

Human Capital: Senior Executive Performance Management Can Be
Significantly Strengthened to Achieve Results. GAO-04-614. Washington,
D.C.: May 26, 2004.

Human Capital: Implementing Pay for Performance at Selected Personnel
Demonstration Projects. GAO-04-83. Washington, D.C.: January 23, 2004.

Results-Oriented Cultures: Creating a Clear Linkage between Individual
Performance and Organizational Success. GAO-03-488. Washington, D.C.:
March 14, 2003.

See www.gao.gov for numerous speeches and presentations from the
Comptroller General on human capital challenges in general and as they
apply to specific agencies.

U.S. Postal Service Transformation Efforts and Long-Term Outlook

The Postal Service's financial viability is at risk because its business
model- which relies on mail volume growth to mitigate rate increases and
cover its costs-is not sustainable in an increasingly competitive
environment, given new and emerging technologies. Financial, operational,
governance, and human capital challenges threaten the Service's ability to
remain selfsupporting while providing affordable, high-quality, and
universal postal service. Key trends that demonstrate the need for reform
include declining mail volume, particularly for First-Class Mail; changes
in the mail mix from high-margin to lower-margin products; changing
demographics of the aging postal workforce; growing competition from
private delivery companies; and projected revenue declines while expenses
increase. The Service continues to face challenges in addressing its large
financial liabilities and obligations (e.g., retiree health obligations),
as well as in restructuring its infrastructure and workforce to become
more efficient and performance based.

First-Class Mail Volume Growth, Fiscal Years 1984 through 2004

The Service has recently cut costs and improved productivity, but it is
not clear how the Service will realign its outdated infrastructure and
modernize its workforce policies and practices to achieve additional
long-term productivity gains. The Service has stated that it is using an
evolutionary approach to transform its infrastructure and workforce.
However, little information is available about its plans for this
important effort. Many questions remain as to whether such an incremental
approach will be sufficiently comprehensive, integrated, and responsive to
the increasing pace of change in technology and competition affecting the
Service's core business. Without bold action and better communication, the
Service risks falling short of achieving the major productivity gains
needed to offset rising costs and maintain quality service and affordable
rates. Further, the Congress has not yet enacted comprehensive postal
reform legislation that addresses the Service's key structural and
systemic deficiencies, including its unfunded obligation for retiree
health benefits and the escrow requirement. Without such action, the
accessibility and affordability of postal services to the American people
is at risk, which could result in dramatic increases in postal rates or a
costly taxpayer bailout.

                                Related Products

        U.S. Postal Service Transformation Efforts and Long-Term Outlook

GAO Products

U.S. Postal Service: USPS Needs to Clearly Communicate How Postal Services
May Be Affected by Its Retail Optimization Plans. GAO-04-803. Washington,
D.C.: July 13, 2004.

Postal Service: Progress in Implementing Supply Chain Management
Initiatives. GAO-04-540. Washington, D.C.: May 17, 2004.

U.S. Postal Service: Key Reasons for Postal Reform. GAO-04-565T.
Washington, D.C.: March 23, 2004.

Need for Comprehensive Postal Reform. GAO-04-455R. Washington, D.C.:
February 6, 2004.

U.S. Postal Service: Key Elements of Comprehensive Postal Reform.
GAO-04-397T. Washington, D.C.: January 28, 2004.

Postal Pension Funding Reform: Issues Related to the Postal Service's
Proposed Use of Pension Savings. GAO-04-238. Washington, D.C.: November
26, 2003.

Postal Pension Funding Reform: Review of Military Service Funding
Proposals. GAO-04-281. Washington, D.C.: November 26, 2003.

U.S. Postal Service: Bold Action Needed to Continue Progress on Postal
Transformation. GAO-04-108T. Washington, D.C.: November 5, 2003.

Federal Real Property: Vacant and Underutilized Properties at GSA, VA, and
USPS. GAO-03-747. Washington, D.C.: August 19, 2003.

U.S. Postal Service: A Primer on Postal Worksharing. GAO-03-927.
Washington, D.C.: July 31, 2003.

U.S. Postal Service: Key Postal Transformation Issues. GAO-03-812T.
Washington, D.C.: May 29, 2003.

Review of the Office of Personnel Management's Analysis of the United
States Postal Service's Funding of Civil Service Retirement System Costs.
GAO-03-448R. Washington, D.C.: January 31, 2003.

Other Products: President's Commission on the United States Postal Service

Embracing the Future: Making the Tough Choices to Preserve Universal Mail
Service. http://www.treas.gov/offices/domestic-finance/usps/ Washington,
D.C.: July 31, 2003.

For more information on U.S. Postal Service major management challenges,
see http://www.gao.gov/pas/2005/postal.htm.

Managing Federal Real Property

The federal real property portfolio is vast and diverse-over 30 agencies
control hundreds of thousands of real property assets worldwide, including
facilities and land worth hundreds of billions of dollars. Unfortunately,
many of these assets are no longer effectively aligned with, or responsive
to, agencies' changing missions. Further, many assets are in an alarming
state of deterioration; agencies have estimated restoration and repair
needs to be in the tens of billions of dollars. Compounding these problems
are the lack of reliable governmentwide data for strategic asset
management; a heavy reliance on costly leasing, instead of ownership, to
meet new needs; and the cost and challenge of protecting these assets
against terrorism.

In February 2004, the President added the Federal Asset Management
Initiative to the President's Management Agenda and signed Executive Order
13327. The order requires senior real property officers at all executive
branch departments and agencies to, among other things, prioritize actions
needed to improve the operational and financial management of the agency's
real property inventory. A new Federal Real Property Council at the Office
of Management and Budget (OMB) has developed guiding principles for real
property asset management and is also developing performance measures, a
real property inventory database, and an agency asset management planning
process. In addition to these reform efforts, agencies such as the
Departments of Defense (DOD) and Veterans Affairs (VA) have made progress
in addressing long-standing federal real property problems. For example,
DOD is preparing for a round of base realignment and closures in 2005.
Also, in May 2004, VA announced a wide range of asset realignment
decisions.

These and other efforts are positive steps, but it is too early to judge
whether the administration's focus on this area will have a lasting
impact. The underlying conditions and related obstacles that led to GAO's
high-risk designation continue to exist. Remaining obstacles include
competing stakeholder interests in real property decisions; various legal
and budgetrelated disincentives to optimal, businesslike, real property
decisions; and the need for better capital planning among agencies.

                Examples of Vacant GSA, VA, and USPS Facilities

Related Products

Managing Federal Real Property

Homeland Security: Further Actions Needed to Coordinate Federal Agencies'
Protection Efforts and Promote Key Practices. GAO-05-49. Washington, D.C.:
November 30, 2004.

Embassy Construction: Achieving Concurrent Construction Would Help
Reduce Costs and Meet Security Goals. GAO-04-952. Washington, D.C.:
September 28, 2004.

Homeland Security: Transformation Strategy Needed to Address Challenges
Facing the Federal Protective Service. GAO-04-537. Washington, D.C.:
July 14, 2004.

U.S. Postal Service: Key Elements of Comprehensive Postal Reform.
GAO-04-397T. Washington, D.C.: January 28, 2004.

Budget Issues: Agency Implementation of Capital Planning Principles Is
Mixed. GAO-04-138. Washington, D.C.: January 16, 2004.

Embassy Construction: State Department Has Implemented Management
Reforms, but Challenges Remain. GAO-04-100. Washington, D.C.:
November 4, 2003.

Federal Real Property: Actions Needed to Address Long-standing and
Complex Problems. GAO-04-119T. Washington, D.C.: October 1, 2003.

National Park Service: Efforts Underway to Address Its Maintenance
Backlog. GAO-03-1177T. Washington, D.C: September 27, 2003.

Federal Real Property: Vacant and Underutilized Properties at GSA, VA,
and USPS. GAO-03-747. Washington, D.C.: August 19, 2003.

VA Health Care: Framework for Analyzing Capital Asset Realignment for
Enhanced Services Decisions. GAO-03-1103R. Washington, D.C.:
August 18, 2003.

Military Base Closures: Better Planning Needed for Future Reserve
Enclaves. GAO-03-723. Washington, D.C.: June 27, 2003.

Military Housing: Opportunities That Should Be Explored to Improve
Housing and Reduce Costs for Unmarried Junior Servicemembers.

GAO-03-602. Washington, D.C.: June 10, 2003.

Federal Real Property: Executive and Legislative Actions Needed to Address
Long-standing and Complex Problems. GAO-03-839T. Washington, D.C.:
June 5, 2003.

Protecting the Federal Government's Information Systems and the Nation's
Critical Infrastructures

With the enactment of the Federal Information Security Management Act of
2002 (FISMA), the Congress continued its work to improve federal
information security by permanently authorizing and strengthening key
information security requirements. The administration has also made
progress through a number of efforts, including the Office of Management
and Budget's emphasis on information security in the budget process.

However, significant information security weaknesses at federal agencies
continue to place a broad array of federal operations and assets at risk
of fraud, misuse, and disruption. Although recent reporting by these
agencies showed some improvements, GAO found that many agencies still have
not established information security programs consistent with FISMA's
overall requirement to develop, document, and implement an agencywide
information security program. For example, agencies are not consistently

o  performing periodic risk assessments,

o  developing and maintaining current security plans,

o  creating and testing contingency plans, or

o  evaluating and monitoring the effectiveness of security controls.

Federal efforts have been taken to protect our nation's critical public
and private information infrastructures. For example, federal policy
emphasizes the importance of cooperative efforts among state and local
governments and the private sector to protect these information
infrastructures, and has established specific cyber responsibilities for
the Department of Homeland Security and other federal agencies involved
with the private sector in CIP. In addition, the federal government has
led efforts to research and develop (R&D) new technologies; coordinate
responses to incidents, threats, and vulnerabilities; and develop analysis
and warnings capabilities related to critical information infrastructures.
However, this area remains high risk as the federal government continues
to face the critical challenges shown below.

Challenges to Effective Cyber Critical Infrastructure Protection

                             Challenge Description

Developing a comprehensive and coordinated national plan to facilitate CIP
that clearly delineates the roles and responsibilities of federal and
nonfederal CIP

Policy and entities, defines interim objectives and milestones, sets time
frames for achieving ~guidance objectives, and establishes performance
measures.~Trusted Developing productive relationships within the federal
government and between ~relationships the federal government and state and
local governments and the private sector.~

Improving the federal government's capabilities to analyze incident,
threat, and Analysis and vulnerability information obtained from numerous
sources and share appropriate, warning timely, and useful warnings and
other information concerning both cyber and capabilities physical threats
to federal and nonfederal entities. Information sharing Providing
appropriate incentives for nonfederal entities to increase information
incentives sharing with the federal government and enhance other CIP
efforts.

Source: GAO.

                                Related Products

    Protecting the Federal Government's Information Systems and the Nation's
                            Critical Infrastructures

Critical Infrastructure Protection: Improving Information Sharing with
Infrastructure Sectors. GAO-04-780. Washington, D.C.: July 9, 2004.

Information Security: Agencies Need to Implement Consistent Processes in
Authorizing Systems for Operation. GAO-04-376. Washington, D.C.:
June 28, 2004.

Information Security: Continued Action Needed to Improve Software Patch
Management. GAO-04-706. Washington, D.C.: June 2, 2004.

Information Security: Information System Controls at the Federal Deposit
Insurance Corporation. GAO-04-630. Washington, D.C.: May 28, 2004.

Technology Assessment: Cybersecurity for Critical Infrastructure
Protection. GAO-04-321. Washington, D.C.: May 28, 2004.

Information Security: Continued Efforts Needed to Sustain Progress in
Implementing Statutory Requirements. GAO-04-483T. Washington, D.C.:
March 16, 2004.

Critical Infrastructure Protection: Challenges and Efforts to Secure
Control
Systems. GAO-04-354. Washington, D.C.: March 15, 2004.

Information Security: Technologies to Secure Federal Systems. GAO-04-467.
Washington, D.C.: March 9, 2004.

Information Security: Further Efforts Needed to Address Serious
Weaknesses at USDA. GAO-04-154. Washington, D.C.: January 30, 2004.

Information Security: Improvements Needed in Treasury's Security
Management Program. GAO-04-77. Washington, D.C.: November 14, 2003.

Information Security: Computer Controls over Key Treasury Internet
Payment System. GAO-03-837. Washington, D.C.: July 30, 2003.

FDIC Information Security: Progress Made but Existing Weaknesses Place
Data at Risk. GAO-03-630. Washington, D.C.: June 18, 2003.

Information Security: Progress Made, but Weaknesses at the Internal
Revenue Service Continue to Pose Risks. GAO-03-44. Washington, D.C.:
May 30, 2003.

Information Security: Progress Made, but Challenges Remain to Protect
Federal Systems and the Nation's Critical Infrastructures. GAO-03-564T.
Washington, D.C.: April 8, 2003.

Critical Infrastructure Protection: Efforts of the Financial Services
Sector to
Address Cyber Threats. GAO-03-173. Washington, D.C.: January 30, 2003.

Implementing and Transforming the Department of Homeland Security

Since its inception in March 2003, DHS leadership has provided a
foundation for maintaining critical operations while undergoing
transformation. DHS has worked to protect the homeland and secure
transportation and borders, funded emergency preparedness improvements and
emerging technologies, assisted law enforcement activities against
suspected terrorists, and issued its first strategic plan. However, in
managing its transformation, DHS must overcome a number of significant
challenges that as yet have not been adequately addressed. For example,
annual goals and time frames are vague or missing, and the capacity to
achieve them is uncertain. Performance measures and plans to monitor,
assess, and independently evaluate the effectiveness of corrective
measures are not fully developed. In addition, DHS has not completed
legislatively mandated comprehensive threat and risk assessments to set
priorities and to focus its limited resources to mitigate the greatest
risk. Moreover, given these challenges, DHS needs sustained leadership and
a commitment to a strategy that incorporates accountability and oversight
to succeed in its multiyear transformation.

DHS also must follow through on its initial actions to address its
management, programmatic, and partnering challenges. DHS's high-risk
management challenges and actions include

o  	strengthening internal controls and reducing the number of material
weaknesses in its financial systems;

o  	fully establishing and institutionalizing a departmentwide strategic
framework for managing information; and

o  addressing systemic problems in human capital and acquisition systems.

Concurrently, DHS is initiating corrective actions on a broad array of
programmatic challenges that require sustained effort. These challenges
include improving transportation, cargo, and border security;
systematically tracking visitors; consolidating border security functions;
updating outmoded capabilities in the Coast Guard fleet; and balancing
homeland security with other missions, such as law enforcement and
disaster planning. Also, DHS's progress in forming effective partnerships
with other governmental and private-sector entities remains challenged in
several critical areas, such as improving critical infrastructure
protection and emergency preparedness, communication among first
responders, dissemination of timely and specific threat information, and
planning for continuity of operations in case of an adverse event.

Overall, DHS has made some progress, but significant challenges remain to
concurrently transform DHS into a more effective organization with robust
planning, management, and operations while maintaining and improving
readiness for its highly critical mission to secure the homeland.
Therefore, DHS's transformation remains high risk.

                                Related Products

       Implementing and Transforming the Department of Homeland Security

GAO Products

Homeland Security: Further Actions Needed to Coordinate Federal Agencies'
Facility Protection Efforts and Promote Key Practices. GAO-05-49.
Washington, D.C.: November 30, 2004.

Homeland Security: Effective Regional Coordination Can Enhance Emergency
Preparedness. GAO-04-1009. Washington, D.C.: September 15, 2004.

Department of Homeland Security: Formidable Information and Technology
Management Challenge Requires Institutional Approach. GAO-04-702.
Washington, D.C.: August 27, 2004.

Homeland Security: Transformation Strategy Needed to Address Challenges
Facing the Federal Protective Service. GAO-04-537. Washington D.C.: July
14, 2004.

The Chief Operating Officer Concept and its Potential Use as a Strategy to
Improve Management at the Department of Homeland Security.

GAO-04-876R. Washington, D.C.: June 28, 2004.

Human Capital: DHS Faces Challenges in Implementing Its New Personnel
EURSystem. GAO-04-790. Washington, D.C.: June 18, 2004.

Transportation Security Administration: High-Level Attention Needed to
EURStrengthen Acquisition Function. GAO-04-544. Washington, D.C.:
May 28, 2004.

Homeland Security: Summary of Challenges Faced in Targeting
OceangoingEURCargo Containers for Inspection. GAO-04-557T. Washington,
D.C.:
March 31, 2004.

Homeland Security: Risks Facing Key Border and Transportation Security
EURProgram Need to Be Addressed. GAO-04-569T. Washington, D.C.:
March 18, 2004.

Contract Management: Coast Guard's Deepwater Program Needs Increased
EURAttention to Management and Contractor Oversight. GAO-04-380.
Washington, D.C.: March 9, 2004.

Aviation Security: Challenges Exist in Stabilizing and Enhancing
EURPassenger and Baggage Screening Operations. GAO-04-440T.
Washington, D.C.: February 12, 2004.

DHS Products

Major Management Challenges Facing the Department of HomelandEURSecurity.
OIG-05-06. DHS Office of the Inspector General. Washington, D.C.:
December 2004.

For more information on Department of Homeland Security major management
challenges, see http://www.gao.gov/pas/2005/dhs.htm.

Establishing Appropriate and Effective Information-Sharing Mechanisms to
Improve Homeland Security

The 9/11 Commission Report recognized the need to improve information and
intelligence collection, sharing, and analysis for homeland security
efforts within federal and nonfederal entities. Over the past several
years, GAO has identified potential information-sharing barriers, critical
success factors, and other key management issues to facilitate information
sharing among and between government entities and the private sector.
Effective information sharing is currently hindered by the absence of key
practices, including (1) developing strategic plans; (2) establishing
processes, procedures, and mechanisms; and (3) appropriately implementing
incentives. Accordingly, GAO is designating this area as high risk.

Since 1998, GAO has recommended the development of comprehensive plans for
information sharing to support critical infrastructure protection efforts.
Key elements of GAO's recommendation can be applied to broader homeland
security and intelligence-sharing efforts, including clearly delineating
the roles and responsibilities of federal and nonfederal entities,
defining interim objectives and milestones, setting time frames, and
establishing performance metrics. Administration efforts are currently
under way to develop such plans.

Information sharing barriers among federal agencies include the existence
of overlapping sets of data, inconsistent agency policies for the sharing
of data, and technical incompatibilities that impede consolidation of
data. For example, in 2003 GAO found that these challenges hindered
consolidation of watch list data. In addition, recent reports from the
inspectors general at the departments of Homeland Security and Justice
highlight the challenges of integrating and sharing information between
fingerprint databases.

GAO also determined that the federal agencies had not established
processes and procedures for disseminating homeland security information
to the private sector. For example, according to industry officials, law
enforcement agencies did not provide the chemical manufacturing industry
with specific and accurate threat information in a well-coordinated
manner. Without this information, chemical companies cannot effectively
design facility security systems and protocols, and the federal government
cannot accurately assess the facilities' vulnerability to terrorist
attacks. Until information-sharing mechanisms are instituted, federal
agencies and private entities will be constrained in their ability to
effectively analyze incident, threat, and vulnerability information to
prevent terrorist attacks.

Finally, the federal government needs to more effectively consider the use
of public policy tools, such as grants, regulations, and tax incentives,
to encourage private-sector participation in sharing homeland security
information. Although the private sector has emphasized the need for
government funding to assist with its information-sharing efforts, the
government has not comprehensively assessed potential public policy tools
to encourage the private sector to share information.

                                Related Products

Establishing Appropriate and Effective Information-Sharing Mechanisms to Improve
                               Homeland Security

Homeland Security: Further Actions Needed to Coordinate Federal Agencies'
Facility Protection Efforts and Promote Key Practices. GAO-05-49.
Washington, D.C.: November 30, 2004.

Information Technology: Major Federal Networks That Support Homeland
Security Functions. GAO-04-375. Washington, D.C.: September 17, 2004.

9/11 Commission Report: Reorganization, Transformation, and Information
Sharing. GAO-04-1033T. Washington, D.C.: August 3, 2004.

Critical Infrastructure Protection: Improving Information Sharing with
Infrastructure Sectors. GAO-04-780. Washington, D.C.: July 9, 2004.

Critical Infrastructure Protection: Establishing Effective Information
Sharing
with Infrastructure Sectors. GAO-04-699T. Washington, D.C.: April 21,
2004.

Homeland Security: Information-Sharing Responsibilities, Challenges, and
Key
Management Issues. GAO-03-1165T. Washington, D.C.: September 17, 2003.

Homeland Security: Efforts to Improve Information Sharing Need to Be
Strengthened. GAO-03-760. Washington, D.C.: August 27, 2003.

Homeland Security: Information-Sharing Responsibilities, Challenges, and
Key
Management Issues. GAO-03-715T. Washington, D.C.: May 8, 2003.

Information Technology: Terrorist Watch Lists Should Be Consolidated to
Promote
Better Integration and Sharing. GAO-03-322. Washington, D.C.: April 15,
2003.

Homeland Security: Voluntary Initiatives Are Under Way at Chemical
Facilities,
but the Extent of Security Preparedness Is Unknown. GAO-03-439.
Washington, D.C.: March 14, 2003.

Critical Infrastructure Protection: Challenges for Selected Agencies and
Industry
Sectors. GAO-03-233. Washington, D.C.: February 28, 2003.

Critical Infrastructure Protection: Efforts of the Financial Services
Sector to
Address Cyber Threats. GAO-03-173. Washington, D.C.: January 30, 2003.

Information Sharing: Practices That Can Benefit Critical Infrastructure
Protection. GAO-02-24. Washington, D.C.: October 15, 2001.

Department of Defense Approach to Business Transformation

DOD spends billions of dollars to sustain key business operations intended
to support the warfighter, including systems and processes related to the
management of contracts, finances, the supply chain, support
infrastructure, and weapons systems acquisition. GAO has reported on
inefficiencies in DOD's business operations, such as the lack of sustained
leadership, the lack of a strategic and integrated business transformation
plan, and inadequate incentives. Moreover, the lack of adequate
transparency and accountability across DOD's major business areas results
in billions of dollars of wasted resources annually at a time of
increasing military operations and growing fiscal constraints. The
Secretary of Defense estimates that improving business operations could
save 5 percent of DOD's annual budget. Based on DOD's reported fiscal year
2004 budget, this would represent a savings of about $22 billion a year.

DOD has embarked on a series of efforts to reform its business operations,
including modernizing underlying information technology (business)
systems. However, serious inefficiencies remain. The areas of business
systems modernization; contract, financial, supply chain, and support
infrastructure management; and weapons systems acquisition remain high
risk. Because (1) DOD's business improvement initiatives and control over
resources is fragmented, (2) DOD lacks a clear strategic and integrated
business transformation plan and investment strategy, and (3) DOD has not
designated a senior management official to be responsible and accountable
for overall business reform and related resources, GAO now considers DOD's
approach to business transformation to be a high-risk area.

Business transformation requires long-term cultural change and business
process reengineering and a commitment from the executive and legislative
branches of government. Sound strategic planning is the foundation on
which to build but DOD needs clear, capable, sustained, and professional
leadership to maintain the continuity necessary for success. Such
leadership would provide the attention essential for addressing key
stewardship responsibilities-such as strategic planning, performance
management, business information management, and financial management-in
an integrated manner, while helping to facilitate transformation within
DOD.

Since 1999, GAO has recommended a comprehensive, integrated strategy and
action plan for reforming DOD's major business operations and support
activities. In 2004, GAO suggested that DOD clearly establish management
accountability for business reform. While DOD is developing an enterprise
architecture for modernizing its business processes and supporting
information technology assets, it has not assigned management
responsibility or developed a comprehensive and integrated strategy or
action plan for managing its many business improvement initiatives. Unless
they are addressed in a unified and timely fashion, DOD will continue to
see billions of dollars, which could be directed to other higher
priorities, consumed to support inefficiencies in its business functions.

                                Related Products

           Department of Defense Approach to Business Transformation

Comptroller General of the United States. Transformation Challenges.
Presented to the Defense Intelligence Agency Board of Directors.
Arlington, Va.: December 9, 2004.

Department of Defense: Further Actions Are Needed to Effectively Address
Business Management Problems and Overcome Key Business
Transformation Challenges. GAO-05-140T. Washington, D.C.:
November 17, 2004.

Department of Defense: Long-standing Problems Continue to Impede
Financial and Business Management Transformation. GAO-04-907T.
Washington, D.C.: July 7, 2004.

DOD Systems Modernization: Billions Continue to Be Invested with
Inadequate Management Oversight and Accountability. GAO-04-615.
Washington, D.C.: May 27, 2004.

DOD Business Systems Modernization: Limited Progress in Development of
Business Enterprise Architecture and Oversight of Information Technology
Investments. GAO-04-731R. Washington, D.C.: May 17, 2004.

Department of Defense: Further Actions Needed to Establish and Implement
a Framework for Successful Financial and Business Management
Transformation. GAO-04-551T. Washington, D.C.: March 23, 2004.

Comptroller General of the United States. Truth and Transparency: The
Federal Government's Financial Condition and Fiscal OutLook. Presented
before the National Press Club. Washington, D.C.: September 17, 2003.

Major Management Challenges and Program Risks: Department of Defense.
GAO-03-98. Washington, D.C.: January 1, 2003.

Defense Management: New Management Reform Program Still Evolving.
GAO-03-58. Washington, D.C.: December 12, 2002.

Defense Management: Actions Needed to Sustain Reform Initiatives and
Achieve Greater Results. GAO/NSIAD-00-72. Washington, D.C.: July 25, 2000.

Defense Reform Initiative: Organization, Status, and Challenges.
GAO/NSIAD-99-87. Washington, D.C.: April 21, 1999.

For more information on Department of Defense major management challenges,
see http://www.gao.gov/pas/2005/dod.htm.

Department of Defense Business Systems Modernization

DOD, one of the largest and most complex organizations in the world,
reported that it relies on over 4,000 systems to conduct its business
operations. These systems currently function in a stovepiped, duplicative,
and nonintegrated environment that contributes to the department's
operational problems. For years, DOD has attempted to modernize these
systems, and GAO has provided numerous recommendations to help guide
modernization efforts. For example, in 2001 GAO provided DOD with a set of
recommendations to help it develop and use an enterprise architecture
(modernization blueprint) and establish effective investment management
controls to guide and constrain how it was spending billions of dollars
annually on information technology systems. GAO also made numerous
project-specific and DOD-wide recommendations aimed at getting DOD to
follow proven best practices when it acquired systems solutions. While DOD
agreed with most of these recommendations, to date the department has made
uneven progress in addressing them.

After 3 years and over $200 million in obligations, DOD still has not
developed a business enterprise architecture containing sufficient scope
and detail to guide and constrain its departmentwide systems modernization
and business transformation. One reason for this limited progress is its
failure to adopt key architecture management best practices that GAO
recommended, such as developing plans for creating the architecture;
assigning accountability and responsibility for directing, overseeing, and
approving the architecture; and defining performance metrics for
evaluating it. Furthermore, the department still lacks an effective
investment management process for selecting and controlling ongoing and
planned business systems investments. While it has issued a policy that
assigns investment management responsibilities for business systems, it
has not yet defined the detailed procedures necessary for implementing the
policy, clearly defined the roles and responsibilities of the business
domain owners, established common investment criteria, or ensured that its
business systems are consistent with the architecture. Instead, each DOD
component continues to make its own parochial investment decisions.

Finally, DOD incorporated some, but not all, key acquisition best
practices and needed controls in its revised systems acquisition policies
and guidance. Without these controls, DOD cannot adequately ensure that
its components will appropriately follow and implement the practices
contained within the guidance. For example, GAO recently reported that two
DOD initiatives experienced operational problems, schedule delays, and
cost increases of hundreds of millions of dollars, in part because the
department failed to implement disciplined requirements management and
testing processes.

Until it implements GAO's systems modernization recommendations and
related transformation proposals, DOD will remain at risk of spending
billions of dollars on systems that do not provide needed capabilities on
time and within budget, in turn hampering its business transformation
efforts.

                                Related Products

Department of Defense Business Systems Modernization

Department of Defense: Further Actions Are Needed to Effectively Address
Business Management Problems and Overcome Key Business
Transformation Challenges. GAO-05-140T. Washington, D.C.:
November 17, 2004.

Information Technology: DOD's Acquisition Policies and Guidance Need to
Incorporate Additional Best Practices and Controls. GAO-04-722.
Washington, D.C.: July 30, 2004.

Department of Defense: Financial and Business Management
Transformation Hindered by Long-standing Problems. GAO-04-941T.
Washington, D.C.: July 8, 2004.

DOD Business Systems Modernization: Billions Continue to Be Invested
with Inadequate Management Oversight and Accountability. GAO-04-615.
Washington, D.C.: May 28, 2004.

DOD Business Systems Modernization: Limited Progress in Development of
Business Enterprise Architecture and Oversight of Information Technology
Investments. GAO-04-731R. Washington, D.C.: May 17, 2004.

Department of Defense: Further Actions Needed to Establish and Implement
a Framework for Successful Business Transformation. GAO-04-626T.
Washington, D.C.: March 31, 2004.

Department of Defense: Further Actions Needed to Establish and Implement
a Framework for Successful Financial and Business Management
Transformation. GAO-04-551T. Washington, D.C.: March 23, 2004.

DOD Business Systems Modernization: Important Progress Made to Develop
Business Enterprise Architecture, but Much Work Remains. GAO-03-1018.
Washington, D.C.: September 19, 2003.

Business Systems Modernization: Summary of GAO's Assessment of the
Department of Defense's Initial Business Enterprise Architecture.
GAO-03-877R. Washington, D.C.: July 7, 2003.

DOD Business Systems Modernization: Long-standing Management and
Oversight Weaknesses Continue to Put Investments at Risk. GAO-03-553T.
Washington, D.C.: March 31, 2003.

Information Technology: Observations on Department of Defense's Draft
Enterprise Architecture. GAO-03-571R. Washington, D.C.: March 28, 2003.

DOD Business Systems Modernization: Continued Investment in Key
Accounting Systems Needs to Be Justified. GAO-03-465. Washington, D.C.:
March 28, 2003.

DOD Business Systems Modernization: Improvements to Enterprise
Architecture Development and Implementation Efforts Needed. GAO-03-458.
Washington, D.C.: February 28, 2003.

For more information on Department of Defense major management challenges,
see http://www.gao.gov/pas/2005/dod.htm.

Department of Defense Personnel Security Clearance Program

As in the past, DOD continues to face sizeable security clearance
backlogs. As of September 2003 (the most recent data available), DOD had
roughly 270,000 investigative and 90,000 adjudicative cases that had not
been completed within the established time frames. The size of its backlog
of overdue, but not-yet-submitted reinvestigations was unknown; in 2000,
this part of the backlog amounted to 500,000 cases. Such backlogs can
increase the amount of time it takes to determine clearance eligibility.
In fiscal year 2003, for example, industry personnel needed an average of
375 days to get a clearance. Such delays increase national security risks,
delay the start of classified work, hamper employers from hiring the best
qualified workers, and increase the government's cost of national
security-related contracts.

DOD's Personnel Security Clearance Process

Several impediments have hindered DOD's ability to accurately estimate and
eliminate its clearance backlogs: (1) the large and inaccurately
forecasted number and type of new requests submitted since the terrorist
attacks of September 11, 2001; (2) insufficient investigator and
adjudicator workforces; (3) problems gaining access to state, local, and
overseas investigative information; (4) inadequate DOD program oversight
and monitoring; (5) delays in fully implementing a new adjudication
tracking system that DOD's Chief Information Officer identified as mission
critical; and (6) the lack of a comprehensive, integrated management plan
to address various obstacles. While GAO's work focused on DOD, clearance
delays in other agencies suggest that similar impediments and their
effects may extend beyond DOD.

DOD has taken positive steps toward addressing some of the impediments.
For example, DOD agencies have hired additional adjudicative staff, and
DOD is issuing interim clearances to help reduce backlogs and delays. DOD
also is consolidating two adjudication facilities and is looking at
initiatives, such as phased periodic reinvestigations for top secret
clearances, to make staff available for more productive uses. While
promising, the initiative would require a change to governmentwide
investigative standards and regulations before it could be implemented.
The National Defense Authorization Act for Fiscal Year 2004 authorized the
transfer of DOD's personnel security investigative function and over 1,800
investigative employees to the Office of Personnel Management (OPM). The
transfer is scheduled to take place in February 2005. The transfer would
eliminate DOD's responsibility for conducting the investigations, but the
change in responsibility alone will not reduce the shortages of
investigative personnel.

                                Related Products

           Department of Defense Personnel Security Clearance Program

Intelligence Reform: Human Capital Considerations Critical to 9/11
Commission's Proposed Reforms. GAO-04-1084T. Washington, D.C.: September
14, 2004.

DOD Personnel Clearances: Additional Steps Can Be Taken to Reduce Backlogs
and Delays in Determining Security Clearance Eligibility for Industry
Personnel. GAO-04-632. Washington, D.C.: May 26, 2004.

DOD Personnel Clearances: Preliminary Observations Related to Backlogs and
Delays in Determining Security Clearance Eligibility for Industry
Personnel. GAO-04-202T. Washington, D.C.: May 6, 2004.

Security Clearances: FBI Has Enhanced Its Process for State and Local Law
Enforcement Officials. GAO-04-596. Washington, D.C.: April 30, 2004.

Industrial Security: DOD Cannot Provide Adequate Assurances That Its
Oversight Ensures the Protection of Classified Information. GAO-04-332.
Washington, D.C.: March 3, 2004.

DOD Personnel Clearances: DOD Needs to Overcome Impediments to Eliminating
Backlog and Determining Its Size. GAO-04-344. Washington, D.C.: February
9, 2004.

Aviation Security: Federal Air Marshal Service Is Addressing Challenges of
Its Expanded Mission and Workforce but Additional Actions Needed.

GAO-04-242. Washington, D.C.: November 19, 2003.

For more information on Department of Defense major management challenges,
see http://www.gao.gov/pas/2005/dod.htm.

Department of Defense Support Infrastructure Management

Although it reduced the size of its military force following the end of
the Cold War, DOD did not make similar reductions in its defense support
infrastructure, which includes categories such as force installations,
central logistics, the defense health program, and central training. For
several years, DOD has been concerned about its excess infrastructure,
which affects its ability to devote more funding to weapon system
modernization and other critical needs. DOD reported that many of its
business processes and much of its infrastructure are outdated and must be
modernized. Left alone, the current organizational arrangements,
processes, and systems will continue to drain scarce resources. GAO's work
in this area has shown that DOD continues to spend a large portion of its
budget on infrastructure-nearly 44 and 42 percent, respectively, in fiscal
years 2002 and 2003.

DOD has made progress and expects to continue making improvements in its
support infrastructure management, but much work remains to be done. DOD
officials recognize that they must achieve greater efficiencies in
managing their support operations more effectively. DOD has given
highlevel emphasis to reforming its support infrastructure, including
efforts in recent years to transform its associated business processes. It
has achieved some operating efficiencies and reductions from such efforts
as base realignments and closures, consolidations, organizational and
business process reengineering, privatization, and competitive sourcing.
It has also achieved efficiencies by eliminating unneeded facilities
through such means as demolishing unneeded buildings and privatizing
housing and utilities at military facilities. In addition, DOD and the
services are currently gathering and analyzing data to support a new round
of base realignments and closures in 2005 and facilitating other changes
as a result of DOD's overseas basing study. However, much work remains for
DOD to rationalize and transform its support infrastructure to improve
operations, achieve efficiencies, and allow it to concentrate its
resources on the most critical needs. DOD's plans for the 2005 Base
Realignment and Closure round, with its emphasis on eliminating excess
capacity as well as enhancing joint capabilities and searching for
alternative crosscutting solutions for common business-oriented support
functions, represents an important step toward addressing support
infrastructure issues.

Source: GAO photographs (2003).

From left to right: World War II-era wood building at Fort Bragg, North
Carolina; choked and clogged water pipes at Pope Air Force Base, North
Carolina; and outdoor portable facilities used to supplement inadequate
indoor facilities at Quantico Marine Corps Base, Virginia.

                                Related Products

Department of Defense Support Infrastructure Management

Department of Defense: Further Actions Are Needed to Effectively Address
~Business Management Problems and Overcome Key Business ~Transformation
Challenges. GAO-05-140T. Washington, D.C.:
November 17, 2004.

Defense Infrastructure: Factors Affecting U.S. Infrastructure Costs
Overseas~and the Development of Comprehensive Master Plans. GAO-04-609.
Washington, D.C.: July 15, 2004.

Military Housing: Opportunities Exist to Better Explain Family Housing
~O&M Budget Requests and Increase Visibility Over Reprogramming of ~Funds.
GAO-04-583. Washington, D.C.: May 27, 2004.~

Military Housing: Further Improvements Needed in Requirements
~Determinations and Program Review. GAO-04-556. Washington, D.C.:
May 19, 2004.

Military Base Closures: Assessment of DOD's 2004 Report on the Need for a
~Base Realignment and Closure Round. GAO-04-760. Washington, D.C.:
May 17, 2004.

Defense Infrastructure: Issues Related to the Renovation of General and
Flag~Officer Quarters. GAO-04-555. Washington, D.C.: May 17, 2004.

Defense Management: Continuing Questionable Reliance on Commercial
~Contracts to Demilitarize Excess Ammunition When Unused, ~Environmentally
Friendly Capacity Exists at Government Facilities.
GAO-04-427R. Washington, D.C.: April 2, 2004.

Military Base Closures: Observations on Preparations for the Upcoming
~Base Realignment and Closure Round. GAO-04-558T. Washington, D.C.:
March 25, 2004.

Defense Infrastructure: Long-term Challenges in Managing the
Military~Construction Program. GAO-04-288. Washington, D.C.: February 24,
2004. ~

Defense Management: Issues in Contracting for Lodging and Temporary
~Office Space at MacDill Air Force Base. GAO-04-296. Washington, D.C.:
January 27, 2004.

Defense Infrastructure: Basing Uncertainties Necessitate Reevaluation of
~U.S. Construction Plans in South Korea. GAO-03-643. Washington, D.C.:
July 15, 2003.

Defense Infrastructure: Changes in Funding Priorities and
Management~Processes Needed to Improve Condition and Reduce Costs of Guard
and ~Reserve Facilities. GAO-03-516. Washington, D.C.: May 15, 2003.~

For more information on Department of Defense major management
challenges, see http://www.gao.gov/pas/2005/dod.htm.

Department of Defense Financial Management

DOD's senior civilian and military leaders, committed to reforming the
department's financial management operations, have taken positive steps to
begin this effort. However, to date, tangible evidence of improvement has
been seen in a few specific areas, such as internal controls related to
DOD's purchase card program. While DOD has established a goal of obtaining
a clean opinion on its financial statements by 2007, it lacks a clear and
realistic plan to make that goal a reality. DOD's continuing, substantial
financial management weaknesses adversely affect its ability to produce
auditable financial information as well as provide accurate and timely
information for management and the Congress to use in making informed
decisions.

Examples of the Impact of Financial Management Problems at DOD Business
area affected Problem identified and its impact

Military pay~Ninety-four percent of mobilized Army National Guard and
Reserve soldiers GAO investigated during recent audits had pay problems.
These problems distracted soldiers from their missions, imposed financial
hardships on their families, and had a negative impact on retention.

Travel~Seventy-two percent of the over 68,000 premium-class airline
tickets DOD purchased for fiscal years 2001 and 2002 were not properly
authorized, and 73 percent were not properly justified. Further, control
breakdowns resulted in DOD paying millions of dollars for (1) airline
tickets that were not used and not processed for refund and (2) improper
and potentially fraudulent claims made by travelers for airline tickets
they did not purchase.

Property~DOD purchased new JSLIST chem-bio suits for $200 apiece while
they were selling on the Internet for $3. In addition, thousands of
defective suits that DOD declared as excess were improperly issued to
local law enforcement agencies, which are likely to be the first
responders in a terrorist attack.

Contract Some DOD contractors have abused the federal tax system,
including potential

payments~criminal activity, with little or no consequence. As of September
2003, DOD had collected only $687,000 of unpaid federal taxes through a
mandated levy program. GAO estimated that at least $100 million could be
collected annually by effectively implementing the levy on DOD contract
payments.

Automated DOD invested $179 million on two failed automated system efforts
that were systems intended to resolve its long-standing disbursement
problems.

Source: GAO.

DOD is still in the very early stages of a departmentwide reform that will
take years to accomplish. DOD has not yet established a framework to
integrate improvement efforts in this area with related broad-based DOD
initiatives, such as human capital reform. Overhauling the financial
management and related business operations of one of the largest and most
complex organizations in the world represents a daunting challenge. Such
an overhaul of DOD's financial management operations goes far beyond
financial accounting to the very fiber of the department's wide-ranging
business operations and its management culture. As discussed previously,
GAO now considers DOD's current management approach to transforming its
entire business operations as a separate overarching high-risk area.

Related Products

Department of Defense Financial Management

Comptroller General of the United States. Transformation Challenges.
Presented to the Defense Intelligence Agency Board of Directors.
Arlington, Va.: December 9, 2004.

Department of Defense: Further Actions Are Needed to Effectively Address
Business Management Problems and Overcome Key Business
Transformation Challenges. GAO-05-140T. Washington, D.C.:
November 17, 2004.

Military Pay: Army Reserve Soldiers Mobilized to Active Duty Experienced
Significant Pay Problems. GAO-04-911. Washington, D.C.: August 20, 2004.

DOD Travel Cards: Control Weaknesses Resulted in Millions of Dollars of
Improper Payments. GAO-04-576. Washington, D.C.: June 9, 2004.

DOD Business Systems Modernization: Billions Continue to Be Invested
with Inadequate Management Oversight and Accountability. GAO-04-615.
Washington, D.C.: May 27, 2004.

DOD Business Systems Modernization: Limited Progress in Development of
Business Enterprise Architecture and Oversight of Information Technology
Investments. GAO-04-731R. Washington, D.C.: May 17, 2004.

DOD Travel Cards: Control Weaknesses Led to Millions of Dollars Wasted on
Unused Airline Tickets. GAO-04-398. Washington, D.C.: March 31, 2004.

Department of Defense: Further Actions Needed to Establish and Implement
a Framework for Successful Financial and Business Management
Transformation. GAO-04-551T. Washington, D.C.: March 23, 2004.

Financial Management: Some DOD Contractors Abuse the Federal Tax
System with Little Consequence. GAO-04-95. Washington, D.C.:
February 12, 2004.

DOD Excess Property: Risk Assessment Needed on Public Sales of
Equipment That Could Be Used to Make Biological Agents. GAO-04-15NI.
Washington, D.C.: November 19, 2003.

Military Pay: Army National Guard Personnel Mobilized to Active Duty
Experienced Significant Pay Problems. GAO-04-89. Washington, D.C.:
November 13, 2003.

Travel Cards: Internal Control Weaknesses at DOD Led to Improper Use of
First and Business Class Travel. GAO-04-88. Washington, D.C.:
October 24, 2003.

Comptroller General of the United States. Truth and Transparency: The
Federal Government's Financial Condition and Fiscal Outlook. Presented
before the National Press Club. Washington, D.C.: September 17, 2003.

For more information on Department of Defense major management challenges,
see http://www.gao.gov/pas/2005/dod.htm.

Department of Defense Supply Chain Management

DOD's supply chain management has experienced significant weaknesses in
its ability to provide efficient and effective supply support to the
warfighters. During OIF, the supply chain encountered many problems,
including backlogs of hundreds of pallets and containers at distribution
points, a $1.2 billion discrepancy in the amount of material shipped
to-and received by- Army activities, cannibalized equipment because of a
lack of spare parts, and millions of dollars spent in late fees to lease
or replace storage containers because of distribution backlogs and losses.
Moreover, military personnel pointed to shortages of such items as tires,
tank track, helicopter spare parts, and radio batteries. These problems
were due in part to poor asset visibility, insufficient theater
distribution capability, and a failure to apply lessons learned from prior
operations. In a March 2004 report, DOD found that, during OIF, gaps and
seams were evident at every transaction point in the end-to-end supply
chain-from strategic-level transportation to tacticallevel distribution.

While DOD reports show that the department currently owns about $67
billion of inventory, shortages of certain critical spare parts are
adversely affecting equipment readiness and contributing to maintenance
delays. The Defense Logistics Agency (DLA) and each of the military
services have experienced significant shortages of critical spare parts.
In many cases, these shortages contributed directly to equipment downtime,
maintenance problems, and the services' failure to meet their supply
availability goals. DOD, DLA, and the military services each lack
strategic approaches and detailed plans that could help mitigate these
critical spare parts shortages and guide their many initiatives aimed at
improving inventory management. Despite the shortages of parts, more than
half of DOD's reported inventory- about $35 billion-exceeded current
operating requirements.

DOD also lacks visibility and control over the supplies and spare parts it
owns. Currently DOD does not have the ability to provide timely or
accurate information on the location, movement, status, or identity of its
supplies. Although Total Asset Visibility has been a departmentwide goal
for over 30 years, DOD estimates that it will not achieve this visibility
until the year 2010. DOD may not meet this goal by 2010, however, unless
it overcomes three significant impediments: developing a comprehensive
plan for achieving visibility, building the necessary integration among
its many inventory management information systems, and correcting
long-standing data accuracy and reliability problems within existing
inventory management systems.

DOD, DLA, and the services have undertaken a number of initiatives to
improve and transform DOD's supply chain. Many of these initiatives were
developed in response to the logistics problems reported during OIF. While
these initiatives represent a step in the right direction, the lack of a
comprehensive, departmentwide logistics reengineering strategy to guide
their implementation may limit their overall effectiveness.

Related Products

Department of Defense Supply Chain Management

Defense Inventory: Improvements Needed in DOD's Implementation of Its
Long-term Strategy for Total Asset Visibility. GAO-05-15. Washington,
D.C.:
December 6, 2004.

Department of Defense: Further Actions Are Needed to Effectively Address
Business Management Problems and Overcome Key Business
Transformation Challenges. GAO-05-140T. Washington, D.C.:
November 17, 2004.

Defense Inventory: Navy Needs to Improve the Management over
Government-Furnished Material Shipped to Its Repair Contractors.

GAO-04-779. Washington, D.C.: August 23, 2004.

Defense Inventory: Analysis of Consumption of Inventory Exceeding Current
Operating Requirements Since September 30, 2001. GAO-04-689. Washington,
D.C.: August 2, 2004.

Foreign Military Sales: Improved Navy Controls Could Prevent Unauthorized
Shipments of Classified and Controlled Spare Parts to Foreign Countries.
GAO-04-507. Washington, D.C.: July 26, 2004.

Department of Defense: Financial and Business Management Transformation
Hindered by Long-standing Problems. GAO-04-941T. Washington, D.C.: July 8,
2004.

Department of Defense: Long-standing Problems Continue to Impede Financial
and Business Management Transformation. GAO-04-907T. Washington, D.C.:
July 7, 2004.

Defense Logistics: Preliminary Observations on the Effectiveness of
Logistics Activities during Operation Iraqi Freedom. GAO-04-305R.
Washington, D.C.: December 18, 2003.

Defense Inventory: Opportunities Exist to Improve Spare Parts Support
Aboard Deployed Navy Ships. GAO-03-887. Washington, D.C.: August 29, 2003.

Defense Inventory: Several Actions Are Needed to Further DLA's Efforts to
Mitigate Shortages of Critical Parts. GAO-03-709. Washington, D.C.: August
1, 2003.

Defense Inventory: Navy Logistics Strategy and Initiatives Need to Address
Spare Parts Shortages. GAO-03-708. Washington, D.C.: June 27, 2003.

Defense Inventory: The Department Needs a Focused Effort to Overcome
Critical Spare Parts Shortages. GAO-03-707. Washington, D.C.: June 27,
2003.

Defense Inventory: Air Force Plans and Initiatives to Mitigate Spare Parts
Shortages Need Better Implementation. GAO-03-706. Washington, D.C.: June
27, 2003.

For more information on Department of Defense major management challenges,
see http://www.gao.gov/pas/2005/dod.htm.

Department of Defense Weapon Systems Acquisition

While DOD's acquisition process has produced the best weapons in the
world, it also consistently yields undesirable consequences-cost
increases, late deliveries to the warfighter, and performance
shortfalls-in weapon system programs. Such problems were highlighted, for
example, in GAO's reviews of DOD's F/A-22 Raptor, Space-Based Infrared
System, Airborne Laser, Missile Defense, and other programs. Problems
occur because DOD's weapon programs do not capture early on the requisite
knowledge that is needed to efficiently and effectively manage program
risks. For example, programs move forward with unrealistic program cost
and schedule estimates, lack clearly defined and stable requirements, use
immature technologies in launching product development, and fail to
solidify design and manufacturing processes at appropriate junctures in
development. As a result, wants are not always distinguished from needs,
problems often surface late in the development process, and fixes tend to
be more costly than if caught earlier. When programs require more
resources than planned, the buying power of the defense dollar is reduced,
and funds are not available for other competing needs.

While weapon system acquisitions continue to remain on GAO's high-risk
list, it should be acknowledged that DOD has undertaken a number of
acquisition reforms over the past 5 years. Specifically, DOD has
restructured its acquisition policy to incorporate attributes of a
knowledge-based acquisition model and has reemphasized the discipline of
systems engineering. In addition, DOD recently introduced new policies to
strengthen its budgeting and requirements determination processes in order
to plan and manage weapon systems based on joint warfighting capabilities.
While these policy changes are positive steps, implementation in
individual programs will continue to be a challenge because of inherent
funding, management, and cultural factors that lead managers to develop
business cases for new programs that over-promise on cost, delivery, and
performance of weapon systems. The implementation challenge is even
greater when considering DOD's move toward bundling individual programs
into "systems of systems" in order to achieve more integrated, networked
military capabilities. A key will be addressing acquisition management as
part of a comprehensive and integrated business transformation plan.

Related Products

Department of Defense Weapon Systems Acquisition

Department of Defense: Further Actions Are Needed to Effectively Address
Business Management Problems and Overcome Key Business
Transformation Challenges. GAO-05-140T. Washington, D.C.:
November 17, 2004.

Best Practices

Defense Acquisitions: Assessments of Major Weapon Programs. GAO-04-248.
Washington, D.C.: March 31, 2004.

Defense Acquisitions: Stronger Management Practices Are Needed to Improve
DOD's Software-Intensive Weapon Acquisitions. GAO-04-393. Washington,
D.C.: March 1, 2004.

Defense Acquisitions: DOD's Revised Policy Emphasizes Best Practices, but
More Controls Are Needed. GAO-04-53. Washington, D.C.: November 10, 2003.

Defense Acquisitions: Improvements Needed in Space Systems Acquisition
Management Policy. GAO-03-1073. Washington, D.C.: September 15, 2003.

Best Practices: Setting Requirements Differently Could Reduce Weapon
Systems' Total Ownership Costs. GAO-03-57. Washington, D.C.: February 11,
2003.

Best Practices: Capturing Design and Manufacturing Knowledge Early
Improves Acquisition Outcomes. GAO-02-701. Washington, D.C.: July 15,
2002.

Weapon System Reviews

Defense Acquisitions: Challenges Facing the DD(X) Destroyer Program.

GAO-04-973. Washington, D.C.: September 3, 2004.

Defense Acquisitions: Space-Based Radar Effort Needs Additional Knowledge
before Starting Development. GAO-04-759. Washington, D.C.: July 19, 2004.

Uncertainties Remain Concerning the Airborne Laser's Cost and Military
Utility. GAO-04-643R. Washington, D.C.: May 17, 2004.

Missile Defense: Actions Are Needed to Enhance Testing and Accountability.

GAO-04-409. Washington, D.C.: April 23, 2004.

Defense Acquisitions: The Army's Future Combat Systems' Features, Risks,
and Alternatives. GAO-04-635T. Washington, D.C.: April 1, 2004.

Tactical Aircraft: Changing Conditions Drive Need for New F/A-22 Business
Case. GAO-04-391. Washington, D.C.: March 15, 2004.

For more information on Department of Defense major management challenges,
see http://www.gao.gov/pas/2005/dod.htm.

Department of Defense Contract Management

DOD is unable to assure that it is using sound business practices to
acquire the goods and services needed to meet the warfighter's needs. For
example, over the past decade, DOD has significantly increased its
spending on contractor-provided information technology and management
support services, but has not yet fully implemented a strategic approach
to acquiring these services. In 2002, DOD and the military departments
established a structure to review individual service acquisitions valued
at $500 million or more, and in 2003 launched a pilot program to help
identify strategic sourcing opportunities. To further promote a strategic
orientation, however, DOD needs to establish a departmentwide concept of
operations; set performance goals, including savings targets; and ensure
accountability for achieving them. In March 2004, GAO reported that if
greater management focus were paid to opportunities to capture savings
through the purchase card program, DOD could potentially save tens of
millions of dollars without sacrificing the ability to acquire items
quickly or compromising other goals.

DOD also needs to have the right skills and capabilities in its
acquisition workforce to effectively implement best practices and properly
manage the goods and services it buys. However, DOD reduced its civilian
workforce by about 38 percent between fiscal years 1989 and 2002 without
ensuring it had the specific skills and competencies needed to accomplish
current and future DOD missions, and more than half of its current
workforce will be eligible for early or regular retirement in the next 5
years. GAO found that inadequate staffing and the lack of clearly defined
roles and responsibilities contributed to the contract administration
challenges encountered in Iraq. Further, GAO reported that DOD's extensive
use of military logistical support contracts in Iraq and elsewhere
required strengthened oversight. DOD has made progress in laying a
foundation for reshaping its acquisition workforce by initiating a
long-term strategic planning effort, but as of June 2004 it did not yet
have a comprehensive strategic workforce plan needed to guide its efforts.

DOD uses various techniques-such as performance-based service contracting,
multiple-award task order contracts, and purchase cards-to acquire the
goods and services it needs. We have found, however, that DOD personnel
did not always make sound use of these tools. In June 2004, for example,
GAO reported that more than half of the task orders to support Iraq
reconstruction efforts it reviewed were outside the scope of the
underlying contract. In July 2004, GAO found that DOD personnel waived
competition requirements for nearly half of the task orders reviewed. As a
result of the frequent use of waivers, DOD had fewer opportunities to
obtain the potential benefits of competition-improved levels of service,
markettested prices, and the best overall value. We also found that DOD
lacked safeguards to ensure that waivers were granted only under
appropriate circumstances.

Related Products

Department of Defense Contract Management

Comptroller General of the United States. Transformation Challenges.
Presented to the Defense Intelligence Agency Board of Directors.
Arlington, Va.: December 9, 2004.

Department of Defense: Further Actions Are Needed to Effectively Address
Business Management Problems and Overcome Key Business Transformation
Challenges. GAO-05-140T. Washington, D.C.: November 17, 2004.

Contract Management: Guidance Needed to Promote Competition for Defense
Task
Orders. GAO-04-874. Washington, D.C.: July 30, 2004.

Military Operations: DOD's Extensive Use of Logistics Support Contracts
Requires
Strengthened Oversight. GAO-04-854. Washington, D.C.: July 19, 2004.

DOD Civilian Personnel: Comprehensive Strategic Workforce Plans Needed.
GAO-04-753. Washington, D.C.: June 30, 2004.

Rebuilding Iraq: Fiscal Year 2003 Contract Award Procedures and Management
Challenges. GAO-04-605. Washington, D.C.: June 1, 2004.

Contract Management: Agencies Can Achieve Significant Savings on Purchase
Card Buys. GAO-04-430. Washington, D.C.: March 12, 2004.

Satellite Communications: Strategic Approach Needed for DOD's Procurement
of
Commercial Satellite Bandwidth. GAO-04-206. Washington, D.C.:
December 10, 2003.

Purchase Cards: Steps Taken to Improve DOD Program Management, but Actions
Needed to Address Misuse. GAO-04-156. Washington, D.C.: December 2, 2003.

Contract Management: High-Level Attention Needed to Transform DOD Services
Acquisition. GAO-03-935. Washington, D.C.: September 10, 2003.

DOD Contract Payments: Management Action Needed to Reduce Billions in
Adjustments to Contract Payment Records. GAO-03-727. Washington, D.C.:
August 8, 2003.

Best Practices: Improved Knowledge of DOD Service Contracts Could Reveal
Significant Savings. GAO-03-661. Washington, D.C.: June 9, 2003.

Sourcing and Acquisition: Challenges Facing the Department of Defense.

GAO-03-574T. Washington, D.C.: March 19, 2003.

Contract Management: Guidance Needed for Using Performance-Based Service
Contracting. GAO-02-1049. Washington, D.C.: September 23, 2002.

Best Practices: Taking A Strategic Approach Could Improve DOD's
Acquisition of Services. GAO-02-230. Washington, D.C.: January 18, 2002.

For more information on Department of Defense major management challenges,
see http://www.gao.gov/pas/2005/dod.htm.

Department of Energy Contract Management

DOE's contract management, including both contract administration and
project management, continues to be at high risk for fraud, waste, abuse,
and mismanagement. In January 2003, GAO reported that DOE was implementing
new tools to strengthen its contract and project management, but that
contractor performance problems continued to occur and objective
performance information was scarce. These conditions have not
substantially changed.

Over the last 2 years, however, DOE has worked to improve its contract and
project management. For example, DOE has strengthened its contract
acquisition guidance by providing information on the relative trade-offs
between contract type and contract risk, as well as the linkage between
contract type and the work to be performed. DOE has also implemented a
formal process to ensure that contract management plans are established
for each site and each facility management contract. DOE took steps to
strengthen accountability for performance at the contractor level by
linking performance fees more directly to outcome measures, and at the DOE
manager level by linking performance evaluations to the accomplishment of
site-specific goals. DOE also established a formal, systematic approach to
designing and managing its contract management initiative and other
improvement initiatives.

While improvement efforts have been initiated, GAO found that performance
problems continue on DOE's major projects. For example, at the start of
the project to clean up radioactive waste in 177 underground storage tanks
in Hanford, Washington, DOE did not implement the project management
reforms that it was incorporating into its policy and guidance, increasing
the risks DOE faces in cleaning up the waste and potentially adding
significantly to the cost of the cleanup. At the Paducah nuclear waste
cleanup site in Kentucky, DOE has had difficulty reaching agreement with
its regulators on the overall cleanup approach, the scope of the cleanup,
and the details of specific projects. Unless DOE and the regulators can
reach and maintain agreement on key aspects of the cleanup in a timely
manner, the project could continue to be plagued by delays and cost
increases. Finally, in managing the nation's stockpile of nuclear weapons,
the National Nuclear Security Administration does not have a system for
tracking the full costs of individual refurbishments and thus does not
have adequate oversight to ensure that cost increases do not occur.

                                Related Products

Department of Energy Contract Management

National Nuclear Security Administration: Key Management Structure and
Workforce Planning Issues Remain As NNSA Conducts Downsizing. GAO-04-545.
Washington, D.C.: June 25, 2004.

Nuclear Waste: Absence of Key Management Reforms on Hanford's Cleanup
Project Adds to Challenges of Achieving Cost and Schedule Goals.
GAO-04-611. Washington, D.C.: June 9, 2004.

Department of Energy: Achieving Small Business Prime Contracting Goals
Involves Both Potential Benefits and Risks. GAO-04-738T. Washington, D.C.:
May 18, 2004.

Nuclear Waste Cleanup: DOE Has Made Some Progress in Cleaning Up the
Paducah Site, but Challenges Remain. GAO-04-457. Washington, D.C.: April
1, 2004.

Department of Energy: Mission Support Challenges Remain at Los Alamos and
Lawrence Livermore National Laboratories. GAO-04-370. Washington, D.C.:
February 27, 2004.

Nuclear Waste Cleanup: Preliminary Observations on DOE's Cleanup of the
Paducah Uranium Enrichment Plant. GAO-04-278T. Washington, D.C.: December
6, 2003.

Nuclear Weapons: Opportunities Exist to Improve the Budgeting, Cost
Accounting, and Management Associated with the Stockpile Life Extension
Program. GAO-03-583. Washington, D.C.: July 28, 2003.

Nuclear Waste: Challenges and Savings Opportunities in DOE's High-Level
Waste Cleanup Program. GAO-03-930T. Washington, D.C.: July 17, 2003.

Contract Reform: DOE's Policies and Practices in Competing Research
Laboratory Contracts. GAO-03-932T. Washington, D.C.: July 10, 2003.

Nuclear Waste: Challenges to Achieving Potential Savings in DOE's
High-Level Waste Cleanup Program. GAO-03-593. Washington, D.C.: June 17,
2003.

Department of Energy: Status of Contract and Project Management Reforms.
GAO-03-570T. Washington, D.C.: March 20, 2003.

For more information on Department of Energy major management challenges,
see http://www.gao.gov/pas/2005/energy.htm.

National Aeronautics and Space Administration Contract Management

While it has taken recent actions to improve its contract management
function, NASA continues to face considerable challenges in implementing
financial management systems and processes that would allow it to manage
its contracts effectively. As GAO has reported, NASA's failure to overcome
these challenges has put a number of its major scientific and space
programs at risk. For example, our recent review of selected NASA programs
found that NASA lacked the disciplined cost-estimating processes and
financial and performance management systems needed to establish
priorities, quantify risks, and manage program costs.

One of NASA's most formidable barriers to sound contract management is the
lack of an integrated financial management system. In 2003, GAO reported
that, in implementing its most recent system, NASA did not reengineer its
core business processes or establish adequate requirements for the system
to address many of its most significant management challenges, including
producing credible cost estimates. Moreover, NASA opted to defer
addressing the needs of key stakeholders. In recent months, NASA has begun
to take steps toward transforming how it manages its programs and projects
and oversees its contractors. Specifically, NASA has inventoried its
ongoing programs and projects-categorized by product line, size, and
risk-and defined specific management and information requirements for each
category. NASA has also established a standardized accounting code
structure based on these information requirements that, if implemented as
planned, would allow NASA to capture the cost information that program
managers and cost estimators need to develop credible estimates and
compare budgeted and actual cost with the work performed on the contract.

However, much work remains. As GAO reported in May 2004, NASA often does
not obtain from its contractors the financial data and performance
information needed to assess progress on its contracts. In addition, NASA
lacks data analysis tools and staff trained to perform cost analyses,
including earned value management. Until NASA has the data, tools, and
analytical skills needed to alert program managers of potential cost
overruns and schedule delays and take corrective action before they occur,
it will continue to face challenges in effectively overseeing its
contractors.

Finally, NASA continues to use unnegotiated (that is, uncosted) contract
changes, a concern GAO and NASA's Office of Inspector General have raised.
Uncosted contract changes increase the government's cost risk-the longer
changes remain unnegotiated, the greater the risk. Although GAO reported
in 2003 that NASA's use of such actions had significantly decreased, GAO
recently reported its use has begun to rise again. According to NASA
officials, the increase is temporary and needed to expedite activities to
return the space shuttle fleet safely to flight. However, continued
management attention is needed to ensure such actions are justified.

                                Related Products

       National Aeronautics and Space Administration Contract Management

GAO Products

Space Shuttle: Costs for Hubble Servicing Mission and Implementation of
Safety Recommendations Not Yet Definitive. GAO-05-34. Washington, D.C.:
November 19, 2004.

NASA: Lack of Disciplined Cost-Estimating Processes Hinders Effective
Program Management. GAO-04-642. Washington, D.C.: May 28, 2004.

National Aeronautics and Space Administration: Significant Actions Needed
to Address Long-standing Financial Management Problems. GAO-04-754T.
Washington, D.C.: May 19, 2004.

NASA: Compliance with Cost Limits. GAO-04-648R. Washington, D.C.: April 2,
2004.

Business Modernization: Disciplined Processes Needed to Better Manage
NASA's Integrated Financial Management Program. GAO-04-118. Washington,
D.C.: November 21, 2003.

Business Modernization: NASA's Challenges in Managing Its Integrated
Financial Management Program. GAO-04-255. Washington, D.C.: November 21,
2003.

Business Modernization: NASA's Integrated Financial Management Program
Does Not Fully Address Agency's External Reporting Issues.

GAO-04-151. Washington, D.C.: November 21, 2003.

Information Technology: Architecture Needed to Guide NASA's Financial
Management Modernization. GAO-04-43. Washington, D.C.:
November 21, 2003.

NASA: Major Management Challenges and Program Risks. GAO-03-849T.
Washington, D.C.: June 12, 2003.

Business Modernization: Improvements Needed in Management of NASA's
Integrated Financial Management Program. GAO-03-507. Washington, D.C.:
April 30, 2003.

NASA OIG Products

Final Management Letter on Failures in Cost Estimating and Risk Management
Weaknesses in Prior Space Launch Initiative. Assignment Numbers
A-01-049-01 and A-01-049-02, IG-03-023. Washington, D.C.: September 29,
2003.

Integrated Financial Management Program Core Financial Module Conversion
to Full Cost Accounting. IG-03-015. Washington, D.C.: May 30, 2003.

For more information on National Aeronautics and Space Administration
major management challenges, see http://www.gao.gov/pas/2005/nasa.htm.

Management of Interagency Contracting

Use of interagency contracts has increased significantly over the past
several years, with use of the GSA schedule contracts increasing nearly
tenfold since 1992, representing over $32 billion in sales in fiscal year
2004.

Multiple Award Schedules Sales Fiscal Years 1992 through 2004

Dollars in billions

35

32.5

30

25

20

15

10

5

0 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 Year

Source: GSA data.

Interagency contracts provide agencies with easy access to commonly needed
goods and services. Agencies that sponsor these contracts usually charge a
fee to support their operations. These types of contracts have allowed
agencies to meet demands for goods and services at a time when they face
growing workloads, declines in workforce, and the need for new skill sets.
However, GAO's work and the work of agency inspectors general have found
instances of improper use of interagency contracts, including customer
agencies making purchases without ensuring that purchases are within the
scope of the contract, and not following procedures designed to promote
competition. By not following these key requirements of the contract
management process, agencies risk being out of compliance with government
regulations and missing opportunities to achieve savings and obtain better
value. There are several causes of the deficiencies GAO and others have
found with the use of interagency contracts, including the increasing
demands on the acquisition workforce, insufficient training, and, in some
cases, inadequate guidance. In addition, it is not always clear where the
responsibility lies for critical management functions in the interagency
contracting process.

Recently, the Congress and executive branch agencies have taken steps to
address these challenges, particularly in the areas of oversight and
workforce training. These are positive efforts, but some actions are still
under development and it is too early to tell whether all of the
corrective

measures will be effectively implemented.

                                Related Products

Management of Interagency Contracting

GAO Products

Contract Management: Guidance Needed to Promote Competition for Defense
Task Orders. GAO-04-874. Washington, D.C.: July 30, 2004.

Information Technology: DOD's Acquisition Policies and Guidance Need to
Incorporate Additional Best Practices and Controls. GAO-04-722.
Washington, D.C.: July 30, 2004.

Rebuilding Iraq: Fiscal Year 2003 Contract Award Procedures and Management
Challenges. GAO-04-605. Washington, D.C.: June 1, 2004.

Federal Procurement: Spending and Workforce Trends. GAO-03-443.
Washington, D.C.: April 30, 2003.

Acquisition Workforce: Status of Agency Efforts to Address Future Needs.
GAO-03-55. Washington, D.C.: December 18, 2002.

Contract Management: Guidance Needed for Using Performance-Based Service
Contracting. GAO-02-1049. Washington, D.C.: September 23, 2002.

Contract Management: Interagency Contract Program Fees Need More
Oversight. GAO-02-734. Washington, D.C.: July 25, 2002.

Contract Management: Roles and Responsibilities of the Federal Supply
Service and Federal Technology Service. GAO-02-560T. Washington, D.C.:
April 11, 2002.

Best Practices: Taking a Strategic Approach Could Improve DOD's
Acquisition of Services. GAO-02-230. Washington, D.C.: January 18, 2002.

GSA's Guidance and Oversight Concerning Areawide Utility Contracts.

GAO-02-56R. Washington, D.C.: December 17, 2001.

Contract Management: Not Following Procedures Undermines Best Pricing
Under GSA's Schedule. GAO-01-125. Washington, D.C.: November 28, 2000.

Contract Management: Few Competing Proposals for Large DOD Information
Technology Orders. GAO/NSIAD-00-56. Washington, D.C.: March 20, 2000.

Other Related Products

Department of Defense, Office of the Inspector General. Audit Report:
Multiple Award Contracts for Services. Report Number D-2001-189.
Arlington, Va.: 2001.

General Services Administration, Office of the Inspector General.

Compendium of Audits of the Federal Technology Services' Regional Client
Support Center. Washington, D.C.: 2004.

Enforcement of Tax Laws

The Commissioner of Internal Revenue has made strengthening enforcement a
high priority, but IRS has not yet materially reversed enforcement
declines, in large part because unbudgeted expenses and demands for
improved taxpayer service have confounded IRS's intentions. Enforcement
staffing decreased over 21 percent between 1998 and 2003, and individual
audit rates are below the levels of the mid-1990s, even after recent
increases.

IRS lacks current data on the effects of these declines on compliance. For
example, IRS's estimate of the 2001 gross tax gap-the difference between
taxes owed and taxes paid (over $300 billion)-was largely based on
extrapolations from 1988 data. Without current information on
noncompliance, IRS cannot effectively target its enforcement resources,
risks wasting resources by auditing compliant taxpayers, and is impeded in
identifying changes to laws or regulations that could reduce
noncompliance.

IRS is working to improve its enforcement efforts, partly pursuant to our
recommendations and reports. For example, IRS is carrying out important
new compliance research that GAO has encouraged for many years. IRS has
nearly completed field work for a major study of individual taxpayers, and
has plans for further studies of other groups of taxpayers. IRS is also
developing a centralized cost accounting system, in part to obtain better
cost and benefit information on compliance activities, and is modernizing
the technology that underpins many core business processes. Further, it
has redesigned some compliance and collections processes and plans
additional redesigns as technology improves.

IRS is also continuing to address the evolving challenge of unpaid taxes
and continuing EIC noncompliance. For example:

o  	IRS estimates the multiyear tax losses from known and suspected tax
shelters used by corporations and individuals to be in the tens of
billions of dollars. IRS has made abusive tax shelters and schemes a high
priority, but the cost of addressing them can be high because they tend,
by design, to be complex and hard to detect.

o  	IRS estimated deliberate and inadvertent noncompliance with the EIC to
be between $8.5 and 9.9 billion in 1999. IRS is testing initiatives to
reduce EIC noncompliance, but at best it may be years before compliance
improves. Even as IRS addresses noncompliance, it must focus on
maintaining or improving the EIC's high participation rate.

Due to pervasive enforcement declines and the lack of current information
about noncompliance, GAO continues to regard these as high-risk issues. In
light of the Congress's decision to return to a single enforcement
appropriation in 2004, thus ending dedicated appropriations for EIC since
1998, GAO is combining the EIC compliance and collection of unpaid taxes
areas into one high-risk area involving enforcement of tax laws.

Related Products

Enforcement of Tax Laws

Earned Income Tax Credit: Implementation of Three New Tests Proceeded
Smoothly, but Tests and Evaluation Plans Were Not Fully Documented.

GAO-05-92. Washington, D.C.: December 30, 2004.

Taxpayer Information: Data Sharing and Analysis May Enhance Tax Compliance
and Improve Immigration Eligibility Decisions. GAO-04-972T. Washington,
D.C.: July 21, 2004.

Tax Debt Collection: IRS Is Addressing Critical Success Factors for
Contracting Out but Will Need to Study the Best Use of Resources.

GAO-04-492. Washington, D.C.: May 24, 2004.

Internal Revenue Service: Assessment of Fiscal Year 2005 Budget Request
and 2004 Filing Season Performance. GAO-04-560T. Washington, D.C.:
March 30, 2004.

Financial Management: Some DOD Contractors Abuse the Federal Tax
System With Little Consequence. GAO-04-95. Washington, D.C.:
February 12, 2004.

Internal Revenue Service: Challenges Remain in Combating Abusive Tax
Schemes. GAO-04-50. Washington, D.C.: November 19, 2003.

Internal Revenue Service: Challenges Remain in Combating Abusive Tax
Shelters. GAO-04-104T. Washington, D.C.: October 21, 2003.

Earned Income Credit: Qualifying Child Certification Test Appears
Justified, but Evaluation Plan Is Incomplete. GAO-03-794. Washington,
D.C.:
September 30, 2003.

Federal Budget: Opportunities for Oversight and Improved Use of Taxpayer
Funds. GAO-03-1030T. Washington, D.C.: July 17, 2003.

Tax Administration: IRS Is Implementing the National Research Program
As Planned. GAO-03-614. Washington, D.C.: June 16, 2003.

IRS Modernization: Continued Progress Necessary for Improving Service to
Taxpayers and Ensuring Compliance. GAO-03-796T. Washington, D.C.:
May 20, 2003.

Compliance and Collection: Challenges for IRS in Reversing Trends and
Implementing New Initiatives. GAO-03-732T. Washington, D.C.: May 7, 2003.

Vehicle Donations: Taxpayer Considerations When Donating Vehicles to
Charities. GAO-03-608T. Washington, D.C.: April 1, 2003.

Tax Administration: Federal Payment Levy Program Measures,
Performance, and Equity Can Be Improved. GAO-03-356. Washington, D.C.:
March 6, 2003.

For more information on Department of the Treasury major management
challenges, see http://www.gao.gov/pas/2005/treasury.htm.

Internal Revenue Service Business Systems Modernization

IRS has long relied on obsolete automated systems for key operational and
financial management functions, and its attempts to modernize these aging
computer systems span several decades. This long history of continuing
delays and design difficulties and their impact on IRS's operations led
GAO to designate IRS's systems modernization and its financial management
as separate high-risk areas in 1995. In 2003, GAO's high-risk report noted
that IRS had made significant progress in establishing long overdue
management controls and in acquiring foundational system infrastructure
and applications. However, the BSM program remained at risk because the
scope and complexity of modernization activities were growing, and the
agency's modernization management capacity was still maturing. Similarly,
while IRS had made notable progress in addressing several financial
management deficiencies, including deficiencies in controls over budgetary
activity and property and equipment, this area remained high risk because
IRS continued to rely on automated systems that did not provide management
current and reliable information it needed to support informed decision
making. Since resolution of IRS's most serious remaining financial
management problems largely depends upon the success of BSM, we are
combining those two issues into one BSM high-risk area.

IRS has made further progress since 2003 in addressing GAO's concerns
about the management of BSM. IRS has (1) acted to align the pace of the
BSM program with the maturity of the agency's controls and management
capacity, including reassessing its portfolio of planned projects, (2)
deployed several modernized systems that have benefited taxpayers and the
agency and begun implementation of the initial phases of several key
automated financial management systems, and (3) made progress in
implementing GAO's recommendations to improve its modernization management
controls and capabilities. IRS has also taken corrective actions related
to aspects of financial management that are not dependent on automated
systems, such as enhancing controls over hard copy tax receipts and data,
improving the accuracy of property records, and recording interim expense
accruals.

However, BSM projects continue to incur significant cost increases and
schedule delays. IRS needs to further strengthen modernization program
management and replace its outdated financial management systems.
Balancing the scope and pace of modernization activities with the agency's
ability to manage them remains a challenge. These problems are due, in
part, to critical management controls and capabilities that IRS has not
yet fully implemented or institutionalized. IRS has developed 48 action
issues related to its BSM effort and is taking action to resolve them and
to address GAO's recommendations related to BSM and financial management.
However, more remains to be done as program management problems
persist-affecting project cost, schedule, and performance-that have
plagued past systems modernization efforts and that continue to affect
IRS's ability to successfully modernize its operational and financial
management systems.

Related Products

Internal Revenue Service Business Systems Modernization

Business Systems Modernization: IRS's Fiscal Year 2004 Expenditure Plan.
GAO-05-46. Washington, D.C.: November 17, 2004.

Financial Audit: IRS's Fiscal Years 2004 and 2003 Financial Statements.
GAO-05-103. Washington, D.C.: November 10, 2004.

Internal Revenue Service: Status of Recommendations from
FinancialEURAudits and Related Management Reports. GAO-04-523. Washington,
D.C.:
April 28, 2004.

Management Report: Improvements Needed in IRS's Internal Controls and
EURAccounting Procedures. GAO-04-553R. Washington, D.C.: April 26, 2004.

Business Systems Modernization: Internal Revenue Service Needs to
EURFurther Strengthen Program Management. GAO-04-438T. Washington, D.C.:
February 12, 2004.

Financial Audit: IRS's Fiscal Years 2003 and 2002 Financial Statements.
GAO-04-126. Washington, D.C.: November 13, 2003.

Management Report: Improvements Needed in Controls over IRS's Excise
EURTax Certification Process. GAO-03-687R. Washington, D.C.: July 23,
2003.

Business Systems Modernization: IRS Has Made Significant Progress in
EURImproving Its Management Controls, but Risks Remain. GAO-03-768.
Washington, D.C.: June 27, 2003.

Internal Revenue Service: Status of Recommendations from
FinancialEURAudits and Related Management Reports. GAO-03-665. Washington,
D.C.:
May 29, 2003.

Management Report: Improvements Needed in IRS's Internal Controls.
GAO-03-562R. Washington, D.C.: May 20, 2003.

IRS Modernization: Continued Progress Necessary for Improving Service to
EURTaxpayers and Ensuring Compliance. GAO-03-796T. Washington, D.C.:
May 20, 2003.

IRS Lockbox Banks: More Effective Oversight, Stronger Controls, and
EURFurther Study of Costs and Benefits Are Needed. GAO-03-299.
Washington, D.C.: January 15, 2003.

For more information on Department of the Treasury major management
challenges, see http://www.gao.gov/pas/2005/treasury.htm.

Modernizing Federal Disability Programs

GAO's work examining federal disability programs has found that these
programs are neither well aligned with 21st century realities nor are they
positioned to provide meaningful and timely support for Americans with
disabilities. In particular, SSA's and VA's programs are based on concepts
from the past, and both programs face ongoing challenges to make timely,
accurate, and consistent decisions. Since GAO designated this area as high
risk in 2003, SSA and VA have made some progress toward improving their
disability programs. A key initiative involves SSA's proposal to improve
the timeliness and accuracy of disability decisions and to foster return
to work at all stages of the decision-making process. In addition, the
Congress established a commission to study the appropriateness of
veterans' benefits. Moreover, SSA and VA have both made some gains in the
timeliness of their disability claims decisions. While some actions have
been initiated, SSA's and VA's disability programs still face challenges
in two key areas:

o  	Programs remain grounded in outmoded concepts of disability. SSA's and
VA's disability programs have not been updated to reflect the current
state of science, medicine, technology, and labor market conditions. SSA's
proposal for transforming its disability determination process-with
increased opportunities for return to work-could potentially lead to
modernizing SSA's disability programs. But results of SSA's previous
efforts to transform its disability programs were disappointing. Further,
failure to develop a strategic workforce plan to ensure that the
appropriate mix of disability examiner skills are available when and where
needed could hamper SSA's efforts. VA faces similar challenges in
modernizing its disability programs, including reassessing its workforce.
Moreover, in light of a new congressional commission to study the
appropriateness of VA disability benefits, VA may need to revisit its
eligibility criteria.

o  	Agencies have difficulties managing disability programs. Both SSA and
VA still experience lengthy processing times for disability claims and
lack a clear understanding of the extent of possible inconsistencies in
decisions between adjudicative levels. While SSA's proposal for improving
the accuracy and timeliness of its disability determination process
appears promising, several challenges have the potential to hinder the
strategy's success. These include dependence on a technically complex
electronic folder system that has not been fully tested and human capital
problems-such as high turnover, recruiting difficulties, and gaps in key
knowledge and skills-among disability examiners. Moreover, while VA has
made considerable progress in improving the timeliness of its disability
claims decisions, it is still far from meeting its goal.

Related Products

Modernizing Federal Disability Programs

SSA's Disability Programs: Improvements Could Increase the Usefulness of
Electronic Data for Program Oversight. GAO-05-100R. Washington, D.C.:
December 10, 2004.

Veterans' Benefits: More Transparency Needed to Improve Oversight of VBA's
Compensation and Pension Staffing Levels. GAO-05-47. Washington, D.C.:
November 15, 2004.

Veterans Benefits: VA Needs Plan for Assessing Consistency of Decisions.
GAO-05-99. Washington, D.C.: November 19, 2004.

Social Security Disability: Improved Processes for Planning and Conducting
Demonstrations May Help SSA More Effectively Use Its Demonstration
Authority. GAO-05-19. Washington, D.C.: November 4, 2004.

TANF and SSI: Opportunities Exist to Help People with Impairments Become
More Self-Sufficient. GAO-04-878. Washington, D.C.: September 15, 2004.

Disability Insurance: SSA Should Strengthen Its Efforts to Detect and
Prevent Overpayments. GAO-04-929. Washington, D.C.: September 10, 2004.

Social Security Administration: More Effort Needed to Assess Consistency
of Disability Decisions. GAO-04-656. Washington, D.C.: July 2, 2004.

Social Security Disability: Commissioner Proposes Strategy to Improve the
Claims Process, but Faces Implementation Challenges. GAO-04-552T.
Washington, D.C.: March 29, 2004.

Electronic Disability Claims Processing: SSA Needs to Address Risks
Associated with Its Accelerated Systems Development Strategy. GAO-04-466.
Washington, D.C.: March 26, 2004.

Social Security Administration: Strategic Workforce Planning Needed to
Address Human Capital Challenges Facing the Disability Determination
Services. GAO-04-121. Washington, D.C.: January 27, 2004.

SSA Disability Decision Making: Additional Steps Needed to Ensure Accuracy
and Fairness of Decisions at the Hearings Level. GAO-04-14. Washington,
D.C.: November 12, 2003.

VA Benefits: Fundamental Changes to VA's Disability Criteria Need Careful
Consideration. GAO-03-1172T. Washington, D.C.: September 23, 2003.

Department of Veterans Affairs: Key Management Challenges in Health and
Disability Programs. GAO-03-756T. Washington, D.C.: May 8, 2003.

For more information on Social Security Administration and Department of
Veterans Affairs major management challenges, see
http://www.gao.gov/pas/2005/ssa.htm and
http://www.gao.gov/pas/2005/dva.htm.

Pension Benefit Guaranty Corporation Single-Employer Insurance Program

The termination of large, underfunded defined benefit (DB) pension plans
of bankrupt firms in troubled industries has been the major cause of the
singleEURemployer program's worsening net financial position. While
cyclical factors such as stock market and interest rate declines have
contributed to the severity of pension plans' underfunded condition, other
trends suggest serious long-term erosion of the program's participant
base. Active workers made up only 51 percent of the program's participants
in 2001, down from 78 percent in 1980. Also, in 2002, almost half of the
program's insured participants worked in manufacturing, a sector with
stagnant job growth for the last half-century. Further, while the number
of PBGC-insured plans has decreased steadily since 1987,
defined-contribution plans grew rapidly in the 1990s, indicating a decline
in DB plans overall as a retirement savings vehicle.

The rules that govern how much sponsors must contribute to their plans may
not ensure that plans maintain adequate funding to pay promised benefits.
The degree of underfunding in the private pension system has dramatically
increased, and additional severe losses may be on the horizon. The Pension
Benefit Guaranty Corporation (PBGC) estimates that financially weak firms,
particularly in the airline industry, sponsor plans with over $35 billion
in unfunded benefits.

While PBGC likely has enough assets to pay promised benefits for a number
of years, the long-term health of the single-employer program will be
threatened unless the Congress takes action soon. The possible termination
of additional large underfunded airline pension plans has the potential to
worsen the program's finances significantly, increasing the urgency of
reform. The Congress may then face a choice of drastic reductions in
pension benefits or authorizing federal assistance.

Accumulated Surplus/Deficit and Annual Net Gain/Loss of PBGC
Single-Employer Program

                                Related Products

     Pension Benefit Guaranty Corporation Single-Employer Insurance Program

Private Pensions: Airline Plans' Underfunding Illustrates Broader Problems
with the Defined Benefit Pension System. GAO-05-108T. Washington,
D.C.:~October 7, 2004.~

Pension Plans: Additional Transparency and Other Actions Needed in
Connection with Proxy Voting. GAO-04-749. Washington, D.C.: ~August 10,
2004. ~

Private Pensions: Publicly Available Reports Provide Useful but Limited
Information on Plans' Financial Condition. GAO-04-395. Washington, D.C.:
~March 31, 2004. ~

Private Pensions: Timely and Accurate Information Is Needed to Identify
and Track Frozen Defined Benefit Plans. GAO-04-200R. Washington, D.C.:
~December 17, 2003. ~

Pension Benefit Guaranty Corporation: Single-Employer Pension Insurance
Program Faces Significant Long-Term Risks. GAO-04-90. Washington, D.C.:
~October 29, 2003. ~

Private Pensions: Changing Funding Rules and Enhancing Incentives Can
Improve Plan Funding. GAO-04-176T. Washington, D.C.: October 29, 2003. ~

Pension Benefit Guaranty Corporation: Long-Term Financing Risks to
Single-Employer Insurance Program Highlight Need for Comprehensive
Reform. GAO-04-150T. Washington, D.C.: October 14, 2003. ~

Pension Benefit Guaranty Corporation: Single-Employer Pension Insurance
Program Faces Significant Long-Term Risks. GAO-03-873T. ~Washington, D.C.:
September 4, 2003. ~

Options to Encourage the Preservation of Pension and Retirement Savings:
Phase 2. GAO-03-990SP. Washington, D.C.: July 29, 2003. ~

Private Pensions: Participants Need Information on Risks They Face in
Managing Pension Assets at and during Retirement. GAO-03-810. ~Washington,
D.C.: July 29, 2003. ~

Private Pensions: Process Needed to Monitor the Mandated Interest Rate for
Pension Calculations. GAO-03-313. Washington, D.C.: February 27, 2003. ~

                                Medicare Program

MMA has created new challenges for administering the Medicare program.
These include the addition of a prescription drug benefit with an
estimated cost to the federal government of $8.1 trillion in today's
dollars to pay for the benefit over the next 75 years. CMS plans to
conduct new oversight activities for the Medicare prescription drug
benefit effective 2006 and is taking steps to improve contractors' data
analysis efforts for detecting improper payments. Findings from studies
GAO conducted in 2003 and 2004 underscore the importance of taking these
and other steps to increase Medicare's integrity, efficiency, and
effectiveness.

Oversight of patient safety and care. Lax oversight by CMS has allowed
certain patient safety weaknesses to go undetected or uncorrected. For
example, in a 2003 study ofend-stage renal dialysis facilities, GAO found
that significant numbers of patients received inadequate dialysis or
anemia care. Another GAO study found that CMS's oversight of hospital
accreditation was limited. CMS has a pilot project to assess hospital
compliance efforts.

Reforming and refining payments. In the past 2 years, GAO found that
Medicare could have saved millions of dollars and reduced beneficiary
copayments by revising its payment policy for certain pathology and other
services; that payments for home health and ambulance services may have
been adequate in the aggregate but needed targeted adjustments; and that
data weaknesses hinderedCMS from assessing the adequacy of payment for
hospital outpatient, hospice, and other services.

Enhancing program integrity. CMS missed opportunities to use claims data
to target areas vulnerable to fraud and abuse. For example, in 1997, CMS
was alerted to billing abuses in claims madebypower wheelchair suppliers
but delayed implementing reforms for 6 years, costing Medicare millions of
dollars in overpayments. Similarly, in 1999, a Medicare contractor found
high payments for services provided by certain outpatient rehabilitation
facilities in Florida relative to similar facilities in the state, but
steps the contractor took in 2001 were not sufficient to mitigate the
problem. More recently, however, CMS targeted fraudulent entities billing
for home health services and reported avoiding over $260 million in
improper payments between January 2003 and June 2004.

Improving program management. In a study GAO conducted of contractor-run
callcenters charged with responding to providers' inquiries about billing
Medicare, the centers answered only 4 percent of GAO's test calls
correctly and completely. GAO found a higher, but less than desirable,
accuracy rate-61 percent-for calls placed to the 1-800-MEDICARE help line.
In a study of Medicare's claims appeals process, GAO found that less than
half of the appeals were decided within the statutory time frame, owing to
inefficiencies in contractors' case-processing operations and incompatible
data systems.

                                Related Products

                                Medicare Program

Medicare: Accuracy of Responses from the 1-800-MEDICARE Help Line Should
Be
Improved. GAO-05-130. Washington, D.C.: December 8, 2004. EUR

Medicare Chemotherapy Payments: New Drug and Administration Fees Are
Closer
to Providers' Costs. GAO-05-142R. Washington, D.C.: December 1, 2004. EUR

Medicare: CMS's Program Safeguards Did Not Deter Growth in Spending for
Power
Wheelchairs. GAO-05-43. Washington, D.C.: November 17, 2004. EUR

Medicare Hospice Care: Modifications to Payment Methodology May Be
Warranted. EURGAO-05-42 Washington, D.C.: October 15, 2004. EUR

Medicare Physician Payments: Concerns about Spending Target System
Prompt Interest in Considering Reforms. GAO-05-85. Washington, D.C.:
EUROctober 8, 2004. EUR

Medicare: Information Needed to Assess Adequacy of Rate-Setting
Methodology for Payments for Hospital Outpatient Services. GAO-04-772.
EURWashington, D.C.: September 17, 2004. EUR

Medicare: Past Experience Can Guide Future Competitive Bidding for Medical
Equipment and Supplies. GAO-04-765. Washington, D.C.: September 7, 2004.
EUR

Comprehensive Outpatient Rehabilitation Facilities: High Medicare Payments
in
Florida Raise Program Integrity Concerns. GAO-04-709. Washington, D.C.:
EURAugust 12, 2004. EUR

Medicare: CMS Needs Additional Authority to Adequately Oversee Patient
Safety in Hospitals. GAO-04-850. Washington, D.C.: July 20, 2004. EUR

Medicare: Call Centers Need to Improve Responses to Policy-Oriented
Questions
from Providers. GAO-04-669. Washington, D.C.: July 16, 2004. EUR

Medicare Home Health: Payments to Most Freestanding Home Health
Agencies More Than Cover Their Costs. GAO-04-359. Washington, D.C.:
EURFebruary 27, 2004. EUR

Dialysis Facilities: Problems Remain in Ensuring Compliance with
Medicare Quality Standards. GAO-04-63. Washington, D.C.: October 8, 2003.
EUR

Medicare: Modifying Payments for Certain Pathology Services Is
Warranted. GAO-03-1056. Washington, D.C.: September 30, 2003. EUR

Medicare Appeals: Disparity between Requirements and Responsible
Agencies' Capabilities. GAO-03-841. Washington, D.C.: September 29, 2003.
EUR

Ambulance Services: Medicare Payments Can Be Better Targeted to Trips in
Less Densely Populated Rural Areas. GAO-03-986. Washington, D.C.:
EURSeptember 19, 2003. EUR

For more information on Department of Health and Human Services major
management challenges, see http://www.gao.gov/pas/2005/hhs.htm.

                                Medicaid Program

The program remains high risk today. Inadequate fiscal oversight has led
to increased and unnecessary federal spending in the following ways:

Schemes that leverage federal funds inappropriately. Using statutory and
regulatory loopholes for more than a decade, some states have created the
illusion that they have made large Medicaid payments to certain government
providers, such as county health facilities, in order to generate
excessive federal matching payments. In reality, the states only
momentarily made payments to these providers-generally through electronic
funds transfers-and then required that the payments be returned. Some of
these schemes have cost the federal government several billions of dollars
each year. The Congress and CMS have acted to curtail abusive financing
schemes, but problems continue. In response to the Congress's direction,
CMS in 2001 acted to phase out certain financing schemes, but did so in a
manner that continued to result in excessive federal matching payments.
CMS has also taken steps to improve its oversight of states' financing
schemes by centralizing its review process and conducting targeted
financial management reviews. In its fiscal year 2005 proposed budget, the
administration estimated that capping Medicaid payments to individual
government providers' actual costs-a recommendation that GAO has made to
the Congress-could save more than $9.5 billion over 5 years.

Waiver programs that inappropriately increase the federal government's
financial liability. The Secretary of HHS has authority to waive certain
statutory provisions and allow states to test new ideas for delivering
services and expanding coverage. Each waiver program must be "budget
neutral;" it should not be approved if the program would increase federal
financial liability beyond what it would have been without the program.
Since the mid-1990s, HHS has permitted states to use questionable methods
to demonstrate budget neutrality for waiver programs estimated to increase
federal costs. For example, in 2004, GAO estimated that HHS's approval of
four states' waiver requests to provide expanded prescription drug
benefits could increase federal financial liability by over $1 billion.

Inappropriate billing by providers serving program beneficiaries.

Medicaid is vulnerable to waste, fraud, and abuse by providers who submit
inappropriate claims, resulting in substantial financial losses to states
and the federal government. In 2004, GAO reported that states use a
variety of approaches to prevent and detect improper payments, such as
on-site inspections of high-risk providers and criminal background checks.
At the federal level, CMS has activities to support states' program
integrity efforts, but its oversight of state activities is limited. With
the current commitment of CMS resources, compliance reviews of state
programs are infrequent and limited in scope. CMS oversight may be
disproportionately small relative to the risk of serious financial loss.

Related Products

                                Medicaid Program

GAO Products

Medicaid Program Integrity: State and Federal Efforts to Prevent and
Detect Improper Payments.GAO-04-707. Washington, D.C.: July16, 2004.

Medicaid Waivers: HHS Approvals of Pharmacy Plus Demonstrations Continue
to Raise Cost and Oversight Concerns. GAO-04-480. Washington, D.C.: June
30, 2004.

Medicaid: Intergovernmental Transfers Have Facilitated State Financing
Schemes. GAO-04-574T. Washington, D.C.: March 18, 2004.

Medicaid: Improved Federal Oversight of State Financing Schemes Is Needed.
GAO-04-228. Washington, D.C.: February 13, 2004.

SCHIP: HHS Continues to Approve Waivers That Are Inconsistent with Program
Goals. GAO-04-166R. Washington, D.C.: January 5, 2004.

Medicaid and SCHIP: Recent HHS Approvals of Demonstration Waiver Projects
Raise Concerns. GAO-02-817. Washington, D.C.: July 12, 2002.

Medicaid Financial Management: Better Oversight of State Claims for
Federal Reimbursement Needed. GAO-02-300. Washington, D.C.: February 28,
2002.

Medicaid: HCFA Reversed Its Position and Approved Additional State
Financing Schemes. GAO-02-147. Washington, D.C.: October 30, 2001.

Medicaid: State Financing Schemes Again Drive Up Federal Payments.

GAO/T-HEHS-00-193. Washington, D.C.: September 6, 2000.

Medicaid Section 1115 Waivers: Flexible Approach to Approving
Demonstrations Could Increase Federal Costs. HEHS-96-44. Washington, D.C.:
November 8, 1995.

Medicaid: States Use Illusory Approaches to Shift Program Costs to Federal
Government. HEHS-94-133. Washington, D.C.: August 1, 1994.

HHS OIG Products

Testimony of George M. Reeb, Assistant Inspector General for the Centers
for Medicare and Medicaid Audits, Hearing before the House Committee on
Energy and Commerce, March 18, 2004.

For more information on Department of Health and Human Services major
management challenges, see http://www.gao.gov/pas/2005/hhs.htm.

HUD Single-Family Mortgage Insurance and Rental Housing Assistance
Programs

Since January 2003, HUD has demonstrated commitment to and progress in
addressing weaknesses identified in its high-risk program areas; however,
some of HUD's corrective actions are in the early stages of
implementation, and additional steps are needed to resolve
ongoingproblems.

In the single-family mortgage insurance area, HUD has acted to reduce the
risk of financial loss by improving its oversight of lenders and
appraisers and increasing its use of foreclosure prevention tools. For
example, HUD has implemented processes to target for review lenders and
appraisers based on risk. HUD has also recently issued or proposed
numerous regulations designed to strengthen lender accountability and
combat predatory lending practices. In addition, through its loss
mitigation program, HUD reports that it has prevented insurance losses by
helping an increasing number of homebuyers avoid foreclosure. However, HUD
needs to follow through on its initiatives and use its existing oversight
tools more effectively to address continuing weaknesses. For example, HUD
continues to grant loan underwriting authority to lenders that have not
met the agency's performance standards. Furthermore, HUD's system for
rating the underwriting quality of loans does not adequately assess the
risk that the loans pose to the agency'sinsurance fund. Finally,
weaknesses inHUD's process for paying single-family property management
contractors have made the agencyvulnerable to millions of dollars
inquestionable and potentially fraudulent payments.

In the rental assistance area, HUDhas continued to implement measures to
reduce errors in rental subsidy payments and improve the physical
condition of HUD-assistedhousing.HUD estimated that it made at least $1.4
billion in erroneous rental assistance payments in fiscal year 2003.
Through its Rental Housing Integrity Improvement Project, HUD is seeking
to reduce these errors through increasedmonitoring of public housing
agencies and multifamily property owners, better verification of tenant
incomes, and improved training and guidance for HUDstaff and program
intermediaries. Estimates indicate that HUD has made progress in reducing
erroneous payments due to subsidy calculation errors compared with fiscal
year 2000. However, the extent to which project activities are responsible
for this improvement is not known, and it is uncertain whether HUD will be
able to achieve long-term reductions in erroneous payments. In addition, a
critical part of the project-the verification of tenant incomes using
state wage data-has not been fully implemented. HUD has continued to make
progress in ensuring that HUD-assisted housing meets the agency's physical
condition standards. According to HUD, physical inspections from fiscal
year 2004 showed that about 94 percent of HUD-assisted units received
satisfactory inspection scores, an increase from the 91 percent reported
for fiscal year 2002.

Related Products

  HUD Single-Family Mortgage Insurance and Rental Housing Assistance Programs

Single-Family Mortgage Insurance Programs

Single-Family Housing: Progress Made, but Opportunities Exist to Improve
HUD's Oversight of FHA Lenders. GAO-05-13. Washington, D.C.: EURNovember
12, 2004. EUR

Single-Family Housing: HUD's Risk-Based Oversight of Appraisers Could
Be Enhanced. GAO-05-14. Washington, D.C.: November 5, 2004. EUR

Home Inspections: Many Buyers Benefit from Inspections, but Mandating
Their Use Is Questionable. GAO-04-462. Washington, D.C.: April30, 2004.EUR

HUD Single-Family and Multifamily Property Programs: Inadequate
Controls Resulted in Questionable Payments and Potential Fraud.
EURGAO-04-390. Washington, D.C.: March 3, 2004. EUR

Single-Family Housing: Cost, Benefit, and Compliance Issues Raise
Questions about HUD's Discount Sales Program. GAO-04-208. EURWashington,
D.C.: January 30, 2004. EUR

Rental Housing Assistance Programs

Multifamily Housing: More Accessible HUD Data Could Help Efforts to
Preserve Housing for Low-Income Tenants. GAO-04-20. Washington, D.C.:
January 23, 2004

Public Housing: HOPE VI Resident Issues and Changes in Neighborhoods
Surrounding Grant Sites. GAO-04-109. Washington, D.C.: November 21, 2003.

Elderly Housing: Project Funding and Other Factors Delay Assistance to
Needy Households. GAO-03-512. Washington, D.C.: May 30, 2003.

Public Housing: HUD's Oversight of HOPE VI Sites Needs to Be More
Consistent. GAO-03-555. Washington, D.C.: May 30, 2003.

Public Housing: Information on Receiverships at Public Housing
Authorities. GAO-03-363. Washington, D.C.: February 14, 2003.

For more information on Department of Housing and Urban Development major
management challenges, see http://www.gao.gov/pas/2005/hud.htm.

Federal Aviation Administration Air Traffic Control Modernization

Faced with growing air traffic and aging equipment, in 1981, FAA initiated
an ambitious effort to modernize its air traffic control system. This
modernization involves the acquisition of new equipment for surveillance,
data processing, navigation, and communications, in addition to new
facilities, and is expected to cost $48.6 billion through the year 2007.
Over the past 2 decades, many of the projects that make up the
modernization program have experiencedcost overruns, schedule delays, and
performance shortfalls. GAO's work over the years has identified root
causes of the modernization program's problems, including (1) immature
capabilities for acquiring software-intensive systems, (2) lack of a
complete and enforced system architecture (or blueprint), (3) inadequate
cost estimating and cost accounting practices, (4) an ineffective process
for managing investments in information technology (IT), and (5) an
organizational culture that impaired the acquisition process.

FAA has made important progress in addressing these weaknesses, but more
remains to be done. For example, FAA has

o  iimproved key processes for acquiring and developing software and
systems. The agency established a framework for improving its system
management processes, and selected FAA projects are performing many of the
desired practices. Nevertheless, the agency has not yet institutionalized
these process improvements.

o  icontinued to develop an enterprise architecture-a blueprint of the
agency's current and target operations and infrastructure. However, this
architecture is still not complete and compliance is not yet enforced. We
have ongoing work evaluating what the agency needs to do to develop and
enforce its enterprise architecture.

o  iimproved cost accounting and estimating practices. The agency
established sound cost estimating practices and implemented key components
of a cost accounting system. However, the system is not yet fully
operational or used to improve future estimates.

o  iestablishedbasic investment management capabilities, including many
practices for selecting andcontrolling its mission-critical IT
investments. However, FAA's senior IT investment board does not regularly
review investments in the operational phase of their life cycles, and this
inhibits FAA's ability to oversee more than $1billion of its IT
investments.

o  isought to establish an organizational culture that supports sound
acquisitions. However, the agency still faces many human capital
challenges. Specifically, it does not effectively ensure that air traffic
controllers, technical experts, and stakeholders are involved as new
systems are developed, deployed, and refined.

Until the agency addresses these residual issues, it will continue to risk
the project management problems affecting cost, schedule, and performance
that have hampered its ability to acquire systems for improving air
traffic control.

                                Related Products

       Federal Aviation Administration Air Traffic Control Modernization

Air Traffic Control: FAA Needs to Ensure Better Coordination When
Approving Air Traffic Control Systems. GAO-05-11. Washington, D.C.:
EURNovember 17, 2004. EUR

Air Traffic Control: FAA's Acquisition Management Has Improved, but
Policies and Oversight Need Strengthening to Help Ensure Results.
EURGAO-05-23. Washington, D.C.: November 10, 2004. EUR

Air Traffic Control: System Management Capabilities Improved, but More
Can Be Done to Institutionalize Improvements. GAO-04-901. EURWashington,
D.C.: August 20, 2004. EUR

Information Technology: FAA Has Many Investment Management
Capabilities in Place, but More Oversight of Operational Systems is
Needed. EURGAO-04-822. Washington, D.C.: August 20, 2004. EUR

Federal Aviation Administration: Plan Still Needed to Meet Challenges to
Effectively Managing Air Traffic Controller Workforce. GAO-04-887T.
EURWashington, D.C.: June 15, 2004. EUR

Federal Aviation Administration: Challenges for Transforming into a High-
Performing Organization. GAO-04-770T. Washington, D.C.: May 18, 2004. EUR

Air Traffic Control: FAA's Modernization Efforts--Past, Present, and
Future. GAO-04-227T. Washington, D.C.: October 30, 2003. EUR

National Airspace System: Current Efforts and Proposed Changes to
Improve Performance of FAA's Air Traffic Control System. GAO-03-542.
EURWashington, D.C.: May 30, 2003. EUR

Federal Aviation Administration: Reauthorization Provides Opportunities
to Address Key Agency Challenges. GAO-03-653T. Washington, D.C.: EURApril
10, 2003. EUR

National Airspace System: Reauthorizing FAA Provides Opportunities and
Options to Address Challenges. GAO-03-473T. Washington, D.C.: EURFebruary
12, 2003. EUR

National Airspace System: Better Cost Data Could Improve FAA's
Management of the Standard Terminal Automation Replacement
System. GAO-03-343. Washington, D.C.: January 31, 2003. EUR

For more information on Department of Transportation major management
challenges, see http://www.gao.gov/pas/2005/dot.htm.

(450363) EUR

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